Income Tax Appellate Tribunal - Hyderabad
Andhra Bank,, Hyderabad vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
Sl.No. ITA No. AY Appellant Respondent
1. 717/H/12 2008-09 M/s Andhra Dy. Commissioner
Pradesh Housing of Income-tax,
Board, Circle - 5(1),
Hyderabad. Hyderabad.
(PAN - AAAAA
5028 R)
2. 715/H/12 2007-08 -do- Addl.
Commissioner of
Income-tax,
Range-5,
Hyderabad.
3. 1218/H/12 2006-07 -do- -do-
4. 1217/H/12 2005-06 -do- Asst.
Commissioner of
Income-tax, Circle
- 5(1),
Hyderabad.
5. 1216/H/12 2004-05 -do- Income-tax
Officer, Ward -
5(3), Hyderabad
6. 1292/H/12 2006-07 Asst. M/s Andhra
Commissioner of Pradesh Housing
Income-tax, Board, Hyderabad.
Circle - 5(1), (PAN - AAAAA
Hyderabad. 5028 R)
Assessee by : S/Shri P.K. Sahu, Advocate,
S. Ravi, Sr. Advocate
Department by : Shri M. Ravindra Sai
Date of Hearing 04-3-2013
Date of 31-5-2013
Pronouncement
O R D E R
Per Saktijit Dey, Judicial Member:
These are set of six appeals of the same assessee. Appeals for the assessment year 2004-05, 2005-06, 2007-08 and 2008-09 2 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board are by the assessee whereas there are cross appeals for assessment year 2006-07. Since facts are similar and issues are common, all these appeals are clubbed and heard together, therefore, a common order is passed for the sake of convenience.
2. First we will take up assessee's appeal for the asst. years 2004-05, 2005-06, 2006-07 and 2008-09. We will deal with facts as taken from ITA No. 717/Hyd/12 pertaining to the assessment year 2008-09 since the CIT(A) has followed his reasoning for this year in the appeal for the other assessment years.
3. Briefly the facts are, the assessee is an AOP established under the AP Housing Board Act, 1956. The assessee is engaged in the activity of purchase and sale of land, construction of houses and sale of the same and deriving rent from house property. For the assessment year under dispute, it filed return of income 30/09/2008 declaring loss of Rs. 63,15,98,329/-. The return filed by the assessee was originally processed u/s 143(1) of the IT Act. Subsequently, the assessee's case was selected for scrutiny assessment and in response to the notices issued u/s 142(1) and 143(2) of the Act, the assessee appeared before the Assessing Officer and submitted the details called for by the 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 3 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 of infrastructure was borne by the Government and the infrastructure/cost of land to be paid to the Government through AP Housing Corporation.
4. The Assessing Officer after going through the GOs submitted before him by the assessee was of the view that it is not a scheme providing houses to the poor without cost. It involves cost to be borne by the beneficiary. The Government provides land to the assessee free of cost and the government also provides infrastructure facilities free of cost to the assessee. The Assessing Officer was further of the opinion that as per the GO the infrastructure cost payable to the Government to the extent of cost of land has to be utilized for infrastructure development under the scheme by the assessee and it never says that the amount has to be paid back to the Government or to any authority. The Assessing Officer was also of the view that there is no compensatory payment since compensatory payments are made essentially to compensate for some losses or for a breach of contract. The Assessing Officer observed that neither the assessee has caused any loss to the AP Government nor the Government has demanded any compensation from the assessee.
4ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board Hence, the amount purportedly paid to the AP State House Corporation Ltd. on the direction of the Government is not a compensatory payment. The Assessing Officer opined that when the cost of house is borne by the middle income beneficiaries and when the Government bears the cost of land and infrastructure and when there is no clear directive from the Government that the assessee has to pay them back or to any other authority the payment of Rs. 1180 crores claimed by the assessee as expenditure is without any justification. The Assessing Officer observed that for an expenditure to be allowable under the provisions of the Act it should be revenue in nature and it must have a direct nexus with the business or activity of the assessee.
5. The Assessing Officer further came to the conclusion that if the assessee at all has to pay a certain amount to the Government as an obligation it could have done so from the profits derived by it after payment of taxes. On the basis of the above said conclusion, the Assessing Officer disallowed the claim of expenditure of Rs. 1180 crores and added the same to the returned income.
