AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2005 (7) TMI 539
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....ng Officer. Assessee carried the matter before the CIT(A). 4. Assessee's second plea that the assessee's income is exempted under section 10(20A) of the Income-tax Act, 1961 was also rejected. 5. The next objection of the assessee was against the order of the CIT(A) in holding that assessee Corporation is not an instrumentality of the State and is not a State within the meaning of Article 289 of the Constitution of India and thereby holding that the assessee is not having any immunity from tax. 6. The other grounds taken by the assessee are on merit; regarding treatment of interest income, income from house property and claim for set off and carry forward of loss under the head "Income from business". 7. Aggrieved again by the order of the first appellate authority, assessee approached the Tribunal. The Tribunal gave partial relief to the assessee. Aggrieved by the above order, assessee approached the Hon'ble High Court. 8. Vide Their Lordships order dated 27th July, 2004, the Hon'ble High Court held, two substantial questions of law do arise from the decision of the Tribunal which is set out (in Para 3) of Their Lordships order. It is reproduced below : (i)....
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.... not treating assessee's status as "Local Authority" and not allowing exemption under section 10(20) of the Income-tax Act, 1961. Alternatively assessee objected the denial of carry forward and set off against future profit of the Corporation. 14. The CIT(A) set out at page 5 of her order the attributes of a "Local Authority". Firstly, she noted, it should have a separate legal existence as Corporate bodies and must not be a mere Government agency. Secondly, it should function in a "defined area" and should wholly or partially, directly or indirectly be an elected body, by virtue of election by inhabitants of the area. Thirdly, there should be certain degree of autonomy, though not complete and not necessarily fully independent. Further, so as to constitute "Local Authority", body must be entrusted by statute with such Government 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 other words, it should be entrusted with performanc....
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....ion18 of VIDC Act clearly indicates that the main purpose of incorporating Vidarbha Irrigation Development Corporation ('VIDC') was to complete some ongoing irrigation projects in time-bound manner and to promote and operate some schemes for the generation of hydro-electric energy. Some allied activities connected with the above two main objectives are also to be undertaken, like fisheries, sericulture, tissue culture, horticulture, promotion of tourism, water sports and many other related activities. Hence, the learned first appellate authority held, if the objectives for which VIDC has been brought into existence are compared with those of Delhi Development Authority (for short DDA), it is more than evident that the functions assigned to the assessee are not governmental functions which normally entrusted to municipal bodies. Completion of irrigation projects and generation of hydro-electrical energy generally are not the functions of Municipal bodies, as such not a governmental function. It has nothing comparable with the functions of a Municipal body or Municipal Corporation. Assessee was brought into existence only to complete the ongoing irrigation projects in a time-bound ma....
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....s contention was rejected by the first appellate authority, as the assessee was not falling within the scope of the judgment of Hon'ble Supreme Court in the case of Housing Board of Haryana v. Haryana Housing Board Employees Union AIR 1996 SC 434. One of the reasons why the decision went against the assessee in the case of Haryana Housing Board Employees Union (supra) was that it had no independent functioning. Similar is the case with the assessee. The non-official Members are nominated by the State Government. Their services can be terminated prematurely by the Government, if so desired. The Special Invitees to the meeting of the Corporation had no right to vote. Even the subordinate officials can be appointed only if the State Government approves it. In short, she held, assessee's Members had no independent powers or not can function independently and the Members are not elected but selected and nominated by State Government. Hence, assessee's plea was rejected by the learned first appellate authority on the point. 20. The Tribunal, in the first inning, concurred with the view taken by the CIT(A). The decision of the Tribunal was challenged before the Hon'ble High Court and t....
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....cipality as referred to in clause (e) of article 243P of the Constitution; or (iii) Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or (iv) Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924);" Section 10(20A) omitted by the Finance Act, 2002, w.e.f. 1-4-2003. Prior to its omission, clause (20A), as inserted by the Finance Act, 1970, w.r.e.f. 1-4-1962, reads as under : "10(20A) any income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both." 24. The learned counsel for the assessee submitted, section 10(20A) of the Income-tax Act, 1961 has two parts. The first part stipulates that the authority must be constituted by or under any law enacted for the purpose of dealing with and satisfying the need for housing accommodation. If that be so, then, such authority will be exempted from tax. The second part provides ....
