TaxTMI 
TaxTMI 
2003 (2) TMI 182
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....turn of Income. The Assessee made such a claim since under section 10(20) of the Income-tax Act, 1961 (hereinafter referred to as 'The Act') while computing the total income of a previous year of any person, any income of a local authority which is chargeable to tax under the head income from house property, capital gains, income from other sources or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service (not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area, shall not be included. 3. The term 'Local Authority' has not been defined in the Act. The term Local Authority has however been defined under the General Clauses Act, 1897. Under section 3(31) the term 'Local Authority' has been defined as follows: "'Local Authority' means a Municipal Committee, a District Board, a body of Port Commissioners, or other authority legally entitled to or entrusted by the Government with the control or management of a municipal or local fund." The Act being a Central Act, the definition contained in section 3(31) of the General Clauses ....
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....d sewerage, town planning and development, roads, markets, transportation, social welfare services etc. etc. broadly we may say that they may be entrusted with the performance of civic duties and functions which would otherwise be governmental duties and functions. Finally, they must have the power to raise funds for the furtherance of their activities and the fulfilment of their projects by levying taxes, rates, charges, or fees. This may be in addition to moneys provided by government or obtained by borrowing or otherwise. What is essential is that control or management of the fund must vest in the authority. In addition to the above the Honourable Supreme Court also adopted the another test laid down in the decision of Supreme Court in Municipal Corporation of Delhi v. Birla Cotton Mills AIR 1968 SC 1232, wherein Hidayatullah, J., described some of the attributes of local bodies as subordinate branches of governmental activity. They are democratic institutions managed by the representative of the people. They function for public purposes and take away a part of the Government affairs in local areas. They are political sub-divisions and agencies which exercise a part of State ....
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....orpn. AIR 1998 SC 1125 would be applicable to the facts of the Assessee's case in which the Supreme Court applied the tests laid down in R.C. Jain's case in coming to the conclusion that U.P. Forest Corporation was not a Local Authority under section 10(20) of the Act, 1961. The Assessing Officer accordingly rejected the claim of the Assessee for adopting its status as a 'Local Authority'. 7. Thereafter the Assessing Officer made assessment of the income as per the Return of Income filed by the Assessee. The Assessing Officer noticed that the Assessee had claimed a sum of Rs. 1,40,31,211 as loss and the Assessee also claimed carry forward of this loss. The Assessing Officer was of the view that under section 42(2) of the VIDC Act, the net deficit, if any, in respect of any of the objects of the assessee shall be solely borne by the State Government. He was therefore of the view that the loss claimed was not Assessee's loss and therefore no carry forward of losses can be allowed. 8. Thereafter the Assessing Officer noticed that in June, 1997 the Assessee had issued bonds aggregating Rs. 100 Crores for augmenting the funds necessary for completing its projects. In connection wi....
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....ral overhead expenses during the construction of projects. 11. According to the Assessing Officer this admission by the Assessee that its business has not commenced had very serious consequences. The first consequence being that no loss from business can be claimed and all expenditure whether of revenue or of capital nature should be capitalized. The Assessing Officer relied on the decision of the Honourable Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 for the above proposition. The Assessing Officer therefore was of the view that the Profit & Loss Account of the Assessee can never be the basis to determine the income of the Assessee. The Assessing Officer thus in effect concluded that there could be no computation of income or loss from business, as the business had not yet commenced. The second consequence was that though the business of the Assessee had not commenced yet the Assessee was in receipt of income which can be classified under the other heads of income viz., Income from other sources and Income from House Property and these incomes will have to be determined under the respective heads of income. The further consequence was that the ....
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.... the said head under section 22 of the Income-tax Act, 1961. He allowed a deduction of 1/5th of the rent received viz., Rs. 3,77,939 towards repairs and collection charges and determined the net income chargeable under the head 'Income from House Property' at Rs. 15,11,754. 13. Thereafter what remained to be considered by the Assessing Officer was as to the various other incomes and expenditure set out in the profit and loss account: Incomes Expenditure Rs. Rs. Sale of Water ....