6. The Assessing Officer further found that the assessee had debited an amount 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 5 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 entire expenditure from its own sources, which means that the assessee has to create a separate fund and meet the expenditure from that only. The Assessing Officer observing that the assessee has not proved that the expenditure towards pension was made wholly and exclusively for the purpose of business disallowed the expenditure and added the same to the income of the assessee.
7. The Assessing Officer apart from making other disallowances, also disallowed the claim of deduction u/s 80-IB of the Act, by holding that neither the assessee has fulfilled the conditions laid down in section 80-IB(10) nor it has claimed deduction in the return of income.
8. In course of the assessment proceedings, the assessee also took a pleading that by virtue of the amendment to the APHB Act of 1956 on 05/08/2010 with retrospective effect from 01/04/2002, the surplus of the APHB vests with the Government of AP and hence there is no liability to income-tax so far as the assessee is concerned. The Assessing Officer however did not accept such contention of the assessee by holding that the 6 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board assessee is not a state Government or central Government body. The Assessing Officer further observed that the assessee has not obtained any exemption certificate from the income-tax department to claim exemption from tax. Accordingly, the Assessing Officer completed the assessment vide order dated 31/12/2010.
9. The assessee being aggrieved of the assessment order, preferred an appeal before the CIT(A).
10. In course of the proceedings before the first appellate authority, the assessee raised the following additional grounds:
"a) The appellant, Andhra Pradesh Housing Board (APHB), is an instrumentality and agency of the Government of Andhra Pradesh. It functions as an extended arm of the Government. It is to be considered as an attached office or department of the State Government. For this reason, it cannot be considered as an independent taxable entity and the amounts received by it in the course of its activities as its taxable income.
b) The activities of the appellant are undertaken in systematic organized manner Income from such activities by a taxable person is normally taxable under the head 'income from business'. But there is no profit motive by the appellant while undertaking its activities for the purpose for which it exists. Statutorily it exercises sovereign and government 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 7 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 which are essentially Government functions. The APHB is completely under the control and supervision of the Government. The APHB Act also provides that all surplus amounts are to be vested in the consolidated fund of the state Government. It was submitted that even though there is a Board that governs the working of the APHB, yet, the Board functions under the Government and its employees are governed by the same terms and conditions as are applicable to the state Government employees. It was submitted that since there is no profit motive, the income cannot be assessed under the head 'business'. It was further submitted by the assessee that APHB being an instrumentality and agency of the state Government has to be considered as 'State' and its income cannot be brought to tax in view of Article 289 of the Constitution of India.
12. The CIT(A) after considering the submissions of the assessee and other facts and materials on record was not convinced with the contention of the assessee that APHB being a state its income cannot be brought to tax in view of Article 289 of the Constitution of India. The CIT(A) relying upon the ratio laid down by the AP High Court in case of National Remote Sensing Agency, Hyderabad V/s. Additional Industrial Tribunal-cum- Additional Labour Court, Hyderabad in WP No. 17370 of 1994 and by the 8 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board Hon'ble Supreme Court in case of Bangalore Water Supply V/s. A. Rajappa opined that merely because the employer is a Government department or local body the enterprise does not cease to be an industry. He further observed that governments and municipal statutory body may run enterprises which do not for that reason cease to be an industry. Charitable activities may also be industries. Undertakings without profit motive can very well be industries. He observed that any operation carried on in a manner analogous to trade or business may legitimately be a statutory industry. The absence of profit motive or gainful objective is irrelevant by the venture in the public joint, private or other sector. The CIT(A) referring to section 3(2) of the APHB Act, opined that the APHB is not Government but is a body corporate established by the Government of AP which is distinct from the Government of AP. Further referring to section 4 of the Act, the CIT(A) observed that the provision contained in sub- clause (m) providing for appointment of various members of the 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 9 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 APHB Act makes it clear that the employees of Board are servants of the Board and not servants of the AP government. From the analysis of the aforesaid facts, the CIT(A) concluded that the APHB is clearly a commercial corporate body of the Government and is distinct from the Government itself. The CIT(A) further observed that when it comes to the direct revenue of the Government the receipts go to the consolidated fund of the state Government, which is exemplified by all the taxes and other receipts of the Government. The loans taken by the Government are in the form of Government bonds for which the Government itself stands surety. However, in the case of the assessee all receipts go to the fund of the Board and not to the Government. All loans taken by the Board on commercial terms and are not at all equated with the Government securities. He further observed that the Government of AP does not stand surety to any of the loans of the Board and it is the balance sheet and projects of the APHB which are examined financial institutions before giving loans. None of these factors indicate the work of the Government or the work of an agent of the Government. Rather this is exactly how a private commercial organization works.