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....aged in the field of planning, design, land development in the irrigation projects, power projects, etc. Section 18 of the VIDC Act enumerates the functions of the Corporation - (a) promotion and operation of irrigation projects and scheme of hydro-electrical energy; (b) to plan, investigate, design, construct and manage irrigation projects and their command area development; and (c) empowers the assessee to plan, investigate, design, construct and manage schemes of generation of hydro-electrical energy. Assessee is also to promote irrigation-related activities such as fisheries, pisciculture, floriculture, horticulture, sericulture, tissueculture, etc. and also assessee is to promote tourism, water sports and other related activities on and around the irrigation and hydro-electric power projects. Assessee is empowered to develop the land around or nearby lake and in other suitable locations with irrigation facilities and other infrastructure facilities and lease part or whole of such developed properties to the interested parties. Assessee also has to prepare annual plan and five-year working development plan. 27. Inviting our attention to section 19 of the VIDC Act, which deal....
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.... the assessee-Corporation. Assessee's counsel submitted, in other words, the sovereign function of the State has been delegated to the assessee-Corporation, which are necessary to perform the duties and carry out the functions entrusted to assessee-Corporation. 30. The learned counsel for the assessee took us through the Maharashtra Irrigation Act, 1976, i.e., Maharashtra Act No. XXXVIII of 1976. "Canal Officer" is defined as "any officer duly appointed by the State Government by an order in writing for all or any of the purposes of this Act specified in the order, and includes in relation to a canal constructed, maintained, controlled or managed by the Company, a Company Officer, and by a Zilla Parishad, a Parishad Officer, and the expression 'Canal Officer duly empowered in this behalf', or any like expression means a Canal Officer empowered by the Appropriate Authority by an order in writing for all or any of the purpose of this Act specified in the order and also includes a person acting under the general or special order of such Canal Officer. Again inviting our attention to section 11 (Part III) of the Maharashtra Irrigation Act, 1976, learned counsel for the assessee subm....
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....n facilities; (e) use of lands; (f) resettlement of displaced persons; and (g) other activities of the Corporation. Under section 49(2), the assessee-Corporation has to furnish to the State Government such returns, statistics, reports, accounts and other information with respect to its conduct of affairs, properties or activities or in regard to any proposed work or scheme as the State Government may, from time to time, require. These are the sovereign functions of the State, which had been delegated to the assessee by virtue of VIDC Act. 33. Particularly the learned counsel for the assessee brought our attention to section 50 of the VIDC Act, which deals with rehabilitation and resettlement of the project affected persons. It reads as under :- "50. The rehabilitation and resettlement of the persons affected due to the irrigation and the Hydro-electric Power Projects shall be carried out by the State Government in accordance with the provisions of the Maharashtra Project Affected Persons Rehabilitation Act, 1986 : Provided that, all the expenditure required to be incurred by the State Government for the rehabilitation and the resettlement of persons affected by....
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.... attention to section 20 of VIDC Act, again the learned counsel submitted, the section stipulates that water will be supplied for irrigation, industrial and domestic purpose to the State Government, local authorities, Government agencies, Cultivators and Water Users' Association. This, the learned counsel submitted, is nothing but a developmental activity of towns and villages. The learned counsel further submitted, assessee had entered into agreement with MIDC/CIDCO for sale of water and such sale is credited to the Profit and Loss Account. The sale is at subsidised rates. 36. Inviting our attention to Paper Book II, Page 150 [Page 35, Para 86 of CIT(A)'s order], the learned counsel further submitted, even the revenue in fact admits that the purpose for which the Corporation has been brought into existence is in the nature of general public utility. Bringing again our attention to sections 18 and 19 of the VIDC Act, which deals with functions of the Corporation and general powers of the Corporation, the learned counsel submitted, these sections make it clear that the objects to be achieved by the assessee-Corporation are nothing but development, planning and improvement of citi....