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....nbsp; ------------- Excess of Expenditure over Income allowed to be Capitalized as pre commencement Expenses 52,19,80,681 ------------- 56,11,56,458 ------------- The Assessing Officer allowed Rs. 52,19,80,681 to be capitalized as pre-commencement expenses. The total income was thus determined as follows: Income from House property: Rs. 15,11,754 ....
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....of succeeding assessment years as per the provisions of the Act. (v) Alternately, the assessee pleaded that the Interest income be treated as Income from Business and after setting off the interest paid to the bondholders (which is much more than the interest received by the Assessee), allow the net interest expenditure to be capitalized. (vi) Regarding the assessment of income received in the form of Rent from employees under the head Income from House Property', the Assessee contended that the houses were built at various sites/divisional offices of the Assessee corporation specifically to satisfy the needs of expediting the ongoing projects of the corporation and that they were not located in cities/town to fetch any 'rental income', in the real meaning of the term. The Assessee contended that it was income from exploitation of a business asset and therefore should be construed as income from business. The Assessee relied on the decision of the Honourable Supreme Court in the case of Universal Plast Ltd. v. CIT 237 ITR 454 (SC). If construed as a Business income the assessee pleaded that the expenditure incurred in the form of interest paid to bondholders (which is much mo....
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.... programme or for the purpose of planning, development or improvement of cities, towns and villages or for both but was formed for the purpose of completing some ongoing irrigation projects and Hydro-electric power projects, which cannot be said to be planning, development or improvement of any city, town or village though the activity of the corporation remotely and indirectly will have impact on the planning, development or improvement of city, town or village. 3. With regard to the claim of the Assessee that it is a State whose income is exempt under Article 289(1), the CIT(A) held that the Assessee was a body corporate having perpetual succession and a common seal capable of suing and being sued in its name with power to borrow and spend. On dissolution the properties, funds and dues realizable by the corporation and liabilities of the corporation vest in the State Government. In the light of the ratio laid down by the Honourable A.P. High Court in the case of APSRTC v. CIT 47 ITR 101 (AP) affirmed by the Honourable Supreme Court in 52 ITR 524 (SC) and the decision of the Honourable Bombay High Court in the case of Vidarbha Housing Board v. ITO 92 ITR 430 (Bom.), the CIT(A) ....
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....ssee. 7. With regard to the claim of the assessee for carry forward and set off of loss under the provisions of the Act, she held that under section 42(2) of the VIDC Act, the net deficit if any, in respect of any of the objects shall be solely borne by the State Government. Therefore the assessee cannot claim set off or carry forward of loss. We should mention in this connection that in the light of the findings by the Assessing Officer which findings was affirmed by the CIT(A) to the effect that the assessee never commenced any business and its claim for business loss was rejected and the entire expenditure was allowed to be capitalized, there was no occasion to render any decision on this ground. The income determined under the head Income from other sources and Income from House Property was again a positive income and therefore there was no occasion for the CIT(A) to have rendered any decision on this aspect at all." 16. Aggrieved by the order of the CIT(A) the assessee has preferred the present appeal. The original grounds of appeal were not specific, were argumentative in nature and therefore we directed the Learned Counsel for the assessee to raise specific grounds of....
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....es. On an average Rs. 200 to 300 cr. Have been allocated annually for the irrigation projects in Vidarbha region. Since the cost of the ongoing projects is Rs. 4,430 cr., it will require about 15 years to complete them. There is a irrigation backlog of about 2 lac. ha. In this region by June, 95 in terms of the Dandekar Samiti report. In order to remove this backlog, through a time bound programme, and to complete 10 selected ongoing projects, a fiscal provision of Rs. 3,800 crores will be required in the next 5 years. With the completion of these 10 projects, an irrigation potential of 5.89 lac. ha. will be created, establishing a water use of 140 TMC. Therefore, the budgetary support will have to be supplemented through open market borrowings for the completion of these 10 projects in the above period, the experience of the Maharashtra Krishna Velley Development Corporation - a statutory corporation of the State, in raising funds by floating bonds-private/public issue, has been very much encouraging- Accordingly Government of Maharashtra considers it expedient to set up a corporation called 'Vidarbha Irrigation Development Corporation' for the purpose of completion of 10 selec....