13. While dealing with the contention of the assessee to the effect that it is an agent of the Government, the CIT(A) after referring to 'agent' as has been defined under various law including Income-tax Act, and also the decision of the Hon'ble Supreme Court in case of Laxminarayan Ramgopal and Sons Ltd.
10ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board V/s. Government of Hyderabad observed that an agent is an earner of independent income and is subject to taxation. The CIT(A) observed that for considering the assessee's claim that it only acts on behalf of the Government as an agent and therefore is not subject to taxation, it is required to understand the nature of assessee's relationship with the Government while carrying out the following Acts:
1. The level of control being exercised by the assessee and the Government over the property.
2. How are the amounts being remitted to the Government and in what manner.
3. Under the which account are the payments from property being deposited.
14. The CIT(A) on examining the sale deed executed by APHB found that it has been described in the sale deed as the owner. As per the sale deed it is the APHB which is said to have transferred 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) 11 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 commercial organization to an agent of the Government. He observed that the APHB Act also categorically states that the ownership of land vests with APHB and not with the Government. Even the local authorities are required to transfer the land to the APHB. The complete ownership of the lands vests with the Board which has total and complete powers to deal with the lands and to also make purchases, lease agreements etc. That besides the Board has its own funds and powers to obtain loans from other institutions for its own management.
15. The CIT(A) further observed that if the assessee is a state or agent of the state then it need not pay state or local taxes whereas the assessee pays all state and local taxes as applicable. With regard to the contention of the assessee that it is a non- profit organization and hence not taxable, the CIT(A) referring to certain Government orders observed that along with other commercial organizations like HUDA, APIIC, the assessee is a major resource earner for the Government through its commercial activity and it is not a charitable organization. The CIT(A) further inferred that the assessee does not hand over the sale amounts to the Government on a transaction to transaction basis. Rather ad-hoc or surplus amounts is transferred.
16. With regard to the contention of the assessee that its income cannot be taxed in view of the restrictions imposed under Article 289 of the Constitution of India, the CIT(A) referring to the decision of Hon'ble Supreme Court in case of APSRTC V/s.
12ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board ITO, 52 ITR 524 observed that the Hon'ble Supreme Court after interpreting all the clauses of Article 289 has held that the income in respect of which exemption is claimed ought to be the income of the state in terms of clause (1) of Article 289 and secondly, there must be a declaration by the Parliament in terms of clause (3) of the Article 289 of the Constitution, which is absent in the case of the assessee. The CIT(A) referring to various other judicial precedents finally came to hold that exemption claimed by the assessee in terms of Article 289 of the Constitution of India is not sustainable in law, which is also proved by assessee's own conduct when he filed the return of income. The CIT(A) held that the Government apart from implementing the mandate of constitution which is a sovereign function of the Government also conducts many commercial operations 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 13 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 capital expenditure, iii) it should not be a personal expenditure, and iv) the expenditure should have been laid out or expended wholly and exclusively for the purposes of business or profession. The CIT(A) relying upon the decision of the Hon'ble Supreme Court in the case of CIT V/s. Imperial Chemical Industries India P. Ltd., 74 ITR 17 (SC) observed that the Hon'ble Supreme Court therein held that a burden of proving that a particular expenditure has been laid out or expended wholly and exclusively for the purposes of business is on the assessee. The CIT(A) also relied upon the decision of the Hon'ble Supreme Court in case of S.A. Builders Ltd. V/s. CIT, 288 ITR 1 wherein the Hon'ble Apex Court held that a nexus has to be established between the expenditure and the purpose of the activity before it can be allowed.
18. The CIT(A) examining the facts of the assessee's case noted that the assessee claimed to have incurred an expenditure on infrastructure amounting to Rs. 1180 crores showing it under the head 'administrative expenditure'. The assessee had claimed that the amount was paid to the Government of AP as per their directive under different Government orders. From the preamble of the APHB Act, the CIT(A) was of the view that the main objective of the APHB is to make and implement schemes for providing housing accommodation. However, the intention is not to provide charity or free housing schemes to poor people. Rather, the APHB as a commercial arm of the AP Government acquires lands, develops and sales houses built on those lands. The houses are sold at market rate through draw of lots or 14 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board through auction. The Singapore housing project undertaken by the assessee would show that it is an ultra modern housing scheme wherein more than 2000 flats have been constructed in various categories along with duplex houses. The complex has modern facilities with regard to road, greenery and other amenities. All the flats and duplex houses have been sold in the open market through a commercial draw of lots and at market rates of the property.
