TaxTMI 
TaxTMI 
2004 (7) TMI 67
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....tax Act, 1961, cannot be computed? Shri Manohar, learned senior counsel for the appellant, states that Vidarbha Irrigation Development Corporation is a "development authority" within the meaning of section 10(20A) of the Income-tax Act, 1961 (hereinafter referred to as "the IT Act"). The Corporation is established for the purpose of planning, development or improvement of cities, towns and villages and the moment such an authority is constituted, its income is exempted under section 10(20A) of the Income-tax Act. It is submitted that the assessee-corporation is established and incorporated for 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. It is further submitted that the Vidharbha Irrigation Development Corporation Act, 1997 (hereinafter referred to as "the VIDC Act") came into force on March 12, 1997. The area of operation of the corporation is defined in the Schedule to the Act and any ....
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....ar submits that the functions and powers of the assessee-corporation are defined in section 18 of the Act, which contemplates that the functions of the corporation shall be- (a) to promote and operate- (i) some irrigation projects mentioned in the Schedule and command area development including flood control; and (ii) some schemes for the generation of hydro-electrical energy; (iii) to plan, investigate, design, construct and manage the schemes of the generation of hydro-electric energy. It is, therefore, contended that the assessee-corporation is established to perform sovereign functions of the State Government, which the State Government was performing before the appointed date through its irrigation department. The corporation is also expected to promote irrigation related activities such as fisheries, pisciculture, floriculture, horticulture, sericulture, tissue culture, etc., and tourism, water sports and other related activities on and around the irrigation and hydro-electric power projects and to develop the land around or nearby lake and other infrastructure facilities and lease a part or the whole of such developed properties to interested parties, to prepare an annu....
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....tablish, maintain and operate laboratories experimental and research stations and farms for conducting experiments and research for- (i) utilising 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 Vidharba region; (iii) providing navigation condition in the Godavari and Tapi River and its tributaries in Vidharba 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 being monetary advances to the contractors executing works on the projects of the Corporation and perform such acts as may be necessary for, or incidental or conducive to any matters, which are necessary for furtherance of the objectives for which the Corporation is established." It is contended by learned senior counsel Shri Manohar that the corporation is vested with powers to plan and carry out developmental activities in ord....
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....e most important factor for optimum agricultural produce and has the direct effect on development and improvement of lands. It is contended that the provisions of the VIDC Act make it evident that the object of the assessee-corporation falls within the ambit of section 10(20A) of the Income-tax Act. It is contended by learned senior counsel Shri Manohar that the requirement under section 10(20A) of the Income-tax Act is that the assessee-corporation must be established with the object of planning, development or improvement of cities, towns and villages and once it is proved that the activities which the corporation is required to carry out and sovereign functions, which it discharges result in development or improvement of cities, towns and villages, the provisions of the said section are attracted and, therefore, the corporation is not liable to pay tax on the income it earns. Learned senior counsel Shri Manohar further submits that the appellant had raised the following specific grounds before the Income-tax Appellate Tribunal: "(I) That, the Assessing Officer and the Commissioner of Income-tax (Appeals) failed to consider the amendment vide the Ordinance dated January 2001 i....
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....tion 10(20A) of the Income-tax Act are attracted. However, the Appellate Tribunal gave a complete go-by to the grounds raised by the assessee-corporation and in paras. (20) to (51) of the impugned judgment recorded a finding that the provisions of section 10(20A) of the Income-tax Act are not attracted only in view of the preamble to the VIDC Act and did not discuss the provisions of the VIDC Act. It is contended that the provisions of the VIDC Act are required to be considered as they are and appropriate meaning must be given to the plain language of the provisions of the Act and on the basis of that, the Appellate Tribunal was required to find out the object and purpose of the Act. It is further contended that the preamble of the Act can be looked into only if the provisions of the Act are ambiguous and incapable of conveying meaning enumerated in those provisions and not otherwise. However, in the instant case, the Appellate Tribunal has disallowed the benefit of section 10(20A) of the Income-tax Act to the corporation only on the basis of the object and purpose spelt out in the preamble to the Act. It is, therefore, submitted that the Appellate Tribunal has utterly failed to co....
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....ort submitted also indicate that partially completed projects wherein irrigational facilities were operational were transferred to the assessee-corporation for operation. Learned senior counsel for the appellant states that the preamble to the VIDC Act indicates that apart from completion of some ongoing irrigation projects in a time bound manner, the corporation has also to promote and operate existing projects. It is contended that section 15 of the VIDC Act clearly indicates that irrigation projects, hydro-electrical power projects and work under construction shall vest in and stand transferred to the corporation. It is further stipulated that income derived and expenditure incurred in that behalf be brought in the books of the corporation. Thus, it signifies that out of the projects transferred to the corporation, some were already partially completed projects wherein the irrigation activities were already commenced. The corporation has further continued to promote and operate such existing facilities for development of irrigation. Similarly, the provisions of section 18 provide that the function of the corporation established is to promote and operate some irrigation projects....
