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TMI Blog2013 (10) TMI 542X X X X Extracts X X X X X X X X Extracts X X X X ..... - SUPREME Court], assessee’s contention that income of Board cannot be subjected to tax under income-tax Act, in view of provisions contained under Article 289(1) of Constitution of India is not acceptable. Chargeability of income to tax is as per charging section contained u/s 4 of IT Act, 1961. Retrospective amendment made to APHB Act by Act 12 of 2010 cannot dilute effect of provisions contained under income-tax Act, which is an Act of Parliament hence has overriding effect over an Act of State Legislature. It is a fact on record that plea taken by assessee that Board’s income is income of state Government was not there until introduction of subsection (7) to section 58 of APHB Act in 2010. That is reason assessee had never taken this stand all these years. In fact assessee had all along filed returns declaring income and claiming deduction u/s 80-IB of Act. Deduction u/s 80-IB can only be claimed by an assessee who is an industrial undertaking having income from profits and gains from business specified therein. Therefore, assessee’s own conduct goes to show that income from housing projects were treated as business by assessee. assessee has not revised this stand by filing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions relied upon by learned AR are factually distinguishable as in those cases there was nexus between expenditure incurred and business of assessee - decided against assessee. Disallowance of payment of pension - Held that:- CIT(A) has not gone into depth of issue and has confirmed disallowance in a mechanical manner. It is not forthcoming what are details asked for by AO and on failure on part of assessee to furnish such details, disallowance was made. lower authorities have not disputed fact that pension amount has been paid. It is also a fact that Pension is payable as per service conditions. That being case it is an allowable deduction - Decided in favour of assessee. Disallowance u/s 44AD - Estimation of income from Singapore project - Held that:- It is a fact on record that assessee is a government undertaking created under a statute. It maintains regular books of account. Its books of account are not only subject to statutory audit under provisions of income-tax Act but also subject to inspection by other government agencies. Therefore, without pointing out defect or discrepancy in books of account maintained by assessee estimation of income cannot be resorted to. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer. During the assessment proceeding, the Assessing Officer noted that under the head administrative expenditure the assessee has debited infrastructure expenditure of Rs. 1180,00,00,000/-. Explaining the details of expenditure claimed in its letter dated 22/12/10, the assessee submitted that the Government of AP has formulated a scheme under the name Rajiv Gruhakalpa (RGK) for providing housing to the urban poor falling in the salary income of Rs. 24,000-36,000 and the cost of the house was worked out at Rs. 82,500/- to the beneficiary. As per the scheme the beneficiary has to pay only Rs. 8,250/- and the balance to be financed by the Bank as soft loan. The APHB was to bear the financial burden of providing infrastructure facilities, drainage, water suply, internal road and power supply. It was submitted that during the assessment years 2005-06 and 2006-07 more than two lakhs houses were planned under the GORT No. 432, dated 23/12/2005 and subsequent GOs by GORT No. 433, 441 442. Against these GOs the APHB has paid to the Government of AP towards infrastructure fee/cost of land of Rs. 1180 crores. It was submitted that as per the RGK scheme, the entire cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of Rs. 3,86,18,879/- under the head pension . When the Assessing Officer asked the Assessee to explain regarding the allowability of the expenditure claimed, the assessee stated that the employees of the Board are eligible for pension benefit as applicable to State Government employees and they are governed by pension code of 1980. The retired employees are paid monthly pension on the basis of total number of years rendered on the last pay drawn as certified by the Director, State Audit. It was submitted that no reserve fund has been provided by the Board. All the pension payments are met from the revenue. The assessee submitted that the expenditure cannot be considered as capital since it is incurred in course of business and no asset came into existence. As no capital has come into existence the expenditure cannot be considered as a capital expenditure. The Assessing Officer however rejected the contention of the assessee. The Assessing Officer referring to GO No. 17 dated 29/07/94 observed that in para 6 of the said GO it is clearly mentioned that the payment of pension is to be arranged through the CAO, APHB by creating a separate pension cell and fund for meeting the enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment functions. Therefore, income cannot be taxed under the head business income or any other head. c) Even if the appellant is treated as an entity independent of the State Government and the income is arising from business activity, the appellant acts as an agent of the State Government. Therefore, the income accrues to its principal, the State Government. Such income cannot be taxed in the hands of the State Government under Article 289 of the Constitution. 11. The CIT(A) called for a remand report from the Assessing Officer on the additional grounds filed by the assessee and the submissions made in that regard. The Assessing Officer also submitted a remand report, a copy of which was also forwarded to the assessee. The assessee submitted a rejoinder to the remand report of the Assessing Officer. It was contended on behalf of the assessee that APHB is an instrumentality and an agency of Government of AP and as a result it functions as an extended arm of the Government. Being a part and parcel of the Government it works as a dependent entity. It was further submitted that the APHB was constituted under a statute by the State legislature to carry out the activities whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Board including members from the financial institutions which provide financial assistance to the Board clearly establishes the character of the Board as being a commercial body distinct from the Government. The CIT(A) referring to section 7 of the APHB Act, which provides for salary and remuneration to the employees, opined that this section itself clearly brings out the fundamental distinction between the Government and the assessee Board as the Board has separate fund and the salaries of the Board are to be paid from the fund of the Board, which is unlike the salaries of the Government servants and of the Government which are paid from consolidated fund of the state. Further referring to section 17 of the APHB Act, the CIT(A) observed that the provision contained therein clearly states that employees of the APHB are not the government servants but they are servants of the board. The CIT(A) observed that APHB Act clearly states that the