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2011 (12) TMI 375 - AT - Income TaxDiversion by overriding title in respect of infrastructure contribution is untenable - AO found that assessee had claimed to be maintaining an infrastructure fund to which a fixed portion of its receipts is credited and out of which infrastructure related expenses are incurred - it was submitted by the assessee that State Government has a overriding title on these receipts and, therefore, they do not form part of the total income of the assessee. - held that - The office memorandum specifically provides that 80 per cent of the amount from this account would be spent on capital expenditure and 20 per cent can be spent on revenue account - it reveals that assessee has source of income from more than 18 counts, out of that certain incomes are miscellaneous income, rental income, interest income on FDRs - According to the assessee, the Government had issued a memorandum on 15th Jan., 1998 and by virtue of this office memorandum, there is diversion of income at source which relates to this infrastructural fund account and, therefore, the amounts transmitted in this account do not belong to the assessee - learned first appellate authority in asst. yr. 2007-08 has rightly observed that argument of the assessee demonstrating the infrastructure funds as a separate entity, independent of assessee is a fiction - It is not registered under s. 12A of the Act and claimed the benefit of exemption under ss. 11 and 12 of the Act - Decided against the assessee
Issues Involved:
1. Deductibility of prior period adjustments. 2. Claim of diversion by overriding title in respect of infrastructure contribution. Detailed Analysis: 1. Deductibility of Prior Period Adjustments: In the assessment year 2006-07, the assessee raised a ground of appeal regarding the deductibility of prior period adjustments. However, this ground was not pressed by the learned counsel for the assessee and was subsequently rejected. 2. Claim of Diversion by Overriding Title in Respect of Infrastructure Contribution: The primary issue in both assessment years 2006-07 and 2007-08 was whether the infrastructure contributions collected by the assessee were subject to diversion by overriding title and thus not includable in the total income of the assessee. Assessment Year 2006-07: - The assessee filed its return declaring nil income. Upon scrutiny, the Assessing Officer (AO) found that the assessee maintained an "infrastructure fund" to which a fixed portion of its receipts was credited. The amount credited in this year was Rs. 11,63,38,117, with expenses incurred amounting to Rs. 3,14,12,303. The balance of Rs. 8,49,25,814 was claimed by the assessee to be under the overriding title of the State Government and thus not part of its total income. The AO rejected this claim and added the balance to the total income of the assessee. Assessment Year 2007-08: - Similarly, the assessee filed its return declaring nil income. The AO found that the gross receipts in the infrastructure fund were Rs. 24,67,73,593, with incurred expenses of Rs. 4,39,71,667. The balance of Rs. 20,28,01,927 was also claimed to be under the overriding title of the State Government. This claim was again rejected by the AO, who added the balance to the total income. Appeals Before CIT(A): - The assessee appealed against the AO's decisions. The CIT(A) considered the office memorandum issued by the UP Government and the provisions of the UP Urban Planning and Development Act, 1973. The CIT(A) concluded that there was no overriding title over the infrastructure fund by the State Government and included the amounts in the income of the assessee. The appeals were rejected. Arguments Before ITAT: - The assessee reiterated that the funds were collected and spent as per the directions of the State Government, claiming the funds did not vest in the assessee but in the State Government. The assessee relied on the Karnataka High Court's decision in CIT vs. Karnataka Urban Infrastructure Development and Finance Corporation, arguing that the funds were collected as a nodal agency and thus should not form part of the total income. Department's Counterarguments: - The Department argued that the funds collected by the assessee were part of its income and there was no overriding title of the State Government. The amounts were collected in the assessee's independent rights and were to be used for its objects. The Department cited several judgments to support the view that the income was not diverted by overriding title but was an application of income. ITAT's Findings: - The ITAT examined the UP Urban Planning and Development Act, 1973, particularly sections 4, 7, 20, and 41, which outline the establishment, objectives, funding, and State Government control over the development authority. - The ITAT noted that the assessee had various sources of income and was authorized to collect fees and charges. The office memorandum did not create an independent entity for the infrastructure fund but regulated the application of income. - The ITAT distinguished the case from the Karnataka High Court decision, noting that the assessee was not merely a nodal agency but had its own income and expenses. - The ITAT concluded that the memorandum did not create an overriding title at the source of collection but only regulated the application of income. The amounts collected were part of the assessee's income and were rightly included in the total income by the AO. Conclusion: The ITAT upheld the orders of the CIT(A) and rejected the appeals of the assessee for both assessment years, confirming that the amounts in the infrastructure fund were includable in the total income of the assessee.
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