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....vailable on record and therefore the Assessing Officer ought to have considered the entire facts rather than merely going by the presentation of entries of the books of account of the assessee in the financial statement. Learned senior counsel Shri Manohar states that the observations of the Appellate Tribunal that the assessee cannot ask for two different methods-one for writing books of account for the purpose of his business and another having its tax liability determined under the Income-tax Act is contrary to the law laid down by the apex court in the decision in the case of United Commercial Bank v. CIT [1999] 240 ITR 355. It was a case where bank had prepared financial statement of accounts as per the provisions of the Banking Regulation Act, 1949. In the balance-sheet, the bank was disclosing the investment in securities at cost. However, before the revenue authorities, the claim of the bank was that the fall in value of assets be allowed as deduction while computing the income of the assessee. On these facts, the apex court has held that it is open for the purpose of the assessee to prepare books of account in a particular manner whereas make a claim before the income-tax....
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....esulted in profit or loss to the assessee. Learned senior counsel for the appellant states that the appellant-assessee also placed reliance on the judgment of the Bombay High Court in CIT v. V.S. Dempo and Co. Pvt. Ltd. [1994] 206 ITR 291 wherein it is held as under: "The way in which the entries are made by an assessee in the books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee." It is further submitted by learned senior counsel Shri Manohar that the appellant-assessee has already demonstrated that the assessee has taken over the existing business of irrigation activity. Thus, according to the assessee, it is only change of ownership of irrigation project from the State Government to that of the assessee-Corporation. In the case of change of ownership, it cannot be said that the business is being set up over and over again at the time at which change of ownership takes place. In the case of the appellant-assessee, the business had already commenced prior to formation of co....
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....ason that the assessee has recorded net deficit of the year as capital cost to the project concluded that business is not commenced. The presumption raised in favour of the assessee has not been rebutted by the Revenue. Learned senior counsel Shri Manohar states that the Appellate Tribunal has relied on the decision of the Privy Council in CIT v. Sarangpur Cotton Manufacturing Co. Ltd. [1938] 6 ITR 36. The Appellate Tribunal has reproduced part of para. (1) of the said decision, which reads thus: "Their Lordships are clearly of opinion that the section relates to a method of accounting regularly employed by the assessee for his own purposes- in this case for the purposes of the company's business- and does not relate to a method of making up the statutory return for assessment to income-tax. Secondly, the section clearly makes such a method of accounting a compulsory basis of computation unless in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom. It may well be that, though the profit brought out in the accounts is not the true figure for income-tax purposes the true figure can be accurately deduced therefrom. The simplest ....
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....he High Court, it is amply clear that the Appellate Tribunal misdirected itself on the pure questions of law regarding the primary duty of the assessing authority to compute the real taxable income of the assessee irrespective of the method of accounting adopted by the assessee. The finding regarding non-commencement of business is perverse as it is contrary to the admitted facts and material on record. Shri Jaiswal, learned counsel for the respondent, states that during the course of arguments, learned senior counsel for the appellant has made a statement that he is restricting his arguments only in respect of the above referred questions of law involved in the present appeal and is giving up all other grounds raised in the present memo of appeal. This court formulated two questions of law, namely: (I) Whether the income of the assessee is not exigible to tax by virtue of the exemption under section 10(20A) of the Income-tax Act? (II) Whether the assessing authority and the Tribunal were in gross error in holding that the business of the assessee has not commenced and, as such, its income under section 28 of the Income-tax Act, 1961, cannot be computed? Learned counsel Shri Ja....
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....rovement within the cities, towns and villages, which necessarily means civic activities. Even otherwise, the appellant merely supplies the water to the concerned local authority, which then distributes it within its jurisdiction. It is also not incumbent on the local authority to purchase water from the appellant, but it may do so from any other source. The area which is sought to be developed by the appellant is not any village, town or city, but the catchment area, submergence area and the command areas of the irrigation projects. Learned counsel Shri Jaiswal submits that the provisions of section 10(20A) of the Income-tax Act contemplate that the authority could be dealing with housing accommodation or planning, development and improvement of cities, towns and villages or both. This clearly shows the intent of the Legislature in granting exemption to the authorities, which are carrying on civic activities. It is only such authorities that are contemplated under this provision. It is contended by learned counsel for the respondent that actual development must be of the city, town and village only and not general development. Although irrigation would fall within general develo....
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....ose, the respondent relies on the decision in CIT v. L. and T. Mcneil Ltd. [1993] 202 ITR 662 (Bom). It is further contended by learned counsel for the respondent that the third ground as to whether the interest paid to the bondholders is an allowable deduction from the interest received from the bank is not before this court and hence, cannot be considered. Besides this, it is not a ground, which can be raised under section 260A of the Income-tax Act as will be clear from the decision of the Rajasthan High Court in the case of Deputy CIT v. Marudhar Hotels (P.) Ltd. [2000] 245 ITR 138. Even otherwise, the Appellate Tribunal has clearly dealt with this aspect in its order, pointing out that the business of the assessee was not investing funds and earning interest and there was no business compulsion or inextricable link between the business of the assessee and the investment of the funds in temporary short-term deposits. It is submitted that besides this, the assessee was free to use the funds in any manner it liked for the purpose of its business. Merely because it chooses to make temporary investments to earn interest will not alter the character of the income into income from b....