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....ract or otherwise pertaining to the said projects of the State Government shall be deemed to be rights, liabilities and obligations of the Corporation. Therefore, it is clear that from the appointed date, assessee-Corporation stepped into the shoes of the State Government and performed all the duties and functions, which prior to the appointed date were performed by the State Government through its Wing - Irrigation Department. It is clear Corporation was established to perform sovereign function of the State Government, which was performed before the appointed date by the Irrigation Department. Assessee-Corporation is entitled to undertake any other project or activities entrusted by the State Government in furtherance of the objectives, for which the Corporation is established. The power and functions of the Corporation clearly demonstrates that the Corporation is created to discharge the sovereign functions of the State. 40. The learned counsel for the assessee assailed the stand of the Department that the objects of the Corporation are only to complete the incomplete irrigation projects. The learned counsel submitted, Corporation is required to do planning for the purpose of....
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....essentially doing the same function. Assessee is a Corporation established for that purpose. Industry cannot run without water and power. Assessee-Corporation performs the functions of planning and execution, erection of dams and hydro-electric project and, therefore, is doing a pivotal role in the industrial revolution in the region which definitely constitutes planning, development and improvement of cities, towns and villages or both. 43. Relying upon the decision of the Hon'ble Supreme Court in the case of Gujarat Industrial Development Corpn. (supra), counsel submitted, for the purpose of section 10(20A), the word "development" should be understood in wider sense. Establishment of industries, Hon'ble Supreme Court held, is one of the modes of development and such an interpretation would preserve the object of section 10(20A). The learned counsel further submitted, when the object is such, an interpretation which would preserve it should be accepted even if the provision is capable of more than one interpretation. In the instant case, since it is dealing with the welfare of the public, even if two interpretations possible, the one in favour of the assessee should be preferre....
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....provisions of section 10(20A). 46. Again inviting our attention to para 39 of the judgment of Hon'ble Bombay High Court (Nagpur Bench) in the instant case of the assessee, the learned counsel for the assessee submitted, the interpretation given by the Tribunal to section 10(20A) did not find favour of the Hon'ble High Court. Learned counsel quoted the observation of Their Lordships in para 39, which reads as under, bring home the point :- "However, the conclusion arrived at by the appellate Tribunal in respect of question No. 1 mentioned hereinabove in the present appeal appears to be not correct and in our view, needs to be reconsidered by the Appellate Tribunal." Hence the learned counsel for the assessee concluded that the order of the revenue authorities on the point is to be reversed. 47. Replying to the above, the learned standing counsel for the revenue, Shri Anand Jaiswal submitted, assessee is a developmental authority. It exists for mobilisation of the resources that required for development. A reading of the various provisions of the VIDC Act makes it clear that the existence of the assessee will come to an end once it completes the work entrusted. Part....
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....eans it should be done in the area in a planned and organised manner. Indirect development of any village, town, city, etc. is not what contemplated under the section. Assessee's activity may result in development, but the assessee is not doing the development. 51. Distinguishing the decision of the Hon'ble Supreme Court in the case of Gujarat Industrial Development Corpn. (supra), the learned standing counsel submitted, the facts are entirely different. Particulary, he brought our attention to Para 8, which reads as under :- "8. The scheme of the Gujarat Act, as is seen from a survey of the relevant provisions referred to above, would indicate that the Corporation set up thereunder is to chalk out plans for development of industrial area and industrial estate in different places which may locate in cities or towns or villages. Such schemes would normally involve planning and development of such areas. . ." 52. The learned standing counsel for the revenue brought our attention to the decision of the Hon'ble Supreme Court in the case of Aswini Kumar Ghose v. Arabinda Bose AIR 1952 SC 369, wherein Their Lordships observed - "It is not a sound principle of construction ....
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...., no doubt, it is not permissible to supply a clear and obvious lacuna in a statute and imply a right of appeal, it is incumbent on the Court to avoid a construction, if reasonably permissible on the language, which would render a part of the statute devoid of any meaning or application". The learned standing counsel for the revenue also relied on the following decisions:- (1) State of Bombay v. Ali Gulshan AIR 1955 SC 810. (2) J.K. Cotton Spinning and Weaving Mills Co. Ltd. v. State of Uttar Pradesh AIR 1961 SC 1170. 54. The learned standing counsel for the revenue further submitted, even in the case of Gujarat Industrial Development Corporation v. CIT AIR 1997 SC 3275, the Hon'ble Supreme Court held - "the provisions of section 10(20A) applied specifically to development of cities, towns and villages, which clearly indicates that the term 'development' deals with development of city, town or village and does not deal with general development; but it should be specific and should be the development of civic in nature". 55. Replying to the above, the learned counsel for the assessee submitted, to exemption under section 10(20A), the activity should be in the....