general rules regarding government shall apply to the servants of the Board. However, exceptions can be provided and the Board is competent to frame different rules for its servants. He further observed that sections 16, 17, 18 18A, 19 20 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferred the land to the purchaser. There is no reference to the state Government being the owner of the land and the assessee acting as its agent for the purpose of sale. The CIT(A) referring to section 13 of APHB Act observed that the said section clearly keeps the authority to the Board to enter into contract in its own capacity and not on behalf of the Government. The CIT(A) referring to various provisions of the APHB Act, inferred that APHB is competent to and makes and executes housing schemes as it feels necessary or those which are entrusted to it by the Government. In other words, it is not acting at all as an agent of the Government because it is independently forming various housing projects and executing them in commercial terms. The fact that some approval is required from the Government does not alter the basic characteristics of the APHB. In every Corporation or company certain approvals are required from the top management as per rules of the company. The CIT(A) observed that though the Government may be having 100% ownership and it is entirely upto the Government to decide on the level of control, however, the level of control does not in any manner convert the comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions by creating different organization and public sector undertakings. Though these organizations function under the control of the Government, however, they do not perform any sovereign functions of the Government. Neither these type of organizations are extended arm of the Government nor their employees are state Government employees. With the aforesaid observations, the CIT(A) rejected the contentions of the assessee with regard to the additional grounds raised by it. 17. The CIT(A) also repelled assessee s contention of diversion of income by overriding title with regard to claim of infrastructure expenditure amounting to Rs. 1180 crores. The CIT(A) was of the view that for an expense to be allowed it should be revenue in nature and it must have a direct nexus with the business of the assessee. The CIT(A) relying upon the decision of M/s Madhavaprasad Jatia V/s. CIT, 118 ITR 200 (SC) and CIT V/s. Panipat Woollen and General Mills Co. Ltd., 103 ITR 66 opined that for claiming a business expenditure the conditions to be cumulatively satisfied are i) the expenditure should not be disallowed under any section of the IT Act, ii) the expenditure should not be of the nature of cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he only authority which has a right on the revenues of the assessee. Negating the contention of the assessee to the effect that the objective of providing housing accommodation is not a commercial activity rather a charitable one with no business motive and with a mandate to provide development to the state through housing activity, the CIT(A) observed that providing housing does not change the character of the organization. On the other hand, the activity vis- -vis the housing is commercial in nature. He observed that the assessee builds and sales houses in very much the same manner in which a commercial builder does it and only difference being while for a commercial builder the profits are made available to the owners/partners, in case of the assessee the ownership vests with the AP Government and so do all rights over the property. The application of the profit by the AP Government either for schemes for the poor or for its own administrative expenses does not in any way change the character of business of the assessee just as the application of the profits by partners or shareholders does not alter the nature of the business of the partnership or company. The CIT(A) held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion has been demanded. 21. While dealing with the assessee s contention with regard to diversion of income by overriding title, the CIT(A) held that the said principle applies only in cases where the income never reaches the assessee as his income. Merely because the assessee has an obligation to apply certain amount out of its income for a particular purpose will not make it a case of diversion of income by overriding title. An obligation to apply the income accrued, arisen or received amounts merely to the apportionment of income and the income so applied is not deductible. He opined that there is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of his income. Where by the obligation income is diverted before it reaches the assessee it is deductible but where the income is required to be applied to discharge an obligation after such income has reached the assessee then the same consequence in law does not follow. The CIT(A) referring to sub-section (7) of section 58 of the APHB Act, opined that the word surplus net revenue does not in any way state that it is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other head. 3. The learned Commissioner of Income Tax (Appeals) failed to appreciate that even if the appellant is treated as an entity independent of the State Government and the income is arising from business activity. the appellant acts as an agent of the State Government. Therefore. the income accrues to its principal. the State Government. Such income cannot be taxed in the hands of the State Government under article 289 of the Constitution. 4. The learned Commissioner of Income Tax (Appeals) erred in not considering the oral submissions of the appellant made on the last date of hearing on 08.03.2012, besides in his order the last date of hearing has been stated as 01.03.2012, which is not a fact. 5. The learned Commissioner of Income Tax (Appeals) erred in not dealing in his appellate order several oral and written submissions or the appellant as well as the rulings relied upon by it in its appeal and rejoinder to the remand report of the Assessing Officer. 6. The learned Commissioner of Income Tax (Appeals) committed grave impropriety in reproducing the views of the Assessing Officer in the remand report in his own order instead of applying his mind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant under the law is bound to obey. Further, the learned Commissioner of Income Tax (Appeals) has erred in holding that the amendment to section 58 of the APHB Act. providing for transfer of the surplus net revenue after meeting its expenditure to the AP Government is ultra vires the construction. 13. The learned Commissioner of Income Tax (Appeals) has erred in holding that the appellant was clearly a commercial body corporate of the government and is distinct from the government itself. 14. The learned Commissioner of Income Tax (Appeals) erred in heavily relying on the decisions in the case of APSRTC vs. ITO [(1964) 52 ITR 524 (SC)] and New Delhi Municipal Council vs. Punjab and Others [SCC (1997) 7 SCC 339] to hold that the income of the appellant is taxable without taking into account the appellant's submissions distinguishing these cases. 