2019 (7) TMI 122 - AT - Income Tax

Assessment of trust - claiming exemption on the ground that it is an extended arm of State Government - HELD THAT - After withdrawal of exemption under section 10(20A) of the Act by Finance Act w.e.f. 01.04.2003 the assessee was made taxable entity. - The issue which arises in the present appeal is multi-fold wherein the first ground which has been raised in all the years by the assessee is that since it was extended arm of State Government of Maharashtra and consequently income of assessee was not taxable under the Income Tax Act. We find no merit in the said plea raised by assessee and the same is decided against assessee. Assessment of trust - assessability of lease premium in the hands of assessee - application of matching principle - Capital gains - transfer of asset - entire lease rent for 99 years has been brought to tax in the year of receipt then cost of construction plus land cost plus infra cost is to be allowed on proportionate basis - HELD THAT - Even after 01.04.2002 in the return of income the assessee had not claimed any such land cost or constructed cost since it had offered the lease premia in the form of rent in its hands from year to year. It was only after the order passed under section 263 of the Act lease premia in totality was assessed in the hands of assessee in the year in which the assessee had entered into agreement of lease. The corresponding fall out to which is that the concept of matching principle has to be applied and where the assessee had entered into agreement to lease then the cost of said assets needs to be allowed as deduction in its hands. Taxability of lease premium after spread over the period of 99 years - The question which arose was the assessability of lease premium in the hands of assessee i.e. whether it could be spread over the period of 99 years or the same has to be assessed in the hands of assessee in the year in which it enters into lease agreement. The assessee has clearly mentioned that the allotment of land was made by respective State Governments for development of area and has also pointed out that as in the case before the Hon ble High Court there was no renewal clause after 99 years in the agreement. Further in case any lessee surrenders the lease after initial period of 5 years then 93/99 years premium had to be returned. Such a liability was contractual liability of assessee. In the facts before the M.P. AUDYOGIK KENDRA VIKAS NIGAM (INDORE) LTD. SPECIAL ECONOMIC ZONE VERSUS ASSTT. COMMISSIONER OF INCOME TAX 3 (I) INDORE) 2018 (10) TMI 62 - MADHYA PRADESH HIGH COURT it was noted that land was transferred through the Government of Madhya Pradesh and apart from there assessee was also authorized to purchase / acquire land of its own. The assessee was undoubtedly managing and leasing the said land as an independent owner of land the sums equated as land premium was used for incurring expenditure to develop the land and maintaining industrial infrastructure. Hon ble High Court held that there was no denial that the transaction had to be taxed under the Income-tax Act unless the same is exempted by a particular provision of the Act. The assessee was offering 1/99 of land premium (out of total land premium received by it during the year) as taxable. The assessee claimed that lease premium was not its income before the Hon ble High Court so it was decided that the said land premium was the income of assessee to be taxed under the Income-tax Act. Vide para 31 it was held that from the perusal of clauses of memorandum it was revealed that the assessee was in the business of leasing out of land and getting rental income as well as premium therefore the land premium is nothing but a revenue receipt in the form of advance rent which has loosely been named as land premium. The assessee itself had offered 1/99th portion of such land premium as revenue receipt to be taxed in the year under consideration which goes to prove that the nature of receipt is revenue. The issue thus has been decided on the basis of income offered by assessee i.e. @ 1/99 of lease premium as advance rent and the appeal has been dismissed. Tribunal has decided the issue of recognition of revenue receipts while deciding appeal against order passed by Commissioner u/s 263 which is for the instant assessment year itself. The issue of assessability of lease premium has been decided against the assessee. We have in the paras hereinabove decided the alternate issue of allowing deduction of cost / depreciation by following matching principle of accounting. In such circumstances we find no merit in the pleadings of learned Authorized Representative for the assessee in applying dictate of Hon ble High Court of Madhya Pradesh. Accordingly this plea is dismissed. The grounds of appeal on merits are thus allowed in favour of assessee.