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....Act. The definition of 'Local Authority' contained in section 3(31) of the General Clauses Act, 1897 is in two parts. The first part refers to specific authorities like Municipal Committee, a District Board, a Body of Port Commissioners. The second part is generic and covers any other authority legally entitled to or entrusted by Government with the control and management of a municipal or local fund. The second part therefore suggests that in order any other authority to be a local authority should be legally entitled to or entrusted by the Government with the control or management of a local fund and must also possess many, if not all, of the distinctive attributes and characteristics of a Municipal Committee, District Board or Body of Port Commissioners. 19. The Honourable Supreme Court in the case of Union of India v. R.C. Jain AIR 1981 SC 951 has laid down the distinctive attributes and characteristics, all or many of which a Municipal Committee, District Board or Body of Port Commissioners shares with any other local authority. The question before the Honourable Supreme Court in the said case was as to whether Delhi Development Authority was a local Authority within the me....
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....isions with that of the VIDC Act. We should in this context observe that the object sought to be achieved by the two enactments were not the same and though a comparison of the provisions of both the Acts would be necessary but what is material is that the tests laid down by the Honourable Supreme Court are broader principles and the Assessee should satisfy them so as to be called a Local Authority within the meaning of section 3(31) of the General Clauses Act, 1897. 21. The Learned Standing Counsel for the Revenue on the other hand referred to the various provisions of the VIDC Act and submitted that the Appellant does not satisfy any of the attributes (except one attribute) as laid down by the Honourable Supreme Court in the case of R.C. Jain. 22. We shall now deal with each of the attributes laid down by the Honourable Supreme Court in the case of R.C. Jain in the light of the rival submissions. 23. With regard to the 1st attribute laid down by the Honourable Supreme Court viz., that the authority must have separate legal existence as corporate bodies and must not be mere government agencies, it is not in dispute that under section 3(2) of the VIDC Act, the Assessee is ....
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....chments area, submergence area and command area can be identified, the Assessee has not produced any material to show that these areas are identifiable. 27. We have considered the rival submission. We are of the view that from the Schedule to the VIDC Act it is not possible to say that the area is a defined area. What has been handed over to the corporation under the VIDC Act is 10 irrigation projects mentioned in the Schedule to the said Act. The Geographic limit is not the geographic limits of the 9 Districts referred to in the Schedule. The geographic limit is in respect of Catchments area, submergence Area and Command Area of 10 irrigation projects within the geographic limits of the aforesaid 9 districts. In the absence of any definition or explanation as to what is catchments area, submergence Area and Command Area, it is not possible to identify the geographic area of operation of the assessee from a mere perusal of the VIDC Act. Besides this we agree with the conclusion of the CIT(A) that the area administered by a local authority should be of such type and size which is clearly manageable by a municipal body and that the area administered by the Assessee extending to ov....
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....members of the Assessee. The Learned Standing Counsel pointed out that there is no popular representation by the inhabitants of the Vidarbha region where the Assessee functions. Referring to section 4(1) he submitted that the Minister, MLA's and MLC's could be elected representative from any area and not necessarily, Minister, MLA's, MLC's from Vidarbha region. This according to him will not be enough to fulfil the test of election by the inhabitants of the area where the Assessee functions. He also submitted that factually there was no member from the Vidarbha region. The Learned Counsel for the Assessee on the other hand referred to the fact that an MLA or Minister represents the whole of the State and, therefore, they can be said to represent the local inhabitants of the Vidarbha region also. He also referred to an amendment made to section 4(1) of the VIDC Act, w.e.f. 24-10-2000 whereby for the existing section 4(1)(b) of the VIDC Act, the following clause (b) was substituted: "(b) Two non-official members from Vidarbha Region to be nominated by the State Government - Ex-offico Vice-Chairman." The amendment being clarificatory in nature should be deemed to apply retrospec....