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....the States, unless such undertakings are declared by the Parliament to be incidental to the ordinary functions of the Government. In effect, both the Articles envisage inter Governmental immunity from taxation - that of the Union, absolute, but that of the State, qualified. The Hon'ble Supreme Court in the case of Sea Customs Act [1878] section 20(2), In re AIR 1963 SC 1760 (under Sea Customs Act) held that immunity conferred by clause (1) of Article 289 is only in respect of tax on property and the property includes not only lands and buildings, but all forms of property. In the case in Gujarat Industrial Development Corporation v. CIT [1985] 151 ITR 255 (Guj.) the Hon'ble Gujarat High Court held that the assessee-Corporation was neither a State nor entitled for exemption under Article 289(1) nor an authority entitled to exemption under section 20(20A) of the Income-tax Act, 1961. This decision was reversed by the Hon'ble Supreme Court in the case of Gujarat Industrial Development Corpn. v. CIT [1997] 227 ITR 414 , which is heavily relied by the learned counsel for the assessee. Reversing the decision of the Hon'ble Gujarat High Court in Gujarat Industrial Development Corpn.....
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....purpose of plan development; and the agricultural land cannot be isolated from the development of villages and, therefore, the lands fall within the ambit of Corporation engaging into the activities of planning, development and improvement of agricultural lands which related to planning, development and improvement of villages. Thus, the answer being self-evident and finally determined by the Apex Court, is also need not be made subject to a reference application for re-examination". 59. Keeping in view the above two decisions and also the decision of the CIT(A), it is necessary for us now to go through the various provisions and rules framed thereunder to arrive at a conclusion whether the VIDC is an authority exempted from income-tax. 60. Before the CIT(A), the assessee claimed that it is a "Local Authority" entitled to exemption under section 10(20) of the Income-tax Act, 1961. The CIT(A) considered each one of the attributes of which an authority must possess to come within the definition of "Local Authority" as laid down by the Apex Court in the case of Union of India v. R.C. Jain AIR 1981 SC 951. The CIT(A) held - (a) that assessee-Corporation cannot be treated at par w....
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....ticle 289(1) of the Constitution of India. 63. It is the case of the revenue that though the assessee is an authority constituted in India under the law, it is not an authority constituted for the purpose of dealing with and satisfying the need for housing accommodation or it is not an authority constituted for the purpose of planning, development or improvement of cities, towns and villages or for both. 64. We are unable to fully agree with the above finding. In the case of Gujarat Industrial Development Corporation (supra), the Hon'ble Supreme Court, dealing with section 10(20A), held that the word "development" should be understood in its wide sense. Hon'ble Supreme Court further held, "there is no warrant to exclude all development programmes relating to any industry from the purview of the word 'development' in the said definition". Their Lordships further held "there is no indication in the Act that development envisaged therein should confine to non-industrial activities. The development of a place can be accelerated through varieties of schemes and establishment of industries is one of the modes of developing an area". 65. Now the question to be posed is whether de....
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....d by the State Government as Vice Chairman; other officials like Chief Secretary and Secretary of the various departments are ex-officio Members; and five of the MLAs and 3 of the MLCs are also Members of the assessee and thus it has a 'popular representation'. We are afraid; this is not what Hon'ble Supreme Court has stated that the "Members of the Corporation, either wholly or partly, directly or indirectly, must be elected by the inhabitants of the area". Section 3(2) of the VIDC Act does not say that ex-officio Chairman "must be elected by the inhabitants of the area". So also in the case of MLAs and MLCs. In short, the revenue authorities rightly rejected assessee's claim of status of "Local Authority". The local citizens of the area should elect them directly or indirectly. Perhaps the case of Irrigation Minister, MLAs/MLCs can be considered as indirect election. On a careful study this is also to be rejected. Therefore, this plea of the assessee was rightly rejected and held that the assessee is not a "Local Authority" as defined under General Clauses Act, 1897. 69. Now before the Tribunal, the main thrust of the argument of the assessee is that the assessee falls within ....
