2017 (8) TMI 385 - HC - Income Tax

Eligibility for exemption u/s 10(20A) - scope of development - assessee is a development authority - commencement of business - functions performed by assessee under the VIDC Act - Held that - Hon ble Supreme Court in the case of Gujarat Industrial Development Corporation 1997 (8) TMI 3 - SUPREME Court held that the word development in Section 10(20A) of the Act should be understood in its wide sense and that schemes establishing industries help in accelerating development and that, therefore, in the said case the appellant- Corporation was held as being entitled to the exemption. It was also held by the Hon ble Supreme Court that Section 10(20A) of the Act was meant for protection of public bodies created under law for the purpose of developing urban or rural areas for public good. It was also held that the said provision if interpreted rigidly and narrowly, would result in the anomaly of bringing such public bodies within the tentacles of income-tax liability. The Tribunal has held that as per the law laid down in the context of Section 10(20A) of the Act, it is not necessary that a direct nexus is to be established with the purpose of satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages and that an indirect nexus would suffice. Tribunal has correctly found that the functions performed by the respondent- assessee under the VIDC Act result in facilitating the development of cities, towns and villages because its actions make available drinking water as also electricity through hydro-electric projects. Apart from this, the respondent- assessee- Corporation is involved in activities of flood control and resettlement of displaced persons, thereby showing that there is a nexus with developmental activities. The Tribunal has analysed the provisions of the VIDC Act and rendered a finding that the respondent- assessee falls within the scope of Section 10(20A) of the Act. The Tribunal on fresh consideration of the facts in the impugned order found that the respondent-assessee- Corporation, upon it being set up under the VIDC Act, took over the projects concerning irrigation development in the State. It further found that even before the projects were taken over by the assessee, some portion of the canals were completed and water supplied to various fields and water charges were being collected. In fact it is the assessee s case before the Tribunal that it had received consideration of ₹ 1.12 lakhs on sale of water during the subject assessment year. In fact, the object of the assessee is to promote irrigation projects, supply of water by canal etc. as can be seen from Section 18 of the VIDC Act. This itself is the business of the respondent-assessee. The fact that existing canal networks and other activities for taking forward the irrigation projects were carried out by the respondent-assessee in the subject assessment year, would not detract from the fact that the assessee had already commenced its business. It has been found on facts by the Tribunal that the respondent -assessee- Corporation had commenced business. The question as to when an assessee can be said to have commenced business is a question of fact and no universal test can be laid down. The impugned order is not shown to be perverse. Therefore, we do not find any reason to interfere with the said finding of fact of the Tribunal. - Decided in favour of assessee.

Summary

Issues Involved:
1. Eligibility for exemption under Section 10(20A) of the Income Tax Act.
2. Commencement of business for the purpose of Section 28 of the Income Tax Act.

Issue-wise Analysis:

1. Eligibility for exemption under Section 10(20A) of the Income Tax Act:

The appellant-Revenue challenged the Tribunal's order granting the respondent-assessee exemption under Section 10(20A) of the Act, arguing that the respondent-assessee did not satisfy the criteria of being an authority involved in planning, development, or improvement of cities, towns, and villages. The Revenue emphasized the terms "satisfying the need for housing accommodation" and "planning, development or improvement of cities, towns and villages" as crucial for exemption.

In contrast, the respondent-assessee argued that its functions under the Vidarbha Irrigation Development Corporation Act, 1997 (VIDC Act) were aligned with the planning, development, and improvement of cities, towns, and villages. The Tribunal had previously found that the respondent-assessee's activities, such as irrigation projects, hydroelectric projects, and flood control, had a direct nexus with public health and development, thereby qualifying for exemption under Section 10(20A).

The High Court reviewed the relevant provisions of the VIDC Act, which detailed the extensive functions of the respondent-assessee, including irrigation, hydroelectric projects, pollution control, and resettlement of displaced persons. These functions were deemed to have a clear nexus with the development of cities, towns, and villages.

The Court also considered precedent cases, including the Supreme Court's judgment in Gujarat Industrial Development Corporation vs. CIT, which advocated a liberal interpretation of "development" under Section 10(20A). The Court agreed with the Tribunal's analysis that the respondent-assessee's activities facilitated the development of urban and rural areas and thus qualified for exemption.

The Revenue's reliance on certain judgments was found to be misplaced as they pertained to different contexts, such as the definition of "local authority" or entities not constituted under specific laws as required by Section 10(20A). Consequently, the Tribunal's decision to grant exemption under Section 10(20A) was upheld.

2. Commencement of business for the purpose of Section 28 of the Income Tax Act:

The Assessing Officer and the CIT (Appeals) had concluded that the respondent-assessee had not commenced its business, thereby rejecting its claim for computing income under Section 28 and capitalizing its expenditure. This conclusion was partly based on a letter from the respondent-assessee and its method of accounting.

The High Court, in a previous order, had directed the Tribunal to reconsider the issue of business commencement based on factual aspects rather than solely on the method of accounting or the letter. Upon fresh consideration, the Tribunal found that the respondent-assessee had indeed commenced business. It noted that the respondent-assessee had taken over existing irrigation projects, completed portions of canals, supplied water, and collected water charges during the relevant assessment year. These activities aligned with the objectives of the VIDC Act, indicating that the business had commenced.

The Tribunal's finding that the respondent-assessee had commenced business was a factual determination, and the High Court found no reason to interfere with this conclusion. The Revenue failed to provide any material evidence to contradict the Tribunal's finding.

Conclusion:

Both substantial questions of law were answered in favor of the respondent-assessee and against the appellant-Revenue. The appeal was dismissed with no order as to costs.