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....rom constructing any dam, bandhara, weir etc. within their area of operation. Under section 24 it has power to exercise the powers under the Maharashtra Irrigation Act, 1976. Under section 26 it has power to acquire lands. Under section 30 all grants by State Govt. all other receipts, income will be the fund of the assessee and under section 35 the assessee has power to spend from and out of the fund in any manner it likes. Under section 33 it has powers to borrow upto Rs. 1,000 crores. All these powers according to the Learned Counsel for the assessee would show that the assessee functions with a great degree of autonomy. The fact that there are some provisions in the Act under which the State Government's approval is to be obtained will not make the authority non-autonomous and those powers are merely supervisory and such powers vested in the State Government are usual in all enactments. 31. The Learned Standing Counsel on the other hand submitted that under the provisions of section 2(c) of the VIDC Act and submitted that Area of operation as stated in the Schedule is 10 projects which were handed over to it by the State Government. Under section 18 the functions of the Corpo....
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....ee has powers to levy water charges and such water charges shall be at least sufficient to meet the interest and loan repayment on the loans raised by the Corporation from the open market. Under section 25 the State Government may issue to the Assessee such general or special directions as to policy or exercise of the powers or performance of the functions by the Corporation, excepting in respect of levying and recovery of water charges by the Assessee, as it may think necessary or expedient for carrying out the purposes of the VIDC Act and the Assessee shall be bound to follow and act upon such direction. Under Chapter V the Assessee does not have power to acquire land for the purpose of the VIDC Act only the State Government has the power. Even for disposal of the land vested in the Assessee under the Act, the Assessee will be bound by the rules made by the State Government in this behalf. Under Chapter VI the Assessee has financial autonomy in the sense that under section 35 it has power to spend such sums as it thinks fit for the purposes authorized under the Act from and out of the fund of the Corporation referred to in section 30 or from the reserve and other funds referred t....
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....s. The next part of the attribute viz., whether the government functions entrusted to the Assessee by the VIDC Act are such functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services etc. In this regard the submission of the learned counsel for the Assessee is that under section 50 the Assessee has to rehabilitate persons affected by any of the Irrigation or hydroelectric power projects in accordance with the provisions of the Maharashtra Project Affected Persons Rehabilitation Act, 1986 and the said Act the Assessee has resettle the persons affected in the same village and provide civic amenities to them, like health, education, services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services etc. 35. The Learned Standing Counsel referred to the provisions of section 18 of the VIDC Act and submitted that a perusal of the various functions performed by the Assessee would show that these functions....
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....n indication that the Assessee cannot supply water directly to all the inhabitants of the area. In other words supply of water to inhabitants of the area is only incidental or ancillary to the functions of the Assessee. Moreover as rightly contended by the Learned Senior Standing Counsel the VIDC Act nowhere casts an obligation on the Assessee to supply water to any of the inhabitants of the area. Its function is restricted to construction of the irrigation projects and things incidental thereto and thereafter to maintain it. The true test of duty on the part of the Assessee to supply water to the inhabitants is to ask the question whether all the inhabitants have a right to demand water from the Assessee. The answer to the question will be that not all the inhabitants have a right to demand water except the Agriculturists. 37. The contention of the Learned Counsel of the Assessee that the Assessee has to rehabilitate persons affected by any of the irrigation projects and in the process they perform the function of health, education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services etc. is a far fetched argument.....
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....g to him this power is power of compulsory exaction. 40. The Learned Standing Counsel for the Revenue submitted that power to collect tax, rates, charges or fees would envisage that all inhabitants of the area have to pay the same irrespective of any benefit they get in return for the payment. Referring to the provisions of section 20 he submitted what is permitted to be collected by the Assessee is water charges from cultivators. Referring to the proviso to section 20 he submitted that even this collection of water charges is subject to a minimum and the water charges so levied shall be enough to service the interest charges and repayment of the loan raised by the Corporation from open market. The fact that under section 46 of the Maharashtra Irrigation Act, 1976 the Assessee can collect water charges from the occupiers of the command area of a canal even if they do not use the irrigation facility provided by the Assessee at 50% of the charges paid by the persons who use the irrigation facility, by itself is not enough to conclude that there is compulsory exaction by the Assessee. He submitted that the occupiers of land in the command area whether they use the facility of irrig....
