2017 (10) TMI 1338 - HC - Income Tax

Assessee upheld to be local authority - exemption from income tax to the local authority - whether Appellant is not a local authority as contemplated u/s 10(20)? - Held that - As decided in THE COMMISSIONER OF INCOME TAX, ALWAR VERSUS URBAN IMPROVMENT TRUST 2018 (4) TMI 192 - RAJASTHAN HIGH COURT it is true that the functions which are carried out by the assessee are statutory functions and carry on for the benefit of the State Government for urban development therefore, in our considered opinion, the functions carried out by the authority is a supreme function and fall within the activity of the State Government. The reliance placed by counsel for the department regarding 10(20) and explanation A will not make any difference. Taking into consideration income of authority is under constitution of India vide order enacted either for the purpose of dealing with or setting up the housing scheme for the purpose of planning and development of the improvement of the cities, town and villages or both for which the authority are created to carry out the function of State which are sovereign whereas the urban development and calculation of development charges will fall under the development charges. Deletion of 20A will not make difference in case of assessee. In our considered opinion, Clause-3 will come in the help of the assessee. In that view of the matter, we are considered opinion, that the authority assessee is a local authority for the purpose of carrying out of the improvement and development function of the State. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reassessment proceedings and consequential assessment order.
2. Nature of expenditure incurred by the assessee.
3. Disallowance of depreciation claimed.
4. Valuation of closing stock.
5. Status of the appellant as a 'local authority' under Section 10(20) of the Income Tax Act, 1961.
6. Classification of rental income.
7. Allowability of deficit on development work in progress under Section 14A of the Act.
8. Exemption from income tax under Article 289(1) of the Constitution of India.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings and Consequential Assessment Order:
The court examined whether the Tribunal was justified in not declaring the reassessment proceedings and the consequential assessment order as nullity. The Tribunal's partial allowance of appeals from both the department and the assessee was challenged. The court referred to its binding decision in D.B. Income Tax Appeal No.643/2008, which upheld the reassessment proceedings.

2. Nature of Expenditure Incurred by the Assessee:
The court analyzed whether the expenditure of ?11,74,15,986/- incurred by the assessee was of revenue nature. The Tribunal's decision to treat this expenditure as revenue, ignoring its role in bringing inventories to their present location and condition as per Accounting Standard-2 of ICAI, was questioned. The court upheld the Tribunal's view, confirming that such expenditure should be considered part of the closing stock.

3. Disallowance of Depreciation Claimed:
The court evaluated the Tribunal's decision to delete the disallowance made out of depreciation claimed, even though it was not claimed on the written-down value of the asset. The Tribunal's stance was upheld, confirming the deletion of the disallowance.

4. Valuation of Closing Stock:
The court assessed whether the Tribunal was justified in confirming the CIT(A)'s order, which reduced the additions made in the value of closing stock from ?18,31,68,938/- to ?10,87,50,513/-. The court upheld the Tribunal's decision, emphasizing that the value of opening stock must be taken as the closing stock of the preceding year.

5. Status of the Appellant as a 'Local Authority':
The court scrutinized whether the appellant qualified as a 'local authority' under Section 10(20) of the Income Tax Act, 1961, and thus was exempt from income tax. The Tribunal's decision that the appellant was not a 'local authority' was challenged. The court referred to the definition and attributes of a local authority as per Section 3(31) of the General Clauses Act and relevant Supreme Court judgments. It concluded that the appellant did not qualify as a local authority, thus not exempt from income tax.

6. Classification of Rental Income:
The court examined whether the rental income of ?13,26,069 should be treated as "Income from house property" under Section 22 or as "business income." The Tribunal's decision to treat it as business income was upheld.

7. Allowability of Deficit on Development Work in Progress:
The court analyzed whether the deficit of ?1,26,07,674/- on development work in progress was allowable under Section 14A of the Act. The Tribunal's decision not to allow this deficit was upheld.

8. Exemption from Income Tax under Article 289(1) of the Constitution of India:
The court evaluated whether the appellant was exempt from income tax under Article 289(1) of the Constitution of India, which exempts the property and income of a State from Union taxation. The court concluded that the appellant could not claim this exemption, as the income was not considered the income of the State Government.

Conclusion:
The court dismissed the appeals filed by the department and allowed those of the assessee, directing the Assessing Officer to follow the judgment. Other questions were kept open, and the court emphasized that the authority assessee is a local authority for the purpose of carrying out the improvement and development function of the State.