Summary

Issues Involved:
1. Taxability of income of the appellant as an extended arm of the State Government of Maharashtra.
2. Recognition of the appellant as a charitable institution and the applicability of sections 11 and 12 of the Income-tax Act, 1961.
3. Correctness of the reassessment framed and the computation of surplus.
4. Classification of lease transactions as operating or financial leases and the consequent allowance of depreciation.
5. Deduction of cost of land and development expenses.
6. Allowance of depreciation on leased assets and its classification as an application of income.
7. The appellant’s additional grounds for depreciation on opening WDV and proportionate costs.
8. Revenue's objections regarding depreciation on brought forward block of assets and the issue of double relief.

Detailed Analysis:

1. Taxability of Income as an Extended Arm of the State Government:
The appellant claimed that its income was not taxable under the Income Tax Act, 1961, as it was an extended arm of the State Government of Maharashtra. This claim was rejected by the CIT(A), and the Tribunal upheld this decision, finding no merit in the plea that the appellant’s income was exempt from tax on this ground.

2. Recognition as a Charitable Institution:
The appellant argued that it was engaged in charitable activities and that its income should be computed under sections 11 and 12 of the Act. The Tribunal noted that the appellant had been granted registration under section 12A of the Act by the Tribunal, effective from 01.04.2002. Consequently, the income needed to be computed as per sections 11 and 12, allowing for the accumulation of income and application of funds for charitable purposes. The Tribunal directed the Assessing Officer to compute the income accordingly, considering the principles laid down in various judicial precedents.

3. Correctness of Reassessment and Computation of Surplus:
The reassessment framed by the Assessing Officer was challenged on the grounds that it resulted in a higher income than originally assessed. The Tribunal found that the method of accounting adopted by the appellant, which spread the lease premium over 99 years, was not reflecting the real income. The Tribunal directed the Assessing Officer to adopt the correct figures of current year lease premium and exclude figures relating to earlier years, applying the matching principle for corresponding costs.

4. Classification of Lease Transactions:
The appellant contended that its lease transactions should be classified as operating leases, allowing for depreciation on leased assets. The Assessing Officer had classified the leases as financial leases, denying depreciation. The Tribunal upheld the classification of leases as financial leases, noting that the entire risk and rewards incidental to ownership were transferred to the lessee. Consequently, the appellant was not entitled to claim depreciation on these assets.

5. Deduction of Cost of Land and Development Expenses:
The appellant sought deduction of land cost and development expenses incurred in earlier years. The Tribunal applied the matching principle, allowing the deduction of proportionate costs of land and constructed premises against the revenue recognized from lease premiums. The Tribunal directed the Assessing Officer to verify the appellant’s claims and allow the deductions accordingly.

6. Allowance of Depreciation on Leased Assets:
The appellant claimed depreciation on leased assets as an application of income. The Tribunal, referring to the Supreme Court decision in CIT Vs. Rajasthan & Gujarati Charitable Foundation Poona, held that depreciation is to be allowed on assets, even if the cost of acquisition was treated as an application of income under section 11(1)(a) of the Act.

7. Additional Grounds for Depreciation on Opening WDV:
The appellant raised additional grounds for depreciation on the opening WDV of assets. The Tribunal, considering Explanation 6 to section 43(6) of the Act, directed that the WDV should be based on the actual cost of assets as on 01.04.2002, without any depreciation being deemed to have been allowed in the earlier exempt years.

8. Revenue's Objections:
The Revenue objected to the allowance of depreciation on the brought forward block of assets, arguing it resulted in double relief. The Tribunal dismissed these objections, affirming that the appellant was entitled to claim depreciation on assets, as per the principles laid down by the Supreme Court and the Bombay High Court.

Conclusion:
The Tribunal allowed the appeals of the appellant, directing the Assessing Officer to compute the income as per sections 11 and 12 of the Act, applying the matching principle for corresponding costs and allowing depreciation on assets. The cross objections and appeals of the Revenue were dismissed.