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.... section 20 has the power to levy water charges: Section 20 reads as follows: "The Corporation shall, from time to time, determine and levy water charges according to volume, for supply of water for irrigation, industrial and domestic purposes to the State Government, local authorities, Government agencies, cultivators and water users associations: Provided that, the levy of water charges shall be such that water charges so recovered shall be sufficient at least to cover the interest charges and repayment of the loan raised by the Corporation from the open market." On a perusal of section 20 of the VIDC Act three things are evident. Firstly, the water charges are determined on the basis of interest charges and repayment of loan raised by the assessee from the open market. Secondly, the water charges are recovered only from the consumers viz., the State Government, Local authorities, Government agencies, cultivators and water users associations. Thirdly, the water charges are payable in proportion to the consumption. The features are more like recovering cost for supply of an amenity. Therefore the assessee cannot be said to have any powers of compulsory exaction of taxes. ....
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....inancial year an annual statement and the programme of work of the Corporation for the succeeding financial year and these financial statements need to be approved by the State Government. The State Government has powers to make variation to the proposal submitted by the Corporation. It is clear from the analysis of the various provisions that whatever power has been vested with regard to the fund are subject to the prior approval of the State Government and thus, it cannot be said that the assessee has been vested with all powers of control and management of the local fund under the Act. Even if the provisions are construed having vested sufficient powers in the assessee in the matter of controlling it': own fund, the provisions of section 46 of the Act are not merely supervisory in nature and all those powers are overriding powers vested in the State Government. 44. Now we shall discuss the various case laws relied upon by the learned Counsel for the assessee with regard to the 1st Ground of appeal. In R.C Jain's case, the Hon'ble Supreme Court was dealing with the Delhi Development Authority (DDA) constituted under the Delhi Development Act, 1957. It is clear from the perusal....
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....ounsel for the assessee placed reliance on the decision of the Hon'ble Bombay High Court in the case of Krishi Upaj Bazar Samiti v. G.P. Hardas 1985 MLR 377. We have perused the decision relied upon by the learned counsel for the assessee. From the perusal of the said decision, it is seen that under the APMC Act, while carrying out regulation of marketing of agricultural produce in a specified area, the State Government declares by notification that marketing of agricultural produce specified in the notification shall be regulated under the APMC Act in the specified area. On issuance of such notification, the local authority notwithstanding anything contained in any other law for the time being in force are prohibited from establishing, authorising, continuing or allowing to be established or continued in any place in the market for marketing of that agricultural produce. It is thus clear that in the case relied upon by the learned counsel for the assessee the authority created has substituted the functions of a local authority. Such feature is not in the present in the case of the assessee. 45. Apart from the above we find from a perusal of the various provisions of the Income-....
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....) in the case of the State of Jammu and Kashmir a company formed and registered under any law for the time being in force in that State; (iii) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu, and Pondicherry, a company formed and registered under any law for the time being in force in that Union territory: Provided that the registered or, as the case may be, principal office of the company, corporation, institution, association or body in all cases is in India;" Section 2(31) defines a 'person' as follows: "(31) "person" includes- (i) an individual, (ii) a Hindu undivided family, (iii) a company (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses; Explanation - For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or judicial person was formed or established or incorporated with ....
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.... realigned for the purpose of carrying out the objects of the assessee and resettlement of any population is rendered necessary, the same has to be done by the assessee. Under section 50, if any hydro power project or irrigation project is carried out in any area which result in displacement of persons then the assessee has to resettle and rehabilitate them in accordance with the provisions of Maharashtra Project Affected Persons Rehabilitation Act, 1986. In the process of the rehabilitation, it is submitted by the learned counsel for the assessee, that the assessee has to construct houses and has to plan and develop the city, town, villages in which the persons displaced have to be rehabilitated. Thus, according to the learned counsel for the assessee, the assessee performs developmental functions and also satisfies the needs of housing accommodation and also does planning, development and improvement to city, town and villages. He then referred to the decision of the Hon'ble Supreme Court in the case of Gujarat Industrial Development Corpn. v. CIT [1997] 227 ITR 414 wherein the Hon'ble Supreme Court had laid down that the expressions "planning, development or improvement of citie....