24. Apart from the submissions made by the learned counsel for the assessee Shri P.K. Sahu at the time of hearing the assessee has also filed written submissions containing the issues on which the order of the CIT(A) was challenged. Hereafter, we will deal with the issue-wise contention of the parties and record our finding. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, and recover rent or damages from such persons. It can prosecute offenders for imprisonment/fine. Clothing of APHB with statutory powers is indicative of discharging sovereign functions. Such powers and privileges are inconsistent with profit making venture that can be described as trade or business. The CIT(A) has not considered this plea. He has simply gone by the argument that there is no difference between APHB and any private real estate developer. Both construct buildings, sell properties and make profit. He has not considered the following Supreme Court's rulings. In Shri Ramtanu Co-operative Housing Society vs. State of Maharashtra, 1970 (3) SCC 323, in which the activities of lease, sale, exchange, was not held to be trading activities, taking into account the purpose for which Maharashtra Development Corporation is constituted under Maharashtra Industrial Development Act, 1961. In Sukhdev Singh vs. BhagatramSardar Singh Raghuvanshi, (1975) 1 SCC 421 (SC), the Supreme Court observed that a public authority performs statutory duties and carries out transactions for the benefit of the public and not for private profit. The CIT(A) has referred to the submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment but in substance it may be just the alter ego of the Government itself. The true test of determination of the said question depends upon the degree of control the Government has over it, the extent of control exercised by the several other bodies or committees over it and their composition, the degree of its dependence on Government for its financial needs and the functional aspect, namely, whether the body is discharging any important Governmental function or just some function which is merely optional from the point of view of Government. v. The Supreme Court in Virendra Kumar Srivastava vs. V.P. Rajya Karmachari Kalyan Nigam (2005) 1 SCC 149 (SC), the Supreme Court held that on a detailed examination of the administrative, financial and functional control there is no doubt that it is nothing but an "instrumentality and agency of the state" and the control of the State is not only "regulatory" but it is "deep and persuasive" in the sense that it is formed with the object of catering to the needs of the government employees as a supplement to their salaries and other perks. Even day to day functioning of the corporation is watched, supervised and controlled by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption in terms of Article 289(1). In response, at paragraph 18 of the rejoinder (page 292 of Paper Book-H), the appellant had analysed the Supreme Court's observation in APSRTC's case in detail, and argued that the same is not against the stand of the appellant. The Court had observed that APSRTC was a company, in which the State and others were having shareholding. In case of APSRTC, income was not made over to the State or it became part of the general revenue of the State. The surplus fund can be used for road development only. In contrast, the appellant had inter alia argued that APHB does not have any shareholding, it is entirely owned by the State Government and that the surplus net revenue vests in the consolidated funds of the State under APHB Act. Unlike in the case of a corporation having independent board of directors, the State Government has unlimited power under the Act to interfere in the working of the APHB. These and the other submissions made in the tabular analysis by the appellant of the APSRTC's case have not been considered by the CIT(A). No Profit Motive The CIT(A) has extracted in his order paragraphs 5, 5.1, 5.2(part) and 5.5 of the writte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e exercise of power. APHB is executing the decisions taken by the Government as its executing agency. Therefore, APHB is discharging functions which are Governmental in nature. Its entire activities are sanctioned and dictated by the Government. It only executes what the Government wants to be carried out. The appellant would submit that the structure and functions of APHB are such that there is no concept of cost or profit. The accounts are based on cash flow. The accounting is only for the purpose of monitoring activities and recording receipts and expenditure. The concept of profit can be applied only to for profit organizations. The AO/CIT(A) has understood that any activity generating surplus would by itself show profit motive. The appellant would submit that this conclusion is not based on any appreciation of the development of income tax law. In the past there was confusion about the meaning of profit motive. In section 2(15) of Income Tax Act, as it was then worded, the expression "not involving the carrying on of any activity for profit" came to be examined by a Five Member Bench of the Supreme Court in Additional Commissioner of Incometax vs. Surat Art Silk Cloth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otive but the same does not apply to APHB, which is only harnessing the capability of the private parties to achieve the public purpose. In this regard, the appellant would quote from the Supreme Court's ruling in Sooraram Pratap Reddy and Others vs. District Collector, Ranga Reddy District, (2008) 9 SCC 552, wherein foreign rulings were cited with approval before concluding that such joint venture arrangement does not sully public purpose. Clause (1) of Article 289 of the Constitution states that the property and income of a State shall be exempt from Union taxation. However, clause (2) is an exception to this and prescribes that Parliament may by law provide for taxing the income from trade or business of any kind carried on by and on behalf of the Government of a State or any operation connected therein. The AO seeks to invoke this clause after holding that APHB is undertaking real estate business with profit motive. But for the reasons explained in the foregoing paragraphs, the appellant would submit that APBH is a not-forprofit organisation. The nine judge bench of the Supreme Court in New Delhi Municipal Council vs. State of Punjab and Others, (1997) 7 sce 339, has held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... independence which will also be apparent from the fact that in the matter of settlement of its Annual Programmes, Budget and Establishment Schedule, the Board has to obtain the sanction of the State Government under Section 24 of the Act. The supplementary budget and programme, if any, has also to be sanctioned by the State Government. 