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....ment and improvement of agricultural lands, which related to planning, development and improvement of villages. 72. In the instant case of the assessee there is no doubt that the Corporation is constituted by a legislative enactment to engage in the activities of "promotion and operation of some irrigation projects in Vidarbha region, command area development and schemes for generation of hydro-electric energy to harness the water of Godavari and Tapi rivers allocated to the State of Maharashtra under the Water Disputes Tribunal Award and other allied and incidental activities including flood control". To hold that the activity of the assessee does not amount to planning, development or improvement of cities, towns and villages will not stand the scrutiny. It is true, assessee is not directly planning, developing or improving the cities, towns and villages. Assessing Officer as well as the CIT(A) held that the "Authority" should be constituted by or under any law enacted either for the purpose of dealing with and satisfying the needs of housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, and both the authorities held, i....
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....l Development Corporation (supra), that direct nexus is not essential. 74. The distinction pointed out by the learned standing counsel for the revenue, with reference to the decision of the Hon'ble Supreme Court in the case of Gujarat Industrial Development Corporation (supra), i.e. , in that case the Corporation was set up to chalk out the plans for development of industrial area and industrial estate in different places; whereas in the instant case of the assessee, the assessee-Corporation is set up for the purpose of "mobilization of resources" for completion of some on-going irrigation projects in time bound manner and for the promotion and operation of the said irrigation projects in Vidarbha region and command area development and schemes for generation of hydro-electric energy to harness the water of Godavari and Tapi rivers etc. is entirely different and the decision is not applicable. It is a proposition difficult to accept. 75. Again turning to section 10( 20A), it does not speak of establishment of industry. Yet the Hon'ble Supreme Court held that establishment of industry is for the purpose of planning, development and improvement of cities, towns and villages. If....
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....ding and nala bunding; (vii) growing of trees, plants, shrubs and grasses; (viii) development of permanent and temporary pastures, farm forestry and commercial afforestation; (ix) such other works as may be necessary or incidental to development of land or ground or flow water potential and for optimizing the utilization of land and water resources; and (x) repairing and maintenance of any of the foregoing works." Their Lordships held, the object of the Act is clearly to have a planned development of the predominant activities related to the villages, viz., agriculture and agricultural lands. Further Their Lordships observed "the predominant activities of the Corporation is related to agricultural and development activity of the same for the purpose of plan development; and the agricultural land cannot be isolated from the development of villages and, therefore, the lands fall within the ambit of Corpo- ration engaging into the activities of planning, development and improvement of agricultural lands which related to planning, development and improvement of villages. Thus, the answer being self-evident and finally determined by the Apex ....
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....d area development including flood control; and (ii) some schemes for the generation of hydro-electrical energy; (b) to plan, investigate, design, construct and manage those irrigation projects and their command area development; (c) to plan, investigate, design, construct and manage the schemes of the generation of hydro-electrical energy; (d) to enter into contracts in respect of the works and any other matters transferred to the Corporation along with assets and liabilities under this Act; (e) to invite tenders, bids, offers and enter into contracts for the purposes of all the activities of the Corporation; (f) to promote participation of any person or body or association of individuals, whether incorporated or not, in planning, investigation, designing, construction and management of irrigation projects, and command area development and Hydro-Electric Power Projects including flood control; (g) to undertake schemes or works, either jointly with other corporate bodies, or institutions, or with Government or local authorities, or on agency basis in furtherance of the purposes for which the Corporation is established a....
