TaxTMI 
TaxTMI 
2012 (9) TMI 331
X X X X Extracts X X X X
X X X X Extracts X X X X
....overnment of Maharashtra. 6. In the year under consideration, the assessee company did not file its return of income either u/s 139(1) or even u/s 139(4). The AO, after recording his reasons, issued notice u/s 148, against which the assessee filed its return on 13.08.2010, declaring a loss of Rs. 68,18,000/-. 7. The basic facts as noted by the AO in the assessment order, are, that the assessee company is a New Town Development Authority for Navi Mumbai and Special Planning Authority for various other towns of Maharashtra. The business activity of the assessee company is construction of residential and commercial structures as well as development of infrastructures and towns. In earlier years, i.e. up to assessment year 2002-03, the assessee was claiming exemption u/s 10(20A) of the Act in respect of its income. However, the provisions of section 10(20A) of the Act were deleted/omitted w.e.f. 01.04.2003 i.e. assessment year 2003-04 onwards. 8. In the proceedings for assessment as carried on by the AO, the AO proposed the case of the assessee to be referred to Special Audit u/s 142(2A). The AO called for the assessee's comments, who objected to the appointment/reference u/s 142(2A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee was incorporated as a company on 17.3.1970 with a share capital, which was wholly and exclusively subscribed by the Government of Maharashtra, with the object of creation of new town of Navi Mumbai, New Aurangabad, New Nashik, New Nanded, Tarapur, Waluj Mahanagar, Oras, Vasai- Virar sub region, Nagpur and Mhaismal Projects. To implement these projects, as New Town Development Authority and Special Planning Authority as "Statutory Agents" of the Government of Maharashtra for planned development and disposal of notified areas vested with the Government of Maharashtra, which includes development of infrastructure such as roads, railways, water supply, storm water drainage, sewerage etc. and after completion of the development of new township, the assessee company shall submit final accounts to the State Government after disposal of the facilities developed by it, which shall be done without any profit or commercial motive. The Senior Counsel submitted that all these activities being totally commercial activities, but, since the performance of the assessee being totally non-profit and non-commercial and which has to perform the functions of local authority for the new town, having....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ior Deputy Account General, Nagpur. All Departments of Secretariat. The Divisional Commissioner, Bombay Division, Bombay. The Budget Branch, Industries & Labour Department, Bombay. The Director of Publicity, Bombay. Vide the Gazette of the State of Maharashtra, which read as Urban Development, Public Health and Housing Development, dated 20th March, 1971 provided : "MAHARASHTRA REGIONAL AND TOWN PLANNING ACT, 1966 No. RPB. 1171-18124-1, Whereas, the area comprised in the villages specified in the Schedule hereto (hereinafter referred to as the said area) has been designated as a site for a new town in the draft Regional plant for the Bombay Metropolitan Region. Submitted to the State Government under section 15 of the Maharashtra Regional and Town Planning Act, 1966 (Mah. XXXVII of 1966); And whereas, the State Government is satisfied that it is expedient in the public interest that the said area should be developed as a site for the proposed new town; Now, therefore, in exercise of the powers conferred by sub-section (1) of the section 113 of the said Act, the Government of Maharashtra hereby designates the said area as the site for the proposed new town, which shall be k....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncial Arrangement between CIDCO and Government. Sir, Under Government Resolution, Industrial and labour Department No. IDL- 5770/IND-I dated the 18th March, 1970, the City and Industrial Development Corporation of Maharashtra Limited has been appointed as an agent of Government for the development of "New Bombay". Government agree in principle to reimburse the expenditure incurred by CIDCO on the development of land in the project area and to reimburse CIDCO suitably with its remuneration. This letter has been issued with the concurrence of the Finance Department (vide that department's U.O.R. dated 10.9.1971 on General Administration Department File No. CID-1271/U). Yours faithfully, Sd/-xxxxx (S.S. Gadkari), Under Secretary to Govt. of Maharashtra, General Administration Department. 15. The Senior Counsel pointed out that similar notifications existed for the development of already existing townships like Aurangabad, Vasai-Virar, Sindhudurg Nagari etc., which had developed in haphazard and uncontrolled manner, to develop these already existing townships to be developed in proper and orderly manner, he pointed the development project of the city of Nagpur, wherein CIDCO....