19. The CIT(A) noted that huge amount of advances have been taken from customers even before the commencement of the work on the project. He further noted that not a single dwelling unit was constructed by the Housing Board for lower income group or poor persons under the scheme. He further noted that the state Government is the 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-à-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 15 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 the assessee is a commercial arm of the State Government and carries on its activity with the same commercial expediency. He further observe that a reading of the APHB Act, 1956 would clearly show that there is no element of charity or of non-profit motive enshrined with respect to the APHB. The CIT(A) held that the Government orders issued are purely administrative instructions asking the APHB to transfer some funds to AP State Housing Corporation. As such it is not a legal charge by any stretch of imagination. He observed that a legal charge of tax is imposed with legal authority provided by the relevant taxing statute. A legal order is also passed for the same. Whereas in case of the assessee no such conditions exist.
20. The CIT(A) referred to the definition of taxes and legal charges by OECD and relied upon the decision of the Hon'ble Supreme Court in case of TISCO V/s. Collector of Central Excise, 263 ITR 466 (SC) wherein the Hon'ble Supreme Court has held that taxes or cess or legal charges have to be levied by either the Government or a legal authority through the powers conferred by a Statute. Further, any cess or tax or a legal charge must have a prescribed rate under a Statute for the purpose. The Government cannot arbitrarily ask for any amount it deems fit. On the basis of the above, the CIT(A) concluded that there is absolutely no nexus between the amounts paid by the assessee to the State Government and the actual activity of the assessee. He further held that the assessee has also not discharged its onus to prove that indeed this payment was made due to business expediency. The CIT(A) held that the transfer of fund by the assessee is an application of income. The CIT(A) observed that there is 16 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board absolutely no arrangement of sale and purchase of land between the State Government and the AP Housing Board. He further noted that the Government orders quoted by the assessee does not in any way state that any money is to be paid to the State Government in lieu of lands provided. The CIT(A) further held that the transfer of fund cannot also be said to be in the nature of compensatory payment as compensatory payment is essential to compensate for some loss. Compensatory payment can also be for a breach of contract. Since in case of the assessee no such event has happened as the assessee has not caused any loss to the Government for which any compensation 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 be calculated by denying the liability under 17 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board the IT Act. The CIT(A) held that 'surplus net revenue' in other words would mean net profit after taxes. The CIT(A) observed that the assessee has fully paid all the State taxes, local taxes wherever applicable. However, when it comes to payment of income-tax, the assessee interprets the law in a different manner which is in complete dis-consonance with the Constitution of India, the Income-tax Act and even the directions of the AP Government. The CIT(A) observed that the implication of the amendment brought to section 58 of the APHB Act, is only to the extent that the net surplus [after all expenses and taxes] would lie with the Government and not in the APHB account to do away with repeated issuance of Government orders for transfer of fund. However, to interpret the amendment as a legal sanction for not paying income-tax is a deliberate act, which is not only against the spirit of the constitutional provisions but also against the letter and spirit of the amendment in question. On the basis of the aforesaid conclusion the CIT(A) held that the infrastructure expenditure claimed amounting to Rs. 1180 crores being an application of income it cannot be allowed as an expenditure. Accordingly, he sustained the addition made by the Assessing Officer.
22. The CIT(A) also sustained the addition of Rs. 3,86,18,879/- being the claim made by the assessee towards pension payment by observing that pension has to be routed through a pension fund and is not an expense chargeable to the profit and loss account. The CIT(A) also rejected assessee's contention with regard to claim of deduction u/s 80-IB.
23. Being aggrieved of the aforesaid order, the assessee is in appeal before us on the following grounds:
18ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board "1. The learned Commissioner of Income Tax (Appeals) failed to appreciate that the appellant is an instrumentality and agency of the Government of Andhra Pradesh. It functions as an extended arm of the Government. It is and for this reason, it cannot be considered as an independent taxable entity.
2. The learned Commissioner of Income Tax (Appeals) failed to appreciate that there is no profit motive by the appellant while undertaking its activities for the purpose for which it exists. Statutorily it exercises soverign and government functions. Therefore. income cannot be taxed under the head "business income" or 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 on the subject