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....of section 10(20A) of the Income-tax Act and is entitled for the benefit provided therein from payment of tax on the income of the corporation. A perusal of the grounds in the memo of appeal filed by the appellant-assessee before the Appellate Tribunal shows that the appellant had raised ground No. 2, which read thus: "It is submitted that the Commissioner of Income-tax (Appeals) wrongly arrived at the conclusion that the appellant-corporation is not a 'developmental authority' within the meaning of section 10(20A) of the Income-tax Act, 1961, and deprived the corporation of its legitimate claim of exemption available under the said section despite strong plea put up by the corporation." Similarly, the statement of facts submitted by the assessee-Corporation to show that the activities of the assessee-Corporation amount to planning and development in terms of the provisions of section 10(20A) of the Income-tax Act and, therefore, its income is exempt from tax, reveals that the following grounds were raised by the assessee-corporation. The Vidharba Irrigation Development Corporation is the statutory corporation constituted under the VIDC Act. It is an authority constituted by th....
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....vide adequate quantity of drinking water to the public, which is being fulfilled and planned to be fulfilled as per the objectives of the appellant-corporation For development of cities, towns and villages, water is required for most of the developmental functions performed by the local bodies and the appellant-corporation is helping in fulfilling the essential necessities for supply of water for development purposes. It is evident that the corporation in fact has raised various grounds on the basis of various provisions of the VIDC Act in order to show that the assessee-corporation is the authority constituted under the VIDC Act for the purpose of planning, development or improvement of cities, towns and villages. However, a perusal of the order of the Appellate Tribunal shows that the issue was not considered by the Appellate Tribunal in the light of various provisions of the VIDC Act and gave undue weightage to the preamble of the VIDC Act while analysing the object and purpose of the assessee-corporation. The taxing statute is to be construed strictly. There is no room for any intendment. There is no equity and presumption about tax. Nothing is to be read in and nothing is to ....
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.... handed over to the assessee for completion by the State Government. There is no planning, development or improvement of cities, towns and villages in carrying out the purposes for which the assessee has been formed. Thirdly, as rightly contended by learned standing counsel we find that under section 50 of the VIDC Act, the rehabilitation is to be carried out only by the State Government and not by the assessee. Whatever planning, development or improvement of cities, towns and villages are done in the process of rehabilitation are done by the State Government and not by the assessee. Fourthly, the rehabilitation of the displaced persons, consequent to any action in the performance of any functions of the assessee is too remote and is not incidental to the main purpose for which the assessee was established." After considering the decision in the case of Gujarat Industrial Development Corporation v. CIT [1997] 227 ITR 414 (SC) and CIT v. Rajasthan Land Development Corporation [2002] 255 ITR 199 (Raj), the Appellate Tribunal has observed in the latter part of para. (51) thus: "We have already held that development of villages, city and town was not undertaken by the assessee and t....
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....tion 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. So far as the second substantial question of law is concerned, the appellant-assessee had raised the following specific ground before the Appellate Tribunal: "The appellant-corporation started its business on the inception and the income and expenditure account and the balance-sheet of the year under consideration should be read keeping in view this position. The net deficit after deducting all the allowable business expenditure should be allowed to be recast and worked out and then the resulting losses should be allowed to be carried forward as per the provisions of the Income-tax Act, 1961." So far as the conclusion recorded by the Appellate Tribunal in respect of the second question of law that the assessee has not yet commenced its business and, therefore, it is not possible to compute income under the head "Income from business" is concerned, the same is primarily recorded on the basis of letter dated February 16, 2001, filed by the assessee before the Assessing Officer wherein the assessee has mentioned that the assessee-Corp....
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....ect alone unless the authority considers the true nature of the transaction and factual aspect of profit or loss to the assessee. It is therefore, necessary for the Assessing Officer to compute the real taxable income of the assessee irrespective of method of accounting adopted by the assessee. For the reasons stated herein above, in our considered view, the Appellate Tribunal needs to reconsider the second substantial question of law in the light of the observations made by us in the present judgment. Apart from the above referred two substantial questions of law, the assessee-Corporation wanted us to frame another question of law, which reads thus: "Whether the interest paid to bondholders, which has a direct nexus for earning interest from the bank, is an allowable deduction from the interest received from bank?" However, there is no specific ground raised by the assessee in the present appeal in this regard and in the absence thereof, it is not possible for us to conclude that such substantial question of law is involved in the present appeal nor can such question of law be framed only on the basis of oral submissions made by learned senior counsel for the appellant and, th....