31. We need not refer to other provisions as the provisions already referred to above are sufficient to bring home the point that Haryana Housing Board does not have even the semblance of independence which are normally possessed by local self-governments, like Municipal Boards or District Boards etc. The Board also does not even partially consist of elected representatives of the people. The above observations of the Supreme Court are equally applicable to APHB. The provisions of APHB Act are similar to those considered by the Supreme Court with respect to Haryana Housing Board Act. As in the case of Haryana Housing Board, APHB has no autonomy or independence, and it works as a captive instrumentality under the close control and supervision of the State Government. The law of agency contained in sections 182, 212, 213, 222, 223 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h State Road Transport Corporation vs. Income Tax Officer, (1964) 52 ITR 524 (SC), the Supreme Court explained that, if a trade or business is carried on by the State departmentally and income is derived from it, there would be no difficulty in holding that the said income is the income of the State. If a trade or business is carried on by a State through its agents appointed exclusively for that purpose, and the agents carry it on entirely on behalf of the State and not on their own account, there would be no difficulty in holding that the income made from such trade or business is the income of the State. The Gujarat High Court in U.K. Acharya vs. State of Gujarat, AIR 1989 Gujarat 81, has held that the State of Gujarat is entitled to give directions to the Housing Board for the purposes of the Act and these are binding on the Housing Board. The control of the State Government is all pervasive in connection with any of the housing scheme undertaken by APHB. This observation of the Hon'ble High Court is equally applicable to the APHB. APHB has been created to operate as an executing agency for the plans and programmes of the State Government. It is bound by the direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have no activity to perform. Apart from sanctioning the schemes, the State Government is thickly involved in guiding, directing and facilitating the activities of APHB. The statutory powers and privileges conferred on APHB by the Legislature of the State is to help it in carrying out its functions. Hence, there is no doubt that the activities of APHB are undertaken for and on behalf of the State. As of now, there is no law made by the Parliament to levy income tax with respect to any trade or commerce carried on by or on behalf of the Government of a State or any operations connected with therewith. Therefore, any income arising out of the operations in the course of execution of housing schemes cannot be subjected to tax in the hands of the State Government. The same income does not accrue to APHB, as it is merely functioning as an agent of the State Government. 27. The learned Departmental Representative also filed written submissions before us putting forth his contentions. At the outset, the learned Departmental Representative strongly denied the assessee s contention that some of his arguments and case laws have not been considered by the First Appellate Authority. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication of the above principles to the facts of the assessee s case would bring out the following features, which are : i) the assessee has distinct personality from the State, which is evident from the Constitution as a company and the fact that the account of the Board are different than the State. The assessee is conducting trading on its own and showing receipts and expenditure on its own account, the entire activity of the assessee is subject to tax audit, and the assessee is donating part of its income to State and claiming 80-IB deduction separately for some assessment years and the State is not indemnifying the assessee for any of its acts or omissions or commissions. ii) The assessee is also not covered under Article 289(3) because the activity of the assessee is not declared by the Parliament as an activity incidental to the ordinary function of the government. It is submitted that these facts make it clear that the income of the assessee is not that of the State and, hence, is liable to tax. It is submitted that the Hon ble AP High Court in the case of AP State Civil Supplies Corporation, 149 ITR 497 and Hon ble Supreme Court in the case of So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e legislation is passed by a state on a subject on which centre is only competent to legislate. It was submitted that when there is repugnancy between the state legislation and central legislation as per Article 254 of the Constitution the central legislation will prevail and the state legislation shall be treated as void to the extent of the repugnancy. In support of such contention, the learned Departmental Representative relied upon the decision of the Hon ble Allahabad High Court in case of UP Jal Nigam Ltd., 202 Taxman 285. It was submitted that APHB first earns its income for a particular FY which is taxable after meeting its expenditure and the surplus fund is transferred to consolidated fund of the state Government. Thus, the exemption from taxation claimed by the APHB on the ground that its surplus is transferred to the consolidated fund of the state Government is not acceptable as the transfer of surplus is nothing more than mere application of its income. 30. It was submitted that all public sector undertakings and corporations which have been created under some Act, passed by the state Government or the Parliament are also subject to taxation under the Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income admitting income under the head income from other sources and claimed deduction u/s 80-IB. However, as per the computation, the income in fact was excess of income over expenditure, which falls in the category of business income. For the AY 2005-06 it filed its return of income declaring the income under the head house property and income from capital gain and went on to show net loss. For the AY 2007-08 the assessee filed its return of income declaring income under the head income from house property and income from other sources and claimed deduction u/s 80-IB. For the AY 2008- 09 the assessee filed its return of income declaring income under the head income from house property . It is submitted that deduction can be claimed u/s 80-IB only when there are profits derived from business. Though the assessee returned its income under the head income from other sources but the very fact that in the return of income the assessee claimed deduction u/s 80-IB clearly demonstrates that the income of the assessee is in nature of business. It is submitted that the assessee having claimed deduction u/s 80-IB it cannot turn back at the time of proceedings before Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set out in the preamble of the APHB Act, 1956 is to take such measures, to make such schemes, and to carry out such works as are necessary for the purpose of dealing with and satisfying the need of housing accommodation. The activity of the assessee is to construct housing projects on land provided by the state Government or acquired by it and sale it to people belonging to different income groups. The assessee recognises income generated from the activity of sale of houses and also maintains regular books of account wherein such transactions are recorded. The assessee s accounts are also subject to statutory audit under the provisions of the IT