2019 (7) TMI 122 - AT - Income Tax

Tribunal recognizes appellant as charitable institution, allows income computation under sections 11 and 12

Pimpri Chinchwad New Town Development Authority Versus The Asst. Commissioner of Income Tax, Range – 10, Pune And Vice-Versa

Pimpri Chinchwad New Town Development Authority Versus The Asst. Commissioner of Income Tax, Range – 10, Pune And Vice-Versa - TMI Issues Involved:1. Taxability of income of the appellant as an extended arm of the State Government of Maharashtra.2. Recognition of the appellant as a charitable institution and the applicability of sections 11 and 12 of the Income-tax Act, 1961.3. Correctness of the reassessment framed and the computation of surplus.4. Classification of lease transactions as operating or financial leases and the consequent allowance of depreciation.5. Deduction of cost of land and development expenses.6. Allowance of depreciation on leased assets and its classification as an application of income.7. The appellant’s additional grounds for depreciation on opening WDV and proportionate costs.8. Revenue's objections regarding depreciation on brought forward block of assets and the issue of double relief.Detailed Analysis:1. Taxability of Income as an Extended Arm of the State Government:The appellant claimed that its income was not taxable under the Income Tax Act, 1961, as it was an extended arm of the State Government of Maharashtra. This claim was rejected by the CIT(A), and the Tribunal upheld this decision, finding no merit in the plea that the appellant’s income was exempt from tax on this ground.2. Recognition as a Charitable Institution:The appellant argued that it was engaged in charitable activities and that its income should be computed under sections 11 and 12 of the Act. The Tribunal noted that the appellant had been granted registration under section 12A of the Act by the Tribunal, effective from 01.04.2002. Consequently, the income needed to be computed as per sections 11 and 12, allowing for the accumulation of income and application of funds for charitable purposes. The Tribunal directed the Assessing Officer to compute the income accordingly, considering the principles laid down in various judicial precedents.3. Correctness of Reassessment and Computation of Surplus:The reassessment framed by the Assessing Officer was challenged on the grounds that it resulted in a higher income than originally assessed. The Tribunal found that the method of accounting adopted by the appellant, which spread the lease premium over 99 years, was not reflecting the real income. The Tribunal directed the Assessing Officer to adopt the correct figures of current year lease premium and exclude figures relating to earlier years, applying the matching principle for corresponding costs.4. Classification of Lease Transactions:The appellant contended that its lease transactions should be classified as operating leases, allowing for depreciation on leased assets. The Assessing Officer had classified the leases as financial leases, denying depreciation. The Tribunal upheld the classification of leases as financial leases, noting that the entire risk and rewards incidental to ownership were transferred to the lessee. Consequently, the appellant was not entitled to claim depreciation on these assets.5. Deduction of Cost of Land and Development Expenses:The appellant sought deduction of land cost and development expenses incurred in earlier years. The Tribunal applied the matching principle, allowing the deduction of proportionate costs of land and constructed premises against the revenue recognized from lease premiums. The Tribunal directed the Assessing Officer to verify the appellant’s claims and allow the deductions accordingly.6. Allowance of Depreciation on Leased Assets:The appellant claimed depreciation on leased assets as an application of income. The Tribunal, referring to the Supreme Court decision in CIT Vs. Rajasthan & Gujarati Charitable Foundation Poona, held that depreciation is to be allowed on assets, even if the cost of acquisition was treated as an application of income under section 11(1)(a) of the Act.7. Additional Grounds for Depreciation on Opening WDV:The appellant raised additional grounds for depreciation on the opening WDV of assets. The Tribunal, considering Explanation 6 to section 43(6) of the Act, directed that the WDV should be based on the actual cost of assets as on 01.04.2002, without any depreciation being deemed to have been allowed in the earlier exempt years.8. Revenue's Objections:The Revenue objected to the allowance of depreciation on the brought forward block of assets, arguing it resulted in double relief. The Tribunal dismissed these objections, affirming that the appellant was entitled to claim depreciation on assets, as per the principles laid down by the Supreme Court and the Bombay High Court.Conclusion:The Tribunal allowed the appeals of the appellant, directing the Assessing Officer to compute the income as per sections 11 and 12 of the Act, applying the matching principle for corresponding costs and allowing depreciation on assets. The cross objections and appeals of the Revenue were dismissed.