The Commissioner Of Income Tax, Ajmer v. Urban Improvement Trust, Civil, Lines, Todarmal Lane Ajmer

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 392/2011 The Commissioner Of Income Tax, Ajmer ----Appellant Versus Urban Improvement Trust, Civil, Lines, Todarmal Lane Ajmer ----Respondent For Appellant(s) : Mr. Daksh Pareek for Mr. Sameer JainFor Respondent(s): Mr. Mahendra Gargeiya HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS 06/03/2018 Judgment 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal hasallowed the appeal of the assessee and dismissed the appeal of the department. 2.This Court while admitting the matter framed following questions of law:- “1. Whether under the facts and circumstancesof the case, and in law the ld. Tribunal wasjustified in not upholding the order of the CIT(A)whereby the rental income of Rs. 13,26,069 wastreated as “income from house property” u/s 22as against “business income”? 2. Whether under the facts and in thecircumstances of the case, and law the ld.Tribunal was justified in not holding that thedeficit of Rs. 1,26,07,674/- on development workin progress being not allowable u/s 14A of theAct?” 3.The first issue is already covered by the decision of thisCourt in Income Tax Appeal No. 643/2008 (CIT vs. UIT, Alwar) decided on 25[th] July, 2017, therefore, the issue no. 1 is decided infavour of the assessee against the department. In the said case, ithas been held as under:- “14. Taking into consideration he has also takenus to the different part of the judgment andcontention raised by the parties and ultimatelythat the issue is squarely covered against theassessee. He has also relied upon the decision ofthe Tribunal in M/s Jammu Development Authority,Jammu vs. Commissioner of Income Tax ITA No.30 (Asr)/2011 decided on 14[th] June, 2012. whereinit has been held as under:- “It would thus be seen that the income of a localAuthority chargeable under the head “incomefrom house property”, “Capital gains” or “Incomefrom other sources” or from a trade or businesscarried on by it was earlier excluded in computingthe total income of the Authority of a previousyear. However, in view of the amendment witheffect from April 1, 2003, the Explanation “LocalAuthority” was defined to include only theAuthorities enumerated in the Explanation, whichdoes not include an Authority such as the JammuDevelopment Authority. At the same time section10(20A) which related to income of an Authorityconstituted in India by or under any law enactedfor the purpose of dealing with and satisfying theneed for housing accommodation or for thepurposeofplanning,developmentorimprovement of cities, towns and villages, whichbefore the amendment was not included incomputing the total income, was omitted.Consequently, the benefit conferred by clause(20A) on such an Authority was taken away. Thus,in view of the fact that section 10(20A) wasomitted and an Explanation was added to section10(20A) of the Act, enumerating the “LocalAuthorities” contemplated by section 10(20A), theassessee i.e. Jammu Development Authority couldnot claim any benefit under those provisions afterApril 1, 203. The benefit conferred by section10(20A) of the Act on the assessee upto the A.Y.2002-03 has been expressly taken away and theexplanation added to section 10(20) enumeratesthe “Local Authority” which do not cover theAuthority. The assessee i.e. Jammu DevelopmentAuthority subsequently claimed that its objectsfalls under the provisions of section 2(15) of theAct and has complied with all the eligibility criteriafor grant of registration u/s 12A of the Act, whichwas allowed vide property which make the Authority a commercial organization. Therefore,the objects pursued by the Authority cannot besaid to be charitable in view of the fact that theauthority being a commercial organization with norestriction as to the application of the assets ondissolution or winding up of for charitablepurposes. In order to find out whetherorganization is a charitable one, tests have beenlaid down by the B Hon'ble Supreme Court in thecase of CIT vs. Surat Art Silk Cloth ManufacturersAssociation (1997) 121 ITR and CIT vs. AndhraPradesh State Road Transport Corp. (1986) 159ITR 1. In the case of Surat Art Silk ClothManufacturers Association, it was held as under:- “Since the income and property of the assesseewere liable to be applied solely and exclusively forthe promotion of the objects set out in theMemorandum and no part of such income orproperty could be distributed amongst theMembers in any form or utilized for their benefiteither during its operational existence or on itswinding up or dissolution as such the object was acharitable one.” 15.It is true that the functions which are carriedout by the assessee are statutory functions andcarry on for the benefit of the State Governmentfor urban development therefore, in ourconsidered opinion, the functions carried out bythe authority is a supreme function and fall withinthe activity of the State Government. 