Act. It is also a fact that for the AY 2004-05, 2005-06 and 2006-07 the assessee had filed return of income declaring certain income and also claiming deduction u/s 80-IB of the Act. Assessments for the aforesaid assessment years were completed by rejecting claim of deduction u/s 80IB of the Act and also treating the income as business income. In fact it is evident from the assessment order passed for the assessment year 2005-06 the assessee itself in course of assessment proceeding had admitted the profit from sale of land as its business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Government exercises pervasive control over the Board under the terms of the statute, hence, it cannot be regarded as an independent and autonomous body. 3. The Board is empowered with statutory power to acquire land, evict any person from the premises, following the procedure laid down in the Act, and recover rent or damages from such person. Exercise of such statutory power is indicative of the fact that the Board is discharging sovereign function which is inconsistent with profit making venture in the nature of trade or business. 4. The assessee is used as an instrument by the state for resource mobilization for which land is allotted for exploiting commercially for this purpose. 5. The employees of the APHB are governed by the same terms and conditions as are applicable to the state government officers, which establishes that it is an extended arm of the Government. 6. The Accountant General of AP has categorized APHB for civil audit and not for commercial audit, which shows that the APHB is not considered as a commercial organization. 7. The activities of the Board are not undertaken with any profit motive. It only discharges statutory functions to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment, hence, for that reason immune from taxation under Article 289(1) of the Constitution of India. 38. All the aforesaid contentions raised by the learned counsel has been dealt with and answered by the Hon ble Supreme Court in case of APSRTC V/s. ITO, 52 ITR 524. The Hon ble Supreme Court while affirming the decision of the Hon ble AP High Court examined the provisions of APSRTC Act vis- -vis Article 289 of the Constitution of India and held that the income of the APSRTC cannot be held to be the income of the State Government as APSRTC has its own identity and distinct from the Government. The Hon ble Supreme Court anlaysing the three clauses of Article 289 of Constitution of India, held in the following manner: Reading the three clauses together, one consideration emerges beyond all doubt and that is that the property as well as the income in respect of which exemption is claimed under clause (1) must be the property and income of the State, and so, the same question faces us again: is the income derived by the appellant from its transport activities the income of the State? If a trade or business is carried on by the State departmentally and income is derived from it, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the corporation on the one hand and the State and Central Governments on the other. Take, for instance, the case of supersession of the corporation authorized by section 38. Section 38(2)(c) emphatically brings out the fact that the property really vests in the corporation, because it provides that during the period of supersession, it shall vest in the State Government. Similarly, section 39(2) which deals with the distribution of assets in case of liquidation, brings out the same feature. It has been urged before us by the Advocate-General that section 30 contemplates that after provisions is made as required by section 28 and 29 and funds are utilized as prescribed by section 30, the balance has to be given to the State Government for the purpose of road development, and that, it is suggested, indicates that income belongs to the State Government. This argument is clearly not well-founded. When we are deciding the question as to whether the income derived by the corporation is the income of the State, the provision made by section 30 for making over to the State Government the balance that may remain as indicated therein, is of no assistance. The income is undoubtedly t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be constituted of members, who are not only Government officials but also representative of the financial institution providing financial assistance to the Board. Sections 5 to 12 deal with the terms of office and conditions of service of the members, filing up vacancies, appointment of committees, meeting of the board etc. Section 13 of the Act empowers the Board to enter into and perform all such contracts as it may consider necessary or expedient for carrying out any of the purposes of the Act. Section 14 of the Act provides that every contract shall be made on behalf of the Board by the Vice Chairman and Housing Commission. However, amendment was made by Act No. 12 of 2010 by introducing new clauses which require sanction of the Government if the contract exceeds certain monetary limit fixed by the Government. Section 21 of the Act provides that the Board subject to the control of the Government may incur expenditure and undertake works for the framing and execution of such housing schemes as it may consider necessary or as may be entrusted by the Government. Section 58 provides that the Board shall have its own fund and may accept grants, subventions, donations, gifts or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take away the independent identity or character of the Board. Therefore, it cannot be said that the income of the assessee Board is the income of the state Government. In case of Vidarbha Housing Board V/s. ITO (supra), the Hon ble Bombay High Court after interpreting the provisions of the MP Housing Board Act, 1950, which are akin to the provisions in APHB Act, vis- -vis the assessee s claim of immunity under Article 289(1) of the Constitution of India held as under: 13. In our view, though it is true that the State has undoubtedly an obligation to promote the welfare of its citizens and providing housing accommodation would be one of the welfare activities of the State, the question is whether by constituting the petitioner board under the Madhya Pradesh Housing Board Act, 1950, a separate legal entity has been established undertaking the various activities on its own or whether the entity established is either a department of the State Government or an agent of the State Government acting on behalf of the State Government, for, it is obvious that if the activity undertaken is being performed by the petitioner board directly as the department of the State Government or as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities are not of trading or commercial nature or that the element of profit-making is absent may have some relevance on the point whether its income will attract exemption under section 4(3)(i) of the 1922 Act, but from these features no inference could be drawn that the board is a mere department of the State Government or its agent. It is true that under the Act the board while discharging its functions does so under the general supervision and control of the State Government but that by itself cannot lead to the necessary inference that the board is a department or agent of the State Government. As against this, there are several provisions in the Act which support Mr. Manohar's contention for the 1st respondent. 