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....tal or ancillary and is only indirect. He also submitted that the reliance placed by the learned Counsel for the assessee on the decision of the Hon'ble Rajasthan High Court in the case of CIT v. Rajasthan Land Development Corpn. [2002] 121 Taxman 573, was not proper. He submitted that the Hon'ble Rajasthan High Court considered the definition of the word 'land development' as appearing in section 2(i) of the Rajasthan Land Development Corporation Act, 1975 and found that the object of the said enactment was planning and development of villages also. He thus, concluded that the decision of the Rajasthan High Court will also not help the case of the assessee as the said decision was on the facts of the said case before the Rajasthan High Court and the facts of the present case are distinguishable. 51. We have considered the rival submissions. We are of the view that the assessee in the present case cannot be said to be an authority constituted by or under any law for the purpose of satisfying housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both, for the following reasons: Firstly, the object of the Act as sp....
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....jasthan Land Development Corpn. is again a decision wherein the Rajasthan High Court considered the purpose of the Rajasthan Land Development Act, 1957 and the definition of the word 'land development' contained therein and concluded that the definition was vide enough and the objective of the enactment was wide enough to include development of villages also. We have already held that development of villages, city and town was not undertaken by the assessee and that the said objective even assuming it exists, is too remote an objective. It cannot, therefore, be said that the assessee was established by the VIDC Act with the objective of development of city, town or villages. For the reasons set out above, we are of the view that the case of the assessee that its income is exempt under section 10(20A) is not acceptable. Accordingly, the second ground of the appeal of the assessee is dismissed. 52. The third ground of appeal of the assessee reads as follows: "That the CIT(A) has erred in holding that the Appellant Corporation is not an instrumentality of State and is not 'State' within the meaning of Article 289 of the Constitution of India and thereby deprived the Appellant Co....
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....ed upon examining this issue for the first time and then coming to a conclusion favourable to the respondent. We do realise that the respondent did not raise this contention before the income-tax authorities because it had contended that it was liable to exemption being a local authority. Perhaps a contention in the alternative ought to have been raised, but this was not done. If the High Court had wanted this issue to be decided, the proper course would have been to have remanded the case to the Tribunal or to the assessing authority for a decision. This was perhaps not done because the High Court had already come to the conclusion, in our opinion wrongly, that the respondent was a local authority. Inasmuch as the respondent cannot, in our opinion, be regarded as being a local authority, the interest of justice would demand that the question as to whether its income is liable to be exempted from tax under section 11(1) of the Act should be investigated and examined by a proper forum under the Act. These proceedings arise out of the writ petitions which have been filed challenging the correctness of the decision of the Tribunal in respect of the assessment years 1977-78 and 1980....
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....liar facts and circumstances of the case. The Tribunal, being a creature of statute does not have any such power to give such direction. The observations of the Supreme Court in the case of U.P. Forest Corpn. extracted above would be enough to dismiss this ground of appeal of the assessee. We accordingly dismiss this ground of appeal of the assessee. 55. The fourth ground of appeal of the assessee reads as follows: "That the CIT(A) has erred in holding that the Appellant Corporation is not an instrumentality of State and is not 'State' within the meaning of Article 289 of the Constitution of India and thereby deprived the Appellant Corporation from the benefit of immunity from Income-tax." 56. We have considered the submissions of the learned counsel for the assessee as well as the learned Standing Counsel for the revenue. We do not agree with the submissions of the learned counsel for the assessee that the assessee is an instrumentality of the State Government. In the case of Andhra Pradesh State Road Transport Corpn. v. ITO [1964] 52 ITR 524, the Hon'ble Supreme Court affirmed the decision of the Hon'ble High Court holding as follows: "The Andhra Pradesh State Road Tr....