2006 (6) TMI 421 - AT - Income Tax

Summary

Issues Involved:

1. Whether the income of the assessee-corporation can be claimed to be exempted from taxation under Article 289 of the Constitution of India.
2. Whether the CIT(A) was justified in deleting the interest levied under section 216 of the Income-tax Act, 1961, due to the Assessing Officer's order not being a speaking order.

Detailed Analysis:

Issue 1: Exemption under Article 289 of the Constitution of India

The primary issue revolves around whether the income of the assessee-corporation, a company incorporated under the Companies Act, 1956, and a corporation of the U.P. Government, is exempt from taxation under Article 289 of the Constitution of India. The assessee contended that it is essentially a state entity, as its entire share capital is subscribed and paid by the State Government, and its officials are senior government officials acting as benamidars for the State. The profits and dividends are directed to the State Government, and the corporation's operations are heavily regulated by the State Government.

The Assessing Officer and the CIT(A) both rejected the assessee's claim, stating that the assessee-corporation, being a separate legal entity, cannot be equated with the State. The Tribunal agreed with this view, emphasizing that the corporation, despite deep state control, operates as an independent entity with its own legal personality. The Tribunal referenced Article 289 of the Constitution, which exempts the property and income of a State from Union taxation but allows Parliament to impose taxes on state-run businesses unless declared incidental to the ordinary functions of the Government.

The Tribunal also cited judgments from the Allahabad High Court in the case of U.P. Forest Corporation and the Supreme Court in the case of Andhra Pradesh State Road Transport Corporation, both of which held that corporations, even if state-controlled, do not qualify as the State under Article 289 and are subject to taxation. Consequently, the Tribunal upheld the CIT(A)'s decision, ruling that the assessee-corporation could not claim exemption under Article 289.

Issue 2: Deletion of Interest under Section 216 of the Income-tax Act

The second issue pertains to whether the CIT(A) was justified in deleting the interest levied under section 216 of the Income-tax Act, 1961, due to the Assessing Officer's order not being a speaking order. The department argued that the CIT(A) erred in deleting the interest, which is mandatory, and suggested that the matter be remanded to the Assessing Officer to issue a speaking order.

The assessee supported the CIT(A)'s decision, referencing the Gujarat High Court's ruling in the case of Nagri Mills Ltd., which held that interest under section 216 could not be levied without a proper finding by the Assessing Officer. The Tribunal agreed with the assessee, noting that the CBDT circular and the Gujarat High Court's decision require a speaking order before levying interest under section 216. Since the Assessing Officer had not provided any reasons or findings for the interest levy, the Tribunal upheld the CIT(A)'s decision to delete the interest.

Conclusion:

The Tribunal dismissed both the assessee's appeal and the department's appeal, as well as the assessee's cross-objection. The income of the assessee-corporation was ruled taxable, not exempt under Article 289, and the interest levied under section 216 was correctly deleted due to the lack of a speaking order from the Assessing Officer.