16.In that view of the matter, the judgmentswhich are strongly relied upon by counsel for thedepartment are of no help in the facts of the caseas the case relied upon by the department was inrespect of industrial corporation which was underthe statute for the purpose of making profit. Thefees and other charges which are covered arestatutorily for the development of the urban area.In that view of the matter, the judgment whichsought to be relied upon by the counsel for therespondents, in our considered opinion, would beof importance and the functions which are carriedout by the assessee is statutory function. In ourconsidered opinion, under clause-10 (20) & Sub-cluase (3) Municipal Committee and District Boardare legal entity entrusted by the function of theGovernment within the control or management ofthe municipal or local authority and will try tohelp the assessee. 17.In that view of the matter, the relianceplaced by counsel for the department regarding10(20) and explanation A will not make anydifference. Taking into consideration income ofauthority is under constitution of India vide orderenacted either for the purpose of dealing with orsetting up the housing scheme for the purpose ofplanning and development of the improvement ofthe cities, town and villages or both for which theauthority are created to carry out the function ofState which are sovereign whereas the urbandevelopment and calculation of developmentcharges will fall under the development charges. 18.In that view of the matter, deletion of 20Awill not make difference in case of assessee. Inour considered opinion, Clause-3 will come in thehelp of the assessee. In that view of the matter,we are considered opinion, that the authorityassessee is a local authority for the purpose ofcarrying out of the improvement and developmentfunction of the State. 19.In that view of the matter, the issue isrequired to be answered in favour of the assesseeagainst the department. In view of the answer,other issues are become academic, therefore, weare not deciding those issue.” 4.With regard to second issue, counsel for the respondent hastaken us to the order of the Tribunal which reads as under:- 18.In that view of the matter, deletion of 20Awill not make difference in case of assessee. Inour considered opinion, Clause-3 will come in thehelp of the assessee. In that view of the matter,we are considered opinion, that the authorityassessee is a local authority for the purpose ofcarrying out of the improvement and developmentfunction of the State. 19.In that view of the matter, the issue isrequired to be answered in favour of the assesseeagainst the department. In view of the answer,other issues are become academic, therefore, weare not deciding those issue.” 4.With regard to second issue, counsel for the respondent hastaken us to the order of the Tribunal which reads as under:- “We have heard rival submissions and consideredthem carefully. After considering the submissionsand perusing the material on record. We find thatthe department has no case in this respect. Theassessee who is a total authority derives incomefrom maintenance and development of areas andcivic amenities including sale of land. The plots inquestion against which this developmentexpenses has been incurred were sold long backi.e. in the years 1973 to 1989. As per notificationof the Government and as per scheme of theGovernment, the development and drainagecharges have to be incurred by the assessee inrespect to those very plots sold long back. Noincome on account of sale of plots against whichthese expenses are incurred have been shown inthe year under consideration. Provisions ofsection 14A is very clear which provides that anyexpenditure incurred pertaining to exemptedincome are not allowable. As stated above, nopart of income is earned during the year against which these expenses are incurred. Therefore,during the year there is no question ofdisallowing even under Section 14A. The natureof these expenses are clearly revenue in nature.Finding of ld. CIT(A) in this respect have beenrecorded in para 5.3 at page 4 of his order are asunder:- “5.3. It is observed that the expenses incurredon construction of road, drainage, providingwater and electricity and development of gardensetc. is a part of business of the appellant and theexpenses are incurred as per UIT Act 1959. It isfurther observed that in many cases, the plotsare