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TMI Blog2014 (11) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... d 853/Del/2011 for the assessment years 2006-07 and 2007-08 respectively in assessee's own case dated 02nd Dec., 2011 and while filing a copy of the Tribunal order, it was submitted that this bench may follow the earlier order in assessee's own case. Ld. counsel for the assessee has also placed a letter dated 13.03.2014 by contending that he is enclosing therewith an opinion on the point of issue in appeal rendered by one S Rajaratnam dated 20.08.,2011 with a request to take the opinion into consideration while deciding the grounds of appeal. At this point, when Ld. A.R. was asked that firstly this is a fresh document, secondly, it is an unsigned paper and not even signed by the counsel as true copy and thirdly there is also no application seeking admission of the same as additional evidence as being fresh documents but he requested to consider this document. 3. Ld. D.R. submitted that so far as the first plea of the assessee is concerned, the same is liable to be accepted as the issue is covered in favour of the Revenue as such, appeal of the assessee may be dismissed. Since the assessee filed additional evidence in the absence of any application for its admission, therefore requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, it was submitted by the assessee that State Government has a overriding title on these receipts and, therefore, they do not form part of the total income of the assessee. learned Assessing Officer rejected the arguments of the assessee in respect of diversion of income by overriding title and made the addition of Rs. 8,49,25,814. Assessing Officer further found that there is deficit of Rs. 1,18,12,436 in the income and expenditure account. He allowed this deficit while computing the total income of the assessee. However, he did not allow the prior period expenses of Rs. 61,11,000. In this way, income of the assessee in assessment year 2006-07 has been determined at Rs. 7,92,24,378. 5. In assessment year 2007-08, the assessee has filed its return of income on 31.10.2007 declaring nil income. It was processed under sec. 143(1) of the Act. Later on, the case of the assessee was selected for scrutiny assessment and a notice under sec. 143(2) of the Act dated 22.9.2008 was issued and served upon the assessee. In this assessment year, assessee had received gross receipts in the alleged infra-structure fund at Rs. 24,67,73,593. It has incurred a sum of Rs. 4,39,71,667. The balance amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd they cannot form part of the total income of the assessee. In order to appraise us the concept of diversion of income by overriding title, he relied upon the following decisions: 1. CIT v. Karnataka Urban Infrastructure Development & Finance Corpn. [2009] 315 ITR 301 (Kar.); 2. Moti Lal Chhadami Lal Jain v. CIT [1991] 190 ITR 1/56 Taxman 4A (SC). 8. Learned DR on the other hand took us through the provisions of UP Planning and Urban Dev. Act, 1973 by virtue of which assessee came into existence. He referred section 20 which provides the management of finance and accounts of the assessee development authority. He also referred section 41 which contemplates the control of the State Government. He pointed out that the objects of the authority is to promote and secure the development of the developed area according to plan and for that purposes authority shall have the powers to acquire, hold, manage and dispose of land and other properties. The alleged Government Order of the Government of UP does not infuse any special control of the Government of UP, it only provides the collection of fees and how it is to be utilized for the fulfilment of the assessee objects. The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e State Government may, by notification in the Gazette, constitute for the purposes of this Act, an Authority to be called the Development Authority for any development area. (2) The Authority shall be a body corporate, by the name given to it in the said notification, having perpetual succession and a common seal with power to acquire, hold and dispose of property, both movable and immovable and to contract and shall by the said name sue and be sued. (3) The Authority in respect of a development area which includes whole or any part of a city as defined in the (Uttar Pradesh Municipal Corporation Act, 1959), shall consist of the following members namely- a Chairman to be appointed by the State Government: a Vice-Chairman to be appointed by the State Government: the Secretary to the State Government, in charge of the Department in which, for the time being, the business relating, to the Development Authorities is transferred, ex-officio:) the Secretary to the State Government in charge Of the Department of Finance, ex-officio. the Chief Town and Country Planner, Uttar Pradesh ex-officio: the Managing Director of the Jal Nigam established under the Uttar Pradesh Water Supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority. The objects of the Authority shall be promote and secure the development of the development area according to plan and for that purpose the Authority shall have the Power to acquire, hold, manage and dispose of land and other property, to carry out building, engineering, mining and other operations, to execute works in connection with the supply of water and electricity to dispose of sewage and to provide and maintain other services and amenities and generally to do anything necessary or expedient for purposes of such development and for purposes incidental thereto: Provided that save as provided In this Act nothing contained in this Act shall be construed as authorising the disregard by the Authority of any law for the time being in force. 