X X X X Extracts X X X X
X X X X Extracts X X X X
....neral Administration Department, Sachivalaya, Bombay 32. The Senior Counsel then invited our attention to the 36th Annual Report which said at page 108 of paper book that the : "Note: 1. Navi Mumbai Project is being developed by for and on behalf of the Govt. of Maharashtra vide its Resolution No. CID-2072-U dated 11th January, 1974 and No. CID-2084-1320-161- 84/UD-4 of General Administration Department and Urban Development Department respectively of the Government of Maharashtra. 2. Accounts in the prescribed form were submitted to the Govt. of Maharashtra upto the year ended 31st march, 1988. No confirmation has been received to date. 3. Land admeasuring 26315.52 (20312.18) Hectares has been handed over by the Government of Maharashtra, to the Corporation for the purpose of development of Navi Mumbai Project including 5289.40 (5289.40) Hectares of Government land. The payment amounting to Rs. 258.10 crore (Previous year Rs. 246.00 Crore) made by the Government of Maharashtra for land admeasuring 14461.00 (14461.00) Hectares has not been reflected in the accounts of the Corporation as the Corporation is developing Navi Mumbai Project on behalf of the Government of Maharashtr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cquiring, developing and disposing of land in the area of a new town the State Government shall by another notification in the Official Gazette, constitute a New Town Development Authority. The New Town Development Authority shall consist of a Chairman, a Vice- Chairman, [two members representing' the local authorities functioning in the Region and such number of other members not exceeding seven] as in the opinion of the State Government have special knowledge or practical experience in matters relating to town and country planning, an officer to be called the Town Planning Officer and a Chief Executive Officer. The Chairman and the Vice-Chairman and all other members shall be appointed by the State Government." He drew special emphasis on sub-section 3A to section 113, which read as under: "113 (3A) Having regard to the complexity and magnitude of the work involved in developing any area as a site for the new town, the time required for setting up new machinery for undertaking and completing such work of development, and the comparative speed with which such work can be undertaken and completed in the public interest, if the work is done through the agency of a corporation incl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... disposal of lands by the Development Authority. According to section 122(3), it was pointed out that all sums made available to the State Government by the Development Authority shall be paid into the Consolidated Fund of the State. According to sub-section 5 to section 122, the accounts shall be subject to audit and according to sub-section (2) to section 122A, "all moneys borrowed under sub-section (1) may be guaranteed by the State Government as to the repayment of principal and interest............". The Senior Counsel then drew our attention to section 147 which is the protection given to all persons coming under MR&TP Act, for actions undertaken in good faith (which will include the employees of the Development Authority, i.e. the assessee company in the instant case). According to section 160(1) : "Where the State Government is satisfied that the purposes for which any Regional Board, Special Planning Authority or Development Authority was established under this Act have been substantially achieved so as t render the continued existence of the Board or Authority in the opinion of the State Government unnecessary [or where the State Government is of opinion that the work of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as to be held to be the agent of the State, which has been held as, by the State Government of Maharashtra and which has used the word "agent". It has been pointed out that even an agency relationship, may not be a formal relationship, but herein in the instant case, the assessee is a legal agent, who is very closely held, guarded and monitored by its principal, to the extent to providing immunity from or all legal action against it. 22. The Senior Counsel, to demonstrate that CIDCO is an agent of the Government of Maharashtra, took us through the decision of Hon'ble Bombay High Court in the case of Percival Joseph Pareira vs The Special Land Acquisition Officer, in WP No. 1211 of 2009, where CIDCO is the 3rd respondent, wherein it was held as under: "From consideration of the aforesaid documents the following factual position emerges: a) For setting up of the new town of New Bombay, in exercise of powers under sub-section 3(A) of section 113 of the said Act of 1966 under notification dated 20th March, 1971, the CIDCO was appointed as the New Town Development Authority. Thus, the state Government decided to get the work of development of the site of the city of New Bombay done t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted, and there is abundant authority reiterating that principle. Thirdly, the same principle-namely, that of a setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken. "These observations were made in a case where taxation was in issue. This court in Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 at p. 10 stated,: "At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... occasions from the consolidated fund of the State and in discharge of its duties, the same was required to be disbursed for purposes such as roads, drainage, street lights, water supply, schemes for primary facilities, sanitation, play ground, public toilets/bathrooms, community hall, service vehicles, etc., to the local authorities, i.e., a municipality or municipal corporation under the provisions contained in the Gujarat Municipalities Act. The Board had some surplus amount with it and the same was invested, as a result of which there was income. The State Government decided that the interest amount which may be earned be retained by the Board as a part of the grant-in-aid given to it by the Government. The Income-tax Officer started reassessment proceedings to assess the interest in the assessment years 1984-85 to 1993-94. On a writ petition to quash the