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2012 (9) TMI 331 - AT - Income TaxAssessment of business income - whether the assessee should be held to be an agent of the State or an arm of the State and exempt from assessment of income in his hands - Held that - The entire case of the assessee in the instant case, hinges on clause (2) or clause (3) of Article 289 of the Constitution of India - The basic purport of Article 289(2) is to neutralize clause (1)which says The property and income of a State shall be exempt from Union Taxation , but with a rider that, if there is any trade or business done on behalf of the Government or any operations connected therewith or any property issued or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. To make this clause effective, even for Government / State, conduct of trade or business is necessary, which simply means involvement of commercial and profit motive for the vendor. The observation above read together with section 113(3A) of MR&TP Act, 1966, shall emerge that the activity so performed by the assessee is nothing but an act of State without any profit or commercial motive attached with it. The only clause left for our consideration then would be clause (3), which shall come into play once clause (2) is disbanded which operates only if Parliament may by Law declare to be incidental to the ordinary functions of Government . Here, in the instant case, we have to read Parliament as State Government because in the instant case, it is the State Government which has authorized the assessee to perform the development projects at Navi Mumbai, Vasai- Virar, Waluj and such other places - as soon as the Project is complete, the project gets handed back to the State, i.e. when there is a development project, as per phases, and in the case of local authority, as and when the authorizing committee is satisfied, the reins are transferred to the municipal boards, from whom, the project was taken over, as we have seen from Resolution no. 10375 dated 06/08/2010. No agreement with the argument of the DR that there is no document which has drawn out the Agent-Principal relationship, because the very first Resolution dated 18th March, 1970 mention in para no. 2 that which would act as an agent of Government for the development of the areas with a view to secure the above objective , and in para no. 3 of this Resolution clearly say, The subsidiary company will work under the control and supervision of the State Government in the General Administrative Department . Thus the first Resolution itself makes it clear that the assessee is to be an agent, but functions as an arm of the State Government, because, if the assessee can only work under the control and supervision of the State Government, meaning thereby that the assessee cannot make / take any decisions suo moto, then, in such a case authority for performance of all activities lie somewhere else. In any case, as per this Resolution, it clearly makes the assessee an agent of the State - looking into the financial functions of the assessee it is founded that all dealings have to be routed through authorizations by the Government and all funds receivable shall be in compliance and with intimations to State Industrial and Investment Corporation of Maharashtra Ltd. Bombay - as the department has been assessing the assessee as a State Government undertaking for the last three years, therefore, even this cannot be called as an afterthought and applying the rule of consistency the department cannot be allowed to take a distinctive approach in the current year - in favour of assessee.
Issues Involved:
1. Whether the assessee should be held to be an "agent" of the State or an "arm" of the State. 2. Taxability of the income generated by the assessee. 3. Treatment of expenses and capital expenditure. 4. Assessment of remuneration received from the State Government. Detailed Analysis: 1. Whether the Assessee Should Be Held to Be an "Agent" of the State or an "Arm" of the State: The central issue revolves around whether the assessee, a company wholly owned by the Government of Maharashtra, should be considered an agent or an arm of the State. The assessee argued that it functions solely under the authority and guidelines of the State and performs duties that are typically governmental, such as town planning and infrastructure development. The Senior Counsel cited various resolutions and notifications from the Government of Maharashtra, which explicitly referred to the assessee as an "agent" of the State. The Tribunal found that the assessee operates under the control and supervision of the State Government, reinforcing its status as an agent. The Tribunal also referenced the Hon'ble Bombay High Court's decision in Percival Joseph Pareira vs The Special Land Acquisition Officer, which confirmed the assessee's role as an agent of the State Government. 2. Taxability of the Income Generated by the Assessee: The assessee contended that as an agent of the State, it should not be subject to income tax under Article 289(1) of the Constitution of India, which exempts the property and income of a State from Union taxation. The Senior Counsel argued that the income generated by the assessee should be considered the income of the State and not taxable in the hands of the assessee. The Tribunal agreed, stating that the activities of the assessee are not commercial but are governmental functions performed on behalf of the State. The Tribunal held that the income generated by the assessee is deposited into the Consolidated Fund of the State, and therefore, the income does not belong to the assessee. 3. Treatment of Expenses and Capital Expenditure: The Tribunal noted that all expenses incurred by the assessee, whether capital or revenue, are on behalf of the State Government and are reimbursed by the State. Since the assessee does not own any assets in its name, the question of capital expenditure does not arise. The Tribunal dismissed the grounds related to the treatment of expenses and capital expenditure as infructuous. 4. Assessment of Remuneration Received from the State Government: The Tribunal acknowledged that the assessee receives a remuneration of Rs. 5.00 lacs per year from the State Government. This remuneration is to be assessed in the hands of the assessee. The Tribunal directed the Assessing Officer to assess this income after allowing deductions for any expenses incurred wholly and exclusively for the purpose of earning the said income. Conclusion: The Tribunal concluded that the assessee is an agent of the State Government of Maharashtra and that the income generated by the assessee is not taxable in its hands. The Tribunal set aside the order of the CIT(A) and directed the AO to assess only the remuneration received from the State Government. The appeal was partly allowed.
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