allotted in an earlier year, but the expenseson roads, drainage etc. are incurred at muchlater period. The appellant furnished details ofexpenses incurred on development activitiesduring the year. From the perusal of thisstatement, it is found that in the case of VaishaliNagar, plots were allotted in 1973, whereas asum of Rs. 2.47 lacs was incurred during theyear. Similarly, in Panchsheel Nagar, plots wereallotted in 1989, but a sum of Rs. 109.02 lacswas incurred during the year. In such a situation,the observation of the AO that the amount ofdeficit on account of development work inprogress should have been taken to the closingstock of the land in not justified. The case of theappellant cannot be compared with that of aprivate builder, who incurs expenditure onconstruction of roads etc. only before the sale ofplots. In the case of appellant, the developmentwork continues in many localities many yearsafter all the plots have been sold. I, therefore,hold that the AO is not justified in disallowingdeficit of Rs. 1,26,07,674/- on the ground that itis a capital expenditure. The disallowance istherefore directed to be deleted. Ground no. 3 isthus allowed. In view of the finding of ld. CIT(A)and in view of the discussions of ours as abovethat even these expenses are not disallowable inview of section 14A, we confirm the order of ld.CIT(A) on this aspect.” Counsel for the appellant relied on the judgment of theSupreme Court in case of Godrej & Boyce Manufacturing CompanyLimited Versus Dy. Commissioner of Income-Tax & Anr. reported in2017 (394) ITR 449, wherein it has been held as under:- Counsel for the appellant relied on the judgment of theSupreme Court in case of Godrej & Boyce Manufacturing CompanyLimited Versus Dy. Commissioner of Income-Tax & Anr. reported in2017 (394) ITR 449, wherein it has been held as under:- “The object behind the introduction of Section14A of the Act by the Finance Act of 2001 is clearand unambiguous. The legislature intended tocheck the claim of allowance of expenditureincurred towards earning exempted income in asituation where an Assessee has both exemptedand non-exempted income or includible or non-includible income. While there can be no scintillaof doubt that if the income in question is taxableand, therefore, includible in the total income, thededuction of expenses incurred in relation tosuch an income must be allowed, such deductionwould not be permissible merely on the groundthat the tax on the dividend received by theAssessee has been paid by the dividend payingcompany and not by the recipient Assessee,when Under Section 10(33) of the Act suchincome by way of dividend is not a part of thetotal income of the recipient Assessee. A plainreading of Section 14A would go to show that theincome must not be includible in the total incomeof the Assessee. Once the said condition issatisfied, the expenditure incurred in earning thesaid income cannot be allowed to be deducted.The Section does not contemplate a situationwhere even though the income is taxable in thehands of the dividend paying company the sameto be treated as not includible in the total incomeof the recipient Assessee, yet, the expenditureincurred to earn that income must be allowed onthe basis that no tax on such income has beenpaid by the Assessee. Such a meaning, ifascribed to Section 14A, would be plainly beyondwhat the language of Section 14A can beunderstood to reasonably convey.” He contended that in view of the observations made by theSupreme Court, the second issue is required to be answered infavour of the appellant. Counsel for the respondent contended that if the expensesare not allowable it will be carried for loss and it will not make anydifference to the Department since the expenses will be givenagainst the exempted income. Therefore, it will not be appropriateto disallow the expenses. We have heard counsel for both the sides. Taking into account the provisions of Section 14A whichreads as under:- “For the purposes of computing the total incomeunder this chapter, no deduction shall be allowedin respect of expenditure incurred by theassessee in relation to income which does notfrom part of the total income under the Act.” Moreso, in views of the observations made in Para 24 by theSupreme Court as reproduced hereinabove, it is very clear thatthe object of 14A is also described. In that view of the matter, the contentions raised by theDepartment is required to be accepted, the issue is answered infavour of the Department against the assessee. However, it is made clear that the expenses incurred for loss will be considered in accordance with law. The appeal is partly allowed. (VIJAY KUMAR VYAS),J (K.S.JHAVERI),J A.Sharma/63