reassessment notices: Held, allowing the petition, that the Board was not established to carry on trade or business and it was not established for one particular facet of development but looking to the Twelfth Schedule of the Constitution and article 243W, the Board acted for the State and on behalf of the State. The State Gov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tatutory obligation to set aside Rs. 6 per kilolitre for the storage fund. There was, therefore, a clear diversion at source of this amount. In any event, the assessee had lost domain over this amount of Rs. 6 per kilolitre. It had to be utilised in the manner statutorily laid down. Even the storage facilities had to be constructed as per the directions of the Commissioner and the Commissioner had the power, if the assessee failed to construct storage tanks in the prescribed time schedule, to do the work and obtain the said amount from the assessee. Hence, this amount, over which the assessee had lost its domain, could not be considered as a part of its real income or its profit. It was, therefore, required to be excluded under section 28 of the Income-tax Act, 1961, for the purpose of calculation of income." He also referred to the case of CIT vs Sitaldas Tirathdas, reported in 41 ITR 367, wherein Hon'ble Apex Court held, "The true test for the application of the rule of diversion of income by an overriding charge, is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... distribute or use the profits in the manner it liked. The said clause spoke of physical receipt of profits by the assessee and not receipt of profits in the eye of law. Out of these profits, accumulated losses were required to be wiped out and only thereafter, net profits were to go to the assessee. Profits in the hands of the assessee would be that amount which remained with it after the payment contemplated by the agreement was made to the Government. This was a clear case of diversion of profits by overriding title". 25. The Senior Counsel pointed out that the instant assessee had to file a writ before the Hon'ble Bombay High Court for the stay on demand, pending disposal of appeal before the CIT (A) for the year under consideration. He submitted that the Hon'ble Bombay High Court cited the case of Percival Joseph Parcira vs Special Land Acquisition Officer & Ors and accepted the fact that in Percival's case, the Single Judge has held that CIDCO was appointed as an agent of the State Government for the work of development of the site of the city of New Bombay. This according to the Senior Counsel was a fact, arrived at, in Percival's case, which has been accepted in the Writ P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or even rendering transport and communication facilities not to forget healthcare and education, essentially, all the activities of a 'welfare state' like India, are exempted from filing their income tax returns. But, this is not the case. The Income Tax Act does not distinguish a class of persons or businesses from their statutory obligation of filing their returns, be it companies in the private sector or in the public realm. Examples of Govt. companies engaged in the business of railroad construction like IRCON, in the field of real estate like HUDCO, in the field of electricity like NTPC, in the provision of transportation like Konkan Railway Corporation, where the Govt. is the sole or majority shareholder and all of which are engaged in the activities of the 'State', would then be exempted from filing their Income Tax returns, if the proposition of the assessee were to be believed. In view of these facts, I find no force in this argument of the appellant and hence this ground of appeal is dismissed". 28. The DR pointed out that just being an agent or an outsourced agency to function on behalf of the State Government, alone, does not become an agent of the State, simply becaus....
X X X X Extracts X X X X
X X X X Extracts X X X X
....roperty really vests in the corporation, because it provides that during the period of supersession, it shall vest in the State Government. Similarly, section 39(2) which deals with the distribution of assets in case of liquidation, brings out the same feature. Therefore, the income derived by the appellant from its trading activity cannot be said to be the income of the State under article 289(1) of Constitution, and if that is so, the facts that the trading activity carried on by the appellant may be covered by article 289(2) of the Constitution does not really assist the appellant's case. Even if a trading activity falls under clause (2) of article 289 of the Constitution, it can sustain a claim for exemption from Union taxation only if it is shown that the income derived from the said trading activity is the income of the State". The DR referred to the case of Andhra Pradesh State Civil vs. CIT, reported in 148 ITR 497 (AP), wherein Hon'ble AP High Court held, "8. Under the I.T. Act, a "company" as defined in s. 2(17), inter alia, includes any Indian company, any body corporate incorporated by or under the laws of a country and any institution, association body whether incorp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....port Corporation v. ITO [1964] 52 ITR 524; 34 Comp Case 473 (SC), the Supreme Court, dealing with the c1aim of the A.P.S.R.T.C., constituted under the notification issued by the Government of Andhra Pradesh in 1950, that the income derived from its trading activities is immune from liability of income-tax under art. 289 of the Constitution on the ground that its trading activities are carried out by and on behalf of the State, held that though the majority of the shares are owned by the Andhra Pradesh Government and its activities are controlled by the State, the Corporation has a separate personality of its own. The trading activities of the Corporation and the profit and loss arising therefrom are the profit and loss of the Corporation. The income derived from its trading activities cannot be said to be the income of the Andhra Pradesh State under art. 289 of the Constitution. The DR further pointed out that in Gujarat Industrial Development Corporation vs. CIT, reported in 21 Taxman 250 (151 ITR 255), Hon'ble Gujarat High Court held, "11. "Having considered as to