2018 (4) TMI 192 - HC - Income Tax

Exemption from income tax to the local authority - whether Appellant is not a local authority as contemplated u/s 10(20)? - Held that - 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.

Issues Involved:
1. Nature of expenditure incurred by the assessee.
2. Disallowance of depreciation claimed.
3. Valuation of closing stock.
4. Exemption from income tax under Section 10(20) of the Income Tax Act, 1961.
5. Classification of rental income.
6. Applicability of Section 14A of the Income Tax Act.

Detailed Analysis:

1. Nature of Expenditure:
The primary issue was whether the expenditure of ?11,74,15,986/- incurred by the assessee was of revenue nature or should be included in the closing stock as per Accounting Standard-2 (AS-2) of ICAI. The Tribunal held that the expenditure was of revenue nature, ignoring that it was incurred to bring the inventories to their present location and condition, thus should be part of the closing stock as stipulated in AS-2.

2. Disallowance of Depreciation:
The Tribunal deleted the disallowance made out of depreciation claimed by the assessee, even though it was not claimed on the written down value of the asset. This decision was challenged on the grounds that it ignored the Explanation 6 of Section 43(6) of the Income Tax Act, 1961, which was inserted by the Finance Act, 2008 with retrospective effect from 1.4.2003.

3. Valuation of Closing Stock:
The Tribunal confirmed the order of CIT(A) which reduced the additions made in the value of closing stock from ?18,31,68,938/- to ?10,87,50,513/-, granting a relief of ?7,44,18,425/-. The department argued that the value of opening stock should be taken as the closing stock of the preceding year, and the Tribunal ignored the provisions of AS-2 for valuation of inventories.

4. Exemption from Income Tax:
The Tribunal held that the appellant was not a 'local authority' as contemplated under Section 10(20) of the Income Tax Act, 1961, and therefore, not exempt from income tax. The appellant argued that under the proviso added to the explanation of Section 10(20), the expression "local authority" includes entities like Panchayats, Municipalities, Municipal Committees, District Boards, and Cantonment Boards. The Tribunal's decision was challenged based on the Supreme Court's interpretation in Union of India & Ors. vs. Shri R.C. Jain & Ors., which outlined the attributes of a 'local authority.'

5. Classification of Rental Income:
The Tribunal did not uphold the order of CIT(A) which treated rental income of ?13,26,069 as "Income from house property" under Section 22 instead of "business income." The appellant argued that the rental income should be classified as "Income from house property" as per the provisions of the Income Tax Act.

6. Applicability of Section 14A:
The Tribunal was also challenged on not holding that the deficit of ?1,26,07,674/- on development work in progress was not allowable under Section 14A of the Act. The appellant contended that the administrative, establishment, and maintenance costs should not form part of the valuation of inventories and should be charged to the profit & loss account in the year incurred.

Conclusion:
The High Court concluded that the Tribunal erred in its judgment on multiple counts. The expenditure incurred by the assessee should be part of the closing stock as per AS-2. Depreciation disallowance was incorrectly deleted by the Tribunal, ignoring the retrospective effect of Explanation 6 of Section 43(6). The valuation of closing stock should adhere to the provisions of AS-2, and the Tribunal's reduction of additions was arbitrary. The appellant was found to be a 'local authority' under Section 10(20) and thus exempt from income tax. The classification of rental income and the applicability of Section 14A were also decided in favor of the assessee. Consequently, the appeals filed by the department were dismissed, and those by the assessee were allowed.

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