20. Fund of the Authority.- (1) The Authority shall have an maintain its own fund to which shall be credited- all moneys received by the Authority from the State Government by way of grants, loans, advances or otherwise: (b) all moneys borrowed b the Authority from source y the State Government by way of loans or debentures; all [fees, tolls and charges] received by the Authority under this Act: all moneys received by the Author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral, Uttar Pradesh or Comptroller and Auditor General of India or to any other Auditor on such terms and conditions, in such manner, for such period and at such times as may be agreed upon between him and the State Government. The rights, authority and privileges of any person conducting audit under Sub-Section (2) shall - (i) in the case of Examiner, Local Fund Accounts, be the same as he has in connection with the audit of the accounts of local authority; (ii) in the case of the Accountant General, Uttar Pradesh or as the case may be, the Comptroller and Auditor General of India, be the same as he has in connection with the audit of Government accounts, and (iii) in the case of any other auditor, be as prescribed;and, in particular, he shall have the right to demand production of books, accounts, connected vouchers, papers and other documents and to inspect the office of the Authority. The accounts of the Authority, as certified by the Auditor or any person appointed by him in that behalf, together with audit report thereon shall be forwarded to the State Government annually or at such times as may be directed by it. The State Government may issue such directions to the Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act and sell by the said name sue and sued. Under the UP Urban Development Act, 1973, the government had made the provisions for its source of income and, therefore, the assessee had been given powers to collect certain fees and charges in the process of its functioning, as discernible from perusal of section 20 of the Act, the State Government has exercised some control over the assessee under sec. 41 of the Act. 11. From perusal of the record, it reveals that assessee has source of income from more than 18 counts, out of that certain incomes are of miscellaneous income, rental income, interest income on FDRs. Apart from these general incomes, it has been authorized to collect fees and charges. Learned CIT(Appeals) in assessment year 2007-08, noticed all these details in a tabular form on page 3 of the impugned order. From perusal of this table, it revealed that all the incomes are retained by the assessee in its main account except the charges/fees collected on four counts. These are development fees, conversion charges of land user, stamped duty and fees on regularization of colonies. The 90% of the amounts collected under these heads were retained in the alleged infra-structur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... next judgment referred by the Learned DR is if Hon'ble Mumbai High Court in the case of Colaba Central Co-op. Consumers Wholesale & Retail Stores Ltd. (supra). In this case, the assessee is a cooperative society registered under the Maharashtra Societies Act, 1960. Under the scheme of financial assistance to the consumer cooperative under the centrally sponsored scheme, the State Government contributed to the share capital of the assessee cooperative society a sum of Rs. 21 lacs. An agreement was entered into between the State Government and the assessee society for that purpose. According to the agreement, the share capital contribution of the state was to continue for a period of 10 years unless extended by the Registrar. For the purpose of enabling the co-operative societies, to repay the government shares capital contribution within the specified period, the co-operative societies were required to set aside necessary amount for a fund known as the "Government Share Capital Redemption Fund" before arriving at their profits for the purposes of appropriation under sec. 65(2) of the Maharashtra Co-op Societies Act. The amount standing to the credit of the Government Shares Capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -op Societies Rule 1966 can be termed as expenses incurred wholly and exclusively for the purpose of business and is allowable deduction. The Hon'ble Court has found that as per Rajasthan Co-op Societies Act, 1965, assessee was to create a reserve fund whereby 25% of its net profit is to be credited to the said reserve fund. The assessee claimed that the said amount does not remain under the control of the assessee and it goes under the control of Registrar, Rajasthan Co-op Societies, therefore, it does not form part of the assessee's real income and for that reserve it was sought to be excluded from the computation of the total income. Alternatively, it claimed deduction under sec. 37 of the IT Act on account of business expenditure. Hon'ble Court has examined the provisions of Rajasthan Co-op Societies Act, namely, sections 62, 63 and Rule 68 and thereafter held that the reserve fund did not go to any other party then the assessee itself. The concept of diversion of income by overriding title is that income reaches to the party other than the assessee by reasons of a pre-existing title to it. As a matter of fact on interpretation of Rejasthan Co-op Societies Act, 1965 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the time being in force, be handed over to the Board or the State Government, as the case may be." 16. The Hon'ble Court while explaining the clause (v) of 6th Schedule extracted supra, had observed that these are to meet expenses or recoup loss of profit arising out of accidents, strike or other