2017 (10) TMI 1338 - HC - Income Tax

Tax Court Decision: Stock valuation, business income classification upheld. Appellant not tax-exempt.

Urban Improvement Trust, Kota Versus The Income Tax Officer, Kota and Others.

Urban Improvement Trust, Kota Versus The Income Tax Officer, Kota and Others. - TMI Issues Involved:1. Validity of reassessment proceedings and consequential assessment order.2. Nature of expenditure incurred by the assessee.3. Disallowance of depreciation claimed.4. Valuation of closing stock.5. Status of the appellant as a 'local authority' under Section 10(20) of the Income Tax Act, 1961.6. Classification of rental income.7. Allowability of deficit on development work in progress under Section 14A of the Act.8. Exemption from income tax under Article 289(1) of the Constitution of India.Issue-wise Detailed Analysis:1. Validity of Reassessment Proceedings and Consequential Assessment Order:The court examined whether the Tribunal was justified in not declaring the reassessment proceedings and the consequential assessment order as nullity. The Tribunal's partial allowance of appeals from both the department and the assessee was challenged. The court referred to its binding decision in D.B. Income Tax Appeal No.643/2008, which upheld the reassessment proceedings.2. Nature of Expenditure Incurred by the Assessee:The court analyzed whether the expenditure of Rs. 11,74,15,986/- incurred by the assessee was of revenue nature. The Tribunal's decision to treat this expenditure as revenue, ignoring its role in bringing inventories to their present location and condition as per Accounting Standard-2 of ICAI, was questioned. The court upheld the Tribunal's view, confirming that such expenditure should be considered part of the closing stock.3. Disallowance of Depreciation Claimed:The court evaluated the Tribunal's decision to delete the disallowance made out of depreciation claimed, even though it was not claimed on the written-down value of the asset. The Tribunal's stance was upheld, confirming the deletion of the disallowance.4. Valuation of Closing Stock:The court assessed whether the Tribunal was justified in confirming the CIT(A)'s order, which reduced the additions made in the value of closing stock from Rs. 18,31,68,938/- to Rs. 10,87,50,513/-. The court upheld the Tribunal's decision, emphasizing that the value of opening stock must be taken as the closing stock of the preceding year.5. Status of the Appellant as a 'Local Authority':The court scrutinized whether the appellant qualified as a 'local authority' under Section 10(20) of the Income Tax Act, 1961, and thus was exempt from income tax. The Tribunal's decision that the appellant was not a 'local authority' was challenged. The court referred to the definition and attributes of a local authority as per Section 3(31) of the General Clauses Act and relevant Supreme Court judgments. It concluded that the appellant did not qualify as a local authority, thus not exempt from income tax.6. Classification of Rental Income:The court examined whether the rental income of Rs. 13,26,069 should be treated as 'Income from house property' under Section 22 or as 'business income.' The Tribunal's decision to treat it as business income was upheld.7. Allowability of Deficit on Development Work in Progress:The court analyzed whether the deficit of Rs. 1,26,07,674/- on development work in progress was allowable under Section 14A of the Act. The Tribunal's decision not to allow this deficit was upheld.8. Exemption from Income Tax under Article 289(1) of the Constitution of India:The court evaluated whether the appellant was exempt from income tax under Article 289(1) of the Constitution of India, which exempts the property and income of a State from Union taxation. The court concluded that the appellant could not claim this exemption, as the income was not considered the income of the State Government.Conclusion:The court dismissed the appeals filed by the department and allowed those of the assessee, directing the Assessing Officer to follow the judgment. Other questions were kept open, and the court emphasized that the authority assessee is a local authority for the purpose of carrying out the improvement and development function of the State.