14. In the first place, as we have stated in the earlier part of the judgment, the very constitution of the board under section 3 of the Act clearly shows that the board on its incorporation shall be a body corporate having perpetual succession and common seal. This provision clearly shows that prima facie the board is statutory entity distinct from the State Government. Even the constitution of the board which has been provided for by section 4 clearly shows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same direction. It provides that all liabilities enforceable against the board shall be enforceable against the State Government but only to the extent of the properties, funds and dues vested in and realised by the State Government. In other words, upon the dissolution of the board if the board is found to have created liability in excess of its assets or properties and funds which shall vest in the State Government, then the State Government is not responsible for such excess liabilities incurred by the board. If the board were merely acting as a department of the State Government or as an agent of the State Government, then the State Government would have been liable for all the liabilities created by the board. These provisions, in our view, run counter to the contention urged by Mr. Thakar before us that the petitioner-board, when it under took the activities enjoined upon it by the Act, did so either as a department of the State Government or as an agent of the State Government acting on behalf of the State Government. On the other hand, these provisions clearly show that the petitioner-board is a separate statutory body distinct from the State Government and it has been u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents indicated in sections 28 and 29 had been made and, notwithstanding these features, which emerged from the provisions of the Road Transport Corporations Act, 1950, the Supreme Court took the view that the other features emerging from the examination of the other provisions of the Act showed that the Andhra Pradesh State Road Transport Corporation was a distinct statutory corporation and the property and income thereof were not the property and the income of the State Government and as such the immunity from Union taxation under article 289(1) of the Constitution could not be claimed by that corporation. It is true that some distinguishing features would be noticed if the provisions of the Madhya Pradesh Housing Board Act, 1950, are exclaimed in the context of the provisions which obtained in the Road Transport Corporations Act, 1950, but, in our view, the distinguishing features which were pointed out by Mr. Thakar could not be regarded as having any bearing on the question which is required to be considered in this case by us; for example, it was pointed out by Mr. Thakar that whereas under the Road Transport Corporations Act, 1950, there was provision for raising a share capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded as property and income of the State Government. In this view of the matter, we feel that the principle enunciated in the Supreme Court's decision in the case of Andhra Pradesh State Road Transport Corporation, would be applicable to the instant case before us and on an analysis of the provisions of the concerned Act before us, we have come to the conclusion that the property and income of the board is not the property and income of the State Government. Mr. Thakar's contention, therefore, must fail. 44. Facts being identical, the ratio laid down as above clearly applies to the assessee. The assessee s contention that the income of the Board cannot be subjected to tax under the income-tax Act, in view of the provisions contained under Article 289(1) of Constitution of India is not acceptable. For the same reason, the assessee s contention that it acted as an agent of the state Government is also tenable. No material has been placed on record that a relationship of agency exists between the state Government and the APHB. On the contrary, the provisions of the APHB Act as well as the other materials on record clearly establishes the fact that the assessee APHB undertakes the ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income is the income of the state Government therefore immune from income-tax Act in view of the Article 289(1) of the Constitution of India. As has been held by the Hon ble Supreme Court in case of APSRTC V/s. ITO (supra) which was subsequently approved by the Constitution Bench decision of the Hon ble Supreme Court in case of New Delhi Municipal Council V/s. State of Punjab [1997] 7 SCC 339 and followed by the Hon ble Bombay High Court in case of Vidarbha Housing Board V/s. ITO (supra), immunity under Article 289 of the Constitution is subject to fulfillment of the conditions laid down in sub-clauses (1), (2) (3) of Article 289 which are interrelated. As per Article 289, only income or property of the state cannot be taxed under any other law. 46. As can be seen from the facts on record the assessee is having its distinct and separate identity from the state Government, hence, it cannot claim immunity under Article 289 of the Constitution of India. That besides both the AO as well as the CIT(A) have observed that the assessee Board is paying taxes and duties to the State Government wherever it is due. This finding has not been controverted by the assessee. That being, the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llary the income earned is the income of the assessee board and as such is assessable at its hands only. 47. Diversion of Income by Overriding Title The assessee in his written submissions has also taken the plea that there being diversion of income by overriding title the income cannot be taxed at the hands of the assessee. In this regard, the assessee has submitted as under: In the written submission of the original grounds, as also in the written submissions in the additional grounds, the appellant had argued that the income of APHB is diverted to the government of Andhra Pradesh by overriding title and is never a part of its taxable income. The CIT(A) has referred to section 58(7) of the Andhra Pradesh Housing Board Act, which mandates that surplus net revenue after meeting the expenditure of APHB shall vest in the consolidated fund of the Andhra Pradesh, and that such surplus net revenue shall be transferred to the State Government on quarterly basis, as the State Government from time to time may instruct or advise APHB. The CIT(A) has held that State Act cannot override the Central enactment in Income Tax Act. Therefore, the above provisions should be interpreted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an application of income after its accrual to the assessee. 