2015 (4) TMI 885 - AT - Income Tax

Eligibility for exemption u/s 11 - whether the assessee is carrying on commercial activities and hence not eligible for exemption under section 11? - funds claimed to have been received on behalf of the Government of Maharashtra is taxable as income in the hands of the assessee - whether the assessee is not eligible to claim set off of brought forward deficit and also the deduction of book depreciation? - contention of the assessee was that it is an agent or instrumentality of Government of Maharashtra Government, since it is performing Sovereign functions of development and allotment of industrial plots for public purposes - Held that - the control or directions issued by the State Government would not change the character of business activity . We are of the view that the activity carried on by the assessee should be examined independently and the fact that the assessee is being regulated by the State Government would not make any difference. In our view Ownership of the Corporation and activities of the Corporation are two different aspects and the ownership cannot be considered or taken into account to determine the character or nature of the activities carried on by the Corporation. In view of the foregoing discussions, we agree with the Ld CIT(A) in holding that the activities of the assessee are commercial in nature and hence would be hit by the proviso to sec. 2(15) of the Act. Funds claimed to have been received by the assessee on behalf of the Government of Maharashtra - Held that - The assessee is raising the contention for the first time before us that it is carrying on the activities on its own account and also as agent of the Government of Maharashtra. There appears to be no reference in the orders of the tax authorities to the resolutions passed by the Government of Maharashtra. It is further contended that the assessee is following consistently taking the funds received on behalf of the State Government to the Balance Sheet as per the resolutions passed by the State Government. Since the assessee has submitted that it is also carrying out certain activities on behalf of the Government of Maharashtra and since the said claim of the assessee has not been examined by the tax authorities, we are of the view that this issue requires fresh examination at the end of the assessing officer. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the assessing officer with the direction to examine the same afresh by duly considering all the documents and explanations that may be furnished by the assessee before him in order to substantiate its contentions. The assessee is also directed to furnish all the details that may be called for by the assessing officer. Since we have set aside this matter to the file of the AO, the alternative contention of the assessee is also set aside to his file. Claim for deduction of brought forward deficit computed u/s 11 - Held that - The Ld CIT(A) held that the same is not allowable as deduction, since the assessee's income is computed in 'commercial manner', since the provisions of the Act do not allow such kind of deduction. Though the Ld A.R placed reliance on certain case law in this regard, yet we notice that they were rendered in the context of the computation of income u/s 11 of the Act. Since the income of the assessee is required to be computed under normal provisions of the Act for the year under consideration, since it is covered by the proviso to sec. 2(15) of the Act, we are in agreement with the view expressed by Ld CIT(A) on this issue. We notice that the Ld CIT(A) has rejected the claim for deduction of book depreciation. In our view, the depreciation computed u/s 32 of the Income tax Act should be deducted for the purpose of arriving at the income of the assessee, when the income is computed in terms of the provisions of the Income tax Act. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to allow the depreciation admissible u/s 32 of the Act. - Decided partly in favour of assessee for statistical purposes.

Issues Involved:
1. Eligibility of the assessee to claim exemption under section 11 of the Income Tax Act.
2. Whether the assessee's activities are commercial in nature and thus not eligible for exemption under section 11.
3. Taxability of funds received by the assessee on behalf of the Government of Maharashtra.
4. Eligibility of the assessee to claim set off of brought forward deficit and deduction of book depreciation.

Detailed Analysis:

1. Eligibility for Exemption under Section 11:
The assessee, a statutory corporation formed under the Maharashtra Industrial Development Act, 1961 (MID Act), claimed exemption under section 11 of the Income Tax Act as a charitable organization. The Assessing Officer (AO) denied the exemption, stating that the assessee was not a validly constituted trust. The CIT(A) followed the Tribunal's earlier decision, recognizing the assessee as a statutory corporation, not a trust, but still denied exemption under section 11, citing the revocable nature of the trust per section 58 of the MID Act and the commercial nature of the assessee's activities.

The Tribunal disagreed with CIT(A)'s view that the dissolution clause in section 58 of the MID Act rendered the trust revocable. It clarified that dissolution and revocation are distinct concepts, with dissolution merely outlining asset distribution upon winding up, not revocation of the trust.

2. Commercial Nature of Activities:
The AO and CIT(A) held that the assessee's activities were commercial, exceeding the Rs. 25 lakhs threshold, thus falling under the proviso to section 2(15) of the Act. The assessee argued that its activities were not commercial, relying on the Supreme Court's decision in Shri Ramtanu Co-operative Housing Society Ltd. vs. State of Maharashtra, which characterized the assessee's functions as governmental and not commercial.

However, the Tribunal noted a shift in the assessee's approach, now auctioning plots to the highest bidder, indicating a profit motive. The Tribunal concluded that the assessee's activities were commercial, thus falling under the proviso to section 2(15), and not eligible for exemption under section 11.

3. Taxability of Funds Received on Behalf of Government:
The assessee claimed that funds received from lease premiums, interest on deposits, etc., were on behalf of the Government of Maharashtra and thus not its income. The AO and CIT(A) treated these funds as the assessee's income. The Tribunal noted that this contention was raised for the first time and required examination of resolutions and orders from the Government of Maharashtra. The matter was remanded to the AO for fresh examination, directing the assessee to provide necessary documents and explanations.

4. Set Off of Brought Forward Deficit and Deduction of Book Depreciation:
The CIT(A) denied the set off of brought forward deficit, as the assessee's income was computed in a commercial manner. The Tribunal agreed, stating that such deductions are not allowed under normal provisions of the Act. However, the Tribunal allowed the deduction of depreciation computed under section 32 of the Act, setting aside the CIT(A)'s order on this issue.

Conclusion:
The Tribunal partly allowed the appeal, setting aside the CIT(A)'s order on the taxability of funds received on behalf of the Government and the deduction of depreciation but upheld the denial of exemption under section 11 and the set off of brought forward deficit. The order was pronounced in the open court on 27th March 2015.

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