whether the assessee - Gujarat Industrial Development Corporation, Ahmedabad - is entitled or is not entitled to ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t case), for which neither the assessee has to pay anything, nor it can show the land in its Balance Sheet as an asset. He further reiterated that on completion of its project, the assets go back to the State. He further emphasized that it cannot wait until the liquidation process of the company, but, the passing over of the asset(s) is through an operation of law. To prove this contention, the Senior Counsel pointed out that in the case of completion of Vasai-Virar Project, the amounts collected by the assessee, on completion of the project, were ordered to be transferred to Vasai- Virar Municipal Corporation and as per Item No. 28 of Resolution No. 10375 dated 06/08/2010, "it was decided that Vasai-Virar Project; CIDCO is withdrawn as Special Planning Authority from VVSR". He further pointed out that in the agreement between the assessee and Navi Mumbai Municipal Corporation (NMMC), the process of handing over the physical infrastructure was in progress. He, therefore, submitted that it is a typical function adopted normally by the State. 32. He then reverted to the peculiarities of the functions of the assessee and the functions of the companies whose case were cited by the DR,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e of Gujarat Industrial Corp. & Oths Vs CIT, relied and referred to by the DR, has since been reversed by the Hon'ble Supreme Court of India, in the that case, as reported in 227 ITR 414, pointed out that the decision has been reversed by the Hon'ble Supreme Court of India. He pointed out before the Hon'ble Apex Court, the issue of income belonging to the Government was not pressed, therefore, it was not chargeable. In any case, the Senior Counsel submitted that Town Planning activity is different from civil supplies and other commercial activities. 34. The Senior Counsel also responded to the decision of Hon'ble Patna High Court, reported in 191 ITR 173 and pointed out that toll collection is a commercial activity, whereas town planning along with all socially responsible activities, as in the instant case, cannot be called commercial activities. He further submitted that the CIT(A) erred in not following the decision of jurisdictional High Court in the case of Percival Joseph (supra) and the assessee's own case in the Writ Petition. 35. The Senior Counsel finally reiterated that though the assessee is a company incorporated under the Companies Act, 1956, but, its functions, its....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... functions of Government". 39. To our mind, the entire case of the assessee in the instant case, hinges on clause (2) or clause (3) of Article 289 of the Constitution of India. The basic purport of Article 289(2) is to neutralize clause (1), but with a rider that, if there is any "trade or business" , done on behalf of the Government or any operations connected therewith or any property issued or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. To make this clause effective, even for Government / State, conduct of "trade or business" is necessary, which simply means involvement of commercial and profit motive for the vendor. This is in line with the decision of Hon'ble Supreme Court of India in the case of APSRTC (supra), relied upon by the DR, wherein the Hon'ble Supreme Court had observed, "....the facts that the trading activity carried on by the appellant may be covered by article 289(2) of the Constitution does not really assist the appellant's case. Even if a trading activity falls under clause (2) of article 289 of the Constitution, it can sustain a claim for exemption from Union taxation only if it is shown th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r our consideration then would be clause (3), which shall come into play once clause (2) is disbanded and as soon as it become disbanded, clause (3) come to life, which operates only if, "Parliament may by Law declare to be incidental to the ordinary functions of Government". Here, in the instant case, we have to read "Parliament" as "State Government" because in the instant case, it is the State Government which has authorized the assessee to perform the development projects at Navi Mumbai, Vasai- Virar, Waluj and such other places. 40. We cannot agree with the argument of the DR that there is no document which has drawn out the Agent-Principal relationship, because the very first Resolution dated 18th March, 1970 mention in para no. 2 that "............... which would act as an "agent" of Government for the development of the areas with a view to secure the above objective", and in para no. 3 of this Resolution clearly say, "The subsidiary company will work under the control and supervision of the State Government in the General Administrative Department". In our opinion, the first Resolution itself makes it clear that the assessee is to be an agent, but functions as an arm of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... following the decision Percival case (supra), wherein it has been held, that CIDCO, the assessee herein, is an agent of the State Government of Maharashtra. We, therefore, respectfully follow the Hon'ble jurisdictional High Court of Bombay, as held in the case of Percival (supra), and hold, the assessee to be the "agent" of the State Government of Maharashtra, read with the entire overwhelming documents, suggesting that there is no income to the assessee as such, and whatever is, generated, it gets deposited in the Consolidated Fund of the State. We also cannot ignore the fact that the department has been assessing the assessee as a State Government undertaking for the last three years, therefore, even this cannot be called as an afterthought and applying the 'rule of consistency', we hold that the department cannot be allowed to take a distinctive approach in the current year. 44. The revenue authorities were thus, clearly in error, in assessing the business income in the hands of the assessee at Rs. 63,786.58 lacs. We delete this income, as not belonging to the assessee. 45. Ground no. X to XXIV. We have held that there is no business activity of the assessee on its own and t....