49. We have considered the submissions of both the parties on this issue. From the facts on record, it is quite obvious that the income accrues to the assessee. Section 58(4) of APHB Act is very clear on this aspect, which reads as under: All moneys received by or on behalf of the Board by virtue of this Act, all proceeds of land or any other kind of property sold by the Board, all rents, betterment charges and all interest, profits and other moneys accruing to the Board shall constitute the fund of the Board. 50. It may be a fact that by the operation of section 58(7) or by way of Government directive the surplus income or some fund has been diverted to the consolidated fund of the state Government or any other Government corporation, but, that by no means would amount to diversion of income by overriding title. Section 58(7) of the APHB Act, which was brought to the APHB Act in 2010 with retrospective effect from 01/04/2002 reads as under: (7) Now withstanding anything contained in subsections (1), (4) and (5) of this section, the surplus net revenue after meeting the expenditure of the Board shall vest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we are unable to accept the contention of the assessee, which is accordingly rejected. In the result, this issue is decided against the assessee. 53. The next issue is with regard to disallowance of infrastructure expenditure amounting to Rs. 1180 crores. This issue is common to assessment years 2006-07 and 2008-09. 54. The assessee in its written submissions has submitted as under: The CIT(A) was not justified in holding that the expenditure in question was not an allowable business expenditure. Under Govt. order, APHB had remitted Rs.1180 crores to A.P. State Housing Corporation who was to provide infrastructure facilities on the land assigned to the appellant. [The appellant had similarly transferred Rs.285 crorers in A.Y. 2006-07.] The land assigned by A.P. Govt. was held by APHB, on which A.P. State Housing Corporation was to provide housing and infrastructure facilities to the residents of the State, mainly belonging to lower and middle income groups. Since inception of APHB, Govt. of A.P. has been allotting/assigning land without or at nominal cost which was used for constructing and providing housing accommodation to the public. This was the first time that the Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls Co. P. Ltd. vs. CIT (1971) 82 ITR 376 (SC), the assessee was a private company, carrying on the business of manufacturing and sale of sugar, paid to the Cane Development Council certain amounts by way of contribution for the construction and development of roads between the various sugarcane producing centres and the sugar factories of the assessee. This expenditure was incurred under an obligation to make the aforesaid contribution under the provisions of U.P. Sugarcane Regulation of Supply and Purchase Act, 1953. The roads remained the property of the Government and there was no finding that the assessee would get an enduring benefit from those roads. The Supreme Court held that apart from the element of compulsion, the development of roads facilitates the business and the expenditure was revenue in nature. In L.H. Sugar Factory and Oil Mills (P.) Ltd. vs. CIT, (1980) 1251TR 293 (SC), the assessee had contributed towards cost of construction of roads in the area around the factory. The argument of the Revenue was that the newly constructed roads, though not belonging to the assessee, brought to the assessee an enduring advantage for the benefit of its business and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Corporation was application of income and the order of the State Government was not a legal charge. The appellant would submit that section 79(1) of the A.P. Housing Board Act provides that the Government may give the appellant such direction as and when necessary or expedient for carrying on the purposes of this Act. Therefore, such direction had statutory force. The appellant would not have been able to continue its activities lawfully without obeying the order of the State Government to pay the amount to A.P. State Housing Corporation. In this context, the appellant would cite the following observation of the Gujarat High Court in U.K. Acharya vs. State of Gujarat, AIR 1989 Gujarat 81, in which similar provision in the Gujarat State Housing Board was examined: Disposal of Property Regulations cannot be said to be merely contractual in character nor can they be said to be framed for merely regulating internal affairs of the statutory body, as, with respect, wrongly assumed by the learned Judge. It has also to be kept in view that members of the public for whom housing schemes are floated by the Board have no control over the implementation of the regulations by the Boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bligation in nature flowing from section 79(1) of A.P.H.B. Act. This expenditure is also in the nature of diversion of income by overriding title. The Government of A.P. through its Govt. Order required the appellant to treat the amount paid to A.P. State Housing Corporation as its expenditure. This further shows that the appellant had no discretion in retaining the amount and there was legal compulsion in diverting the amount to A.P. State Housing Corporation. The infrastructure expenditure incurred by the appellant is clearly an allowable expenditure on two grounds; one is on commercial expediency and second being of legal impost by virtue of Govt. order. The Hon'ble ITAT had remanded the appeals for the A.Ys. 2004-05,2005- 06 and 2006-07 to the CIT(A) for fresh consideration. Hearing had taken place for these years on additional grounds. The A.O. has submitted remand report on these submissions and the appellant has submitted rejoinder on the remand report. Further, the appellant had submitted written submissions on the original grounds taken in these appeals as the orders of the CIT(A) no longer exist in the eyes of the law. The A.O. has also not submitted any remand repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion have been copied from an order passed in 2009. ii. At paragraph 6.20, the CIT(A) has stated that the appellant had argued that it is a local authority. In the submissions made by the appellant for the A.Y. 2008-09, there was no such pleading. This observation and elaborate discussion along with citations of rulings on what constitutes a local authority by the CIT(A) have found place in the order only because several paragraphs have been copied from the earlier order dated 30.10.2009 of the CIT(A) for the A.Y. 2006-07. iii. The appellant has made submissions on allowability of deduction under section 80-1B. Without considering the same, the CIT(A) has relied upon the findings of his order dated 31.10.2009 for the A.Y. 2006-07 for upholding the disallowance of deduction claimed under section 80-IB. The appellate order for the A.Y. 2006-07 has already been set aside by the ITAT for fresh consideration. Therefore, the submissions made by the appellant on this issue has not been considered by the CIT(A). The CIT(A) at paragraph 5.7.9 has extracted section 13 of APHB Act, and at paragraph 5.7.10 he has stated that APHB is fully competent to enter into contracts in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... develops and sales houses build on those lands. The govt. orders directing transfer of funds to AP State Housing Corporation is only an administrative instruction and no legal charge is created. Therefore, the amount transferred since does not fall within the category of taxes, cess, or legal charges they cannot be considered as expenditure. It was further held by the CIT(A) that there is no nexus between the amount paid by the assessee to the state govt and the actual activity of the assessee. It was further observed that the assessee has also not proved that the payment has been for business expediency. 