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....Maharashtra Co-operative Societies Act, 1961 for the better use of facilities made available by the Corporation; (f ) to lease rights for water sports, other recreational activities related to the use of reservoir and its surroundings and reservoir water; (g) to establish, maintain and operate laboratories, experimental and research stations and farms for conducting experiments and research for- (i) utilizing the water, electrical energy and other resources in the most economical manner for the development of the Godavari and Tapi River Valley in Vidarbha region; (ii) determining the effect of its operations on the flow conditions in the Godavari and Tapi River and its tributaries in Vidarbha region; (iii) providing navigation condition in the Godavari and Tapi River and its tributaries in Vidarbha region; (h) to engage suitable qualified consultant or person having special knowledge or skill to assist the Corporation in the performance of its functions; (i) to do all such other things including making interest bearing monetary advances to the contractors executing works on the projects of the corporation and perform su....
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.... State Government may, from time to time, require." "50. The rehabilitation and resettlement of the persons affected due to the irrigation and the hydro-Electric Power Projects shall be carried out by the State Government in accordance with the provisions of the Maharashtra Project Affected Persons Rehabilitation Act, 1986; Provided that, all the expenditure required to be incurred by the State Government for the rehabilitation and the resettlement of persons affected by the irrigation and Hydro-Electric Power Project shall be borne by the Corporation." 83. In short, in the light of the decision of the Hon'ble Supreme Court in the case of Gujarat Industrial Development Corporation (supra) and also the decision of the Hon'ble Rajasthan High Court in the case of Rajasthan Land Development Corporation (supra), we are of the view that the assessee definitely falls within the scope of section 10(20A). 84. Coming to the decisions relied by the revenue authorities in the case of Veljibhai Muljibhai Soneji (supra); Calcutta State Transport Corporation's case (supra) and in the case of U.P. Forest Corporation (supra), these decisions does not fit into the facts of th....
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....orceable against the State Government; which indicates that assessee is discharging a part of the sovereign function. The liability of the State Government is not confined to the extent of properties/funds that vested in the Government, but to the actual extent. From any point of view, the Corporation needs to be treated as an "Authority" as contemplated under section 10(20A). 88. Hence, we answer Question No. (I) in favour of the assessee and against the revenue. 89. Coming to Question No. (II) framed by the Hon'ble High Court and directed to decide on the facts; it is reproduced in Para 8 of this order. 90. The facts leading to the dispute is as under :- One of the contentions by the assessee before the Tribunal was whether the assessee had commenced the business during the previous year or not. It was contended that the assessee involved not only in the business of providing water for irrigation but also in providing necessary infrastructure like dams, canals and supply and generation of power etc. It was contended; assessee took over from the State Government existing and on-going irrigation projects, which were at different stages of progress. In other words, techn....
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....on project, dam is constructed where water is accumulated and canals are taken out from the dam to regulate the water flow. The canals are very long running into 50 kms. or much more. However, construction of canal of a small portion itself is the starting point for the commencement of business. Water is drawn to nearby agricultural fields from the canal. Assessee never stated that the assessee has not commenced the business. Assessee only stated that the projects were going on and are yet to be completed. The authorities have misread the letter dated 16-2-2001 and reached a wrong conclusion. The stand of the revenue that the assessee cannot ask for two different methods-one for writing books of account for the purpose of business and another for tax purpose is contrary to law laid down by the Apex Court in the case of United Commercial Bank v. CIT [1999] 240 ITR 355 . It was a case where the assessee prepared financial statement of accounts as per provisions of Banking Regulation Act, 1949 and disclosing the investment in securities at cost. The Hon'ble Supreme Court in the case cited supra held that "it is open for the purpose of assessee to prepare books of account in particular....
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....atter; what is material is the year in which it was set up. The change of ownership does not result and amounts to setting up a new undertaking. 96. The learned counsel for the assessee also distinguished the decision of the Privy Council relied upon by the revenue authorities in the case of CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36. 97. The learned standing counsel for the revenue, on the other hand, supported the orders of the revenue authorities, and submitted the contention of the assessee that the assessee had commenced the business even before acquiring the right of ownership is totally false. Vide letter dated 16-2-2001 assessee categorically admitted that none of the projects undertaken were completed or ready for intended use. This itself falsifies assessee's submission. Once given a statement to this effect, now the assessee cannot go back and say that the business has commenced. Mere sale of water is not a business or function contemplated by the statute. The functions under the statute are for promotion and operation of irrigation and its power projects. Mere sale of water from existing standing bodies where water stored is not a business contemplated ....