2017 (2) TMI 919 - AT - Income Tax

Tribunal upholds income classification, denies exemption; penalty proceedings pending.

The Tribunal dismissed both appeals, upholding the classification of the appellant's income as business income, its classification as an Association of ... Income from property of the assessee authority - assessee being a State - immunity from tax under Article 289(1) of the Constitution - whether could be said to be income from property of the State and if so whether the same is derived from trade or business carried out by it? - Held that:- The facts in the present case are identical to that in Vidharba Housing Society (1972 (2) TMI 23 - BOMBAY High Court ) and the decision rendered therein squarely applies in the present case moreso when no other decision on identical facts favouring the assessee was brought to our notice. We, therefore, have no hesitation in holding that the assessee authority could not be termed to be an extension of the State. Even the arguments of the Ld. counsel for the assessee that it is the substance which is relevant for determining the case of the assessee and not form, is defeated by the relevant clauses reproduced above, which clearly point out that even in substance the assessee was not an extension of the State. Having said so, the question of granting immunity under Article 289 of the Constitution does not arise at all. Even the Hon'ble Apex Court in Adityapur Industrial Area Development Authority Vs. UOI, (2006 (5) TMI 61 - SUPREME Court ) read the relevant clauses of the authority in that case, which we find are identical to that in the assessee's case and held it to be a distinct entity separate from the State. The Apex Court further held that the exemption otherwise specifically provided to the assessee authority under section 10(20A)/10(20) having been expressly taken away there was no merit in the contention of the assessee. Thus the assessee is distinct and separate from the State and thus not entitled to claim exemption from taxation under Article 289 of the Constitution. - Decided against assessee. Issues Involved:1. Validity of the assessment orders.2. Classification of the appellant's income as business income.3. Status of the appellant as a 'local authority' under Section 10(20) of the Income Tax Act.4. Classification of the appellant as an Association of Person (AOP).5. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.6. Claim of exemption under Article 289 of the Constitution.Issue-wise Detailed Analysis:1. Validity of the Assessment Orders:The appellant contested that the assessment orders dated 19-03-2013 and 25-08-2014 were against the law and facts of the case. The Tribunal, however, did not find merit in this argument and upheld the validity of the assessment orders.2. Classification of the Appellant's Income as Business Income:The appellant argued that the amount collected should not be treated as business income, emphasizing that it was a government body created for the development of a specific area and not for profit-making. The Tribunal noted that the surplus of income over expenditure was assessed as business income by the Assessing Officer. The Tribunal upheld this classification, rejecting the appellant's claim that it was not engaged in any business activity.3. Status of the Appellant as a 'Local Authority' under Section 10(20) of the Income Tax Act:The appellant claimed exemption under Section 10(20) of the Income Tax Act, asserting it was a 'local authority.' The Tribunal referred to the definition of 'local authority' and concluded that the appellant did not qualify as such. The Tribunal upheld the denial of exemption under Section 10(20), aligning with the findings of the Assessing Officer and the CIT (Appeals).4. Classification of the Appellant as an Association of Person (AOP):The appellant argued against its classification as an AOP, stating it was not formed for profit-earning purposes. The Tribunal, referencing the Explanation inserted in Section 2(31) of the Act, upheld the classification of the appellant as an AOP, thereby dismissing the appellant's argument.5. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:The appellant contested the initiation of penalty proceedings under Section 271(1)(c). The Tribunal did not specifically address this issue in detail, focusing primarily on the main grounds of appeal related to the classification and exemption of income.6. Claim of Exemption under Article 289 of the Constitution:The appellant introduced a new ground, claiming exemption under Article 289 of the Constitution, asserting it represented the State and its income was exempt from union taxation. The Tribunal admitted this additional ground for adjudication. Upon detailed examination, the Tribunal referred to various legal precedents, including the Hon'ble Supreme Court's decision in Adityapur Industrial Area Development Authority Vs. UOI, and concluded that the appellant was a distinct entity separate from the State. The Tribunal held that the appellant could not claim immunity under Article 289 as it was not an extension of the State and was engaged in activities distinct from governmental functions.Conclusion:The Tribunal dismissed both appeals, holding that the appellant was not entitled to exemption under Section 10(20) or Article 289 of the Constitution and upheld the classification of the appellant's income as business income. The Tribunal also upheld the classification of the appellant as an AOP and validated the assessment orders. The initiation of penalty proceedings under Section 271(1)(c) was not specifically addressed in detail.