56. On considering the submissions of the parties in the light of the materials on record and also the ratios cited before us, we are constrained to hold that it is not an allowable expenditure but only an application of income. It is not in dispute that the amount of Rs. 1180 crores is stated to have been given to the AP State Housing Corporation on the directive of the Government. However, that would not amount to an expenditure incurred for the purpose of business. An expenditure which is exclusively laid out for the purpose of business is a revenue expenditure and, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned DR submitted that the pension paid during the year to the retired employees was directly debited to the expenditure and was claimed as expenditure. Since pension is not recurring revenue expenditure it is generally incurred out of reserve fund. Even as per the govt order No. 17 dated 29/07/1984 payment of pension is to be arranged through CAO, APHB by a creating separate pension cell and fund and meet the expenditure from that fund. It was further submitted that as the pension was not routed through a pension fund and is an expenditure chargeable to profit and loss account, the expenditure cannot be allowed as a deduction. 59. We have considered the submissions of both the parties and perused the relevant materials on record. On perusing the order of the CIT(A), we find that the disallowance has been sustained by him on the finding that pension has to be routed through a pension fund and is not an expense chargeable to the profit loss account. He had also observed that no details whatsoever has been provided by the assessee. From the aforesaid observation of the CIT(A), we are of the view that the CIT(A) has not gone into the depth of the issue and has confirmed the disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of 8% of the total expenditure incurred by the assessee. Further no deduction u/s 80-IB was also allowed on the profit estimated on the ground that the assessee has not fulfilled the conditions for claiming deduction u/s 80-IB. 62. Before us, the assessee in the written submissions has submitted as under: One of the main disputes of the appellant with the department relates to computation of taxable income, if any, from the Singapore Project. The A.O. and the CIT(A) have disallowed the benefit u/s 80-IB to the appellant on different grounds for different years, such as inconsistency in accounts, income and expenditure being of capital nature, delayed filing of return and so on. Yet the CIT(A) estimated the income from this project taking into account the expenditure by applying Accounting Standard-7 and following the prescription in section 44AD. In this regard, the appellant submits that without rejecting the entries in the books of accounts, it was not permissible for the CIT(A) to resort to any estimation of income. For this, he had relied on the rulings of ITAT in ITA No.1143/Hyd.l2006 dated 13.07.2007 in Madhava Constructions Pvt. Ltd. vs. CIT. In that, the ITAT had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are audited and the same had not been rejected either by the A.O. or CIT(A), there was no justification to determine the appellant's income on presumptive basis. 63. The learned DR on the other hand supported the order of the first appellate authority. 64. We have considered the arguments of both the parties and perused the materials on record. We have also applied our mind to the decisions cited. On perusal of the order of the CIT(A) it is quite evident that he has estimated the profit at the rate of 8% by taking recourse to the provision contained u/s 44AD of the Act. For that purpose, he has relied upon a decision of the ITAT in case of Madhav Constructions (P) Ltd. Vs. CIT in ITA No. 1143/Hyd/2006, dated 13/07/2007. It is a fact on record that the assessee is a government undertaking created under a statute. It maintains regular books of account. Its books of account are not only subject to statutory audit under the provisions of income-tax Act but also subject to inspection by other government agencies. Therefore, without pointing out defect or discrepancy in the books of account maintained by the assessee estimation of income cannot be resorted to. That besides se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Government of Andhra Pradesh on the functioning of the Appellant, sub-section 7 was introduced into the Act by State Act 12 of 2010 with retrospective effect from 1st April, 2012. Under the Constitution of India, the power to legislate is vested in the Parliament and/or the State Legislatures. The power is traceable to Article 246 of the Constitution of India, and the power is plenary with respect to the subjects specified in respective lists in Schedule 7 of the Constitution of India. The principles that govern the interpretation of a power of legislation are as follows: (A). The Parliament/Legislatures have the power to legislate both prospectively and retrospectively. Ref: (i). Rai Ramkrishna Others V. State of Bihar 50 ITR 171 (SC) (ii) A. Manjula Bhashini Others V. Managing Director, Andhra Pradesh Women's Cooperative Finance Corporation Limited Another (2009) 8 SCC 431 (B). A statute is presumed to be valid unless a Constitutional Court of competent jurisdiction strikes down the statute or any part thereof. (C). The legislation can be struck down only if: (i). It is beyond legislative power of the legislating body examined on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made u/s 80IB of the Act following our observation in concluding part of Paragraph 65 hereinbefore, we remit the issue to the file of the Assessing Officer, who shall consider the allowability or otherwise of the same in accordance with law after affording a reasonable opportunity of being heard to the assessee. 72. In the result, appeal being ITA No. 715/Hyd/2011 by the assessee is partly allowed for statistical purposes. ITA No. 1292/Hyd/2012 for AY 2006-07 by the revenue 73. The department has filed the aforesaid appeal challenging the deletion by the CIT(A) of the amount of Rs. 1,31,01,333/- added by the Assessing Officer on account of difference in letters of credit. 74. In course of assessment proceedings, the Assessing Officer noticed that there was a discrepancy between the amounts that the Board has authorized its various branches to spend and between the actual expenditure made by the various branches. The expenditure is incurred by the various branches after the head office issues letters of credit (LOC) to the branches. Though, the assessee submitted its reply to the query made by the Assessing Officer, the Assessing Officer rejected the explanation of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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