circumstances which the electricity company could not have prevented; to meet expenses on replacement or renewal of plant or works; and for payment of compensation required by law for which no other provisions had been made. These are all expenses which the electricity company had to incur. The reservation is made so that the money is always available for meeting these expenses and supply of electricity is not interrupted. For the same reasons, payment out of the contingency reserve can be made only with the State Government's approval. According to the Hon'ble Court, money in the contingency reserve belongs to the electricity company only. The Doctrine of diversion of income by diversion of an overriding title is quite inopposite. The doctrine applies when by reason of an overriding title or obligation, income is diverted and never reaches the person in whose hands it is so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares in favour of a third person and a case where a partner constitutes a sub-partnership with his shares in the main partnership. The observation of the Hon'ble Supreme Court on pages 17 & 18 are worth to note in this connection: It is apt to notice that there is a clear distinction between a case where a partner of a firm assigns his share in favour of a third person and a case where a partner constitutes a sub-partnership with his share in the main partnership. Whereas in the former case, in view of section 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership except, of course, to receive that part of the profits of the firm referable to the assignment and to the assets in the event of dissolution of the firm, but in the latter case, the sub-partnership acquires a special interest in the main partnership. The case on hand cannot be treated as one of a sub-partnership, though in view of section 29(1) of the Indian Partnership Act, the Trust, as an assignee, becomes entitled to receive the assigned share in the profits from the firm not as a sub-partner because no sub-partnership came into existence but as an assignee of the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. 19. On an analysis of the judgments, we find that the Hon'ble Supreme Court in the case of Sunil J. Kinariwala ( supra) has quoted a paragraph from the earlier judgment of the Hon'ble Supreme Court in the case of Sitaldas Tirathdas (supra) wherein Hon'ble Supreme Court has propounded that true tests of diversion of income on account of overriding title is whether the amount sought to be deducted, in fact, never reached to the assessee as his income. No doubt, there are obligations in every case but the nature of obligation would be a decisive facts. According to the Hon'ble Court, there is a difference between 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 part of the income of the assessee. If the obligation income is diverted before it reaches the assessee, it cannot be claimed as deduction but where the income is applied to discharge an obligation after such income reaches to the assessee then it can be claimed as a deduction. In other words, the mere fact that the assessee has an obligation to apply a certain amounts out of its income for a particular purpose cannot mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the income accrued from the development charges, the 90% and the rest 10% part for the Development Authority. (d) The amount received from the compounding fees from the unauthorized construction the 50 % and rest 50 % part for the development authority. (e) The income from the properties which have been freehold from the development authorities 90 % and rest 10 % part for the development authority. (f) That the land plots sold by development authorities and there will be 10% of surcharge on the value of the said plot the 100% of the said income. (g) That the income received from the registration of the sale deeds the 90% and rest 10% part of development authorities. By order (Atul Kumar Gupta) Secretary 21. On a conjoint reading of this Memorandum vis-à-vis the provisions of UP Urban, Planning & Development Act, 1973, it would reveal that an authority was given to the assessee for collecting certain fees and charges in the process of its functioning. If the State Government had collected the fees and charges and then given the same to the assessee for doing its work, it would be the assessee's income. Thus, it does not make any material difference to the situatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and out of which expenses would be incurred with the approval of an Empowered Committee. All these receipts also form part of the normal receipts of the assessee. We further find that expenses incurred by the assessee out of this fund has already been allowed by the Assessing Officer. Learned CIT(Appeals) further took cognizance of the Empowered Committee referred in the Memorandum as well as in the Act and observed that such committee is not alien to the assessee. The role of the committee is of regulatory in nature which only acts in furtherance of fulfillment of assessee's objects. Learned First Appellate Authority also observed that at the time of hearing a query was raised to the assessee regarding demonstration of material exhibiting the establishment of independent identity of so called infrastructure funds at its own. The inquiry on this angle revealed the there was no such entity called the infra-structure funds. It is just a name given to the earmarked bank account. There are no separate account or audit. The Empowered Committee is concerned with only giving approval for specific items of work to be done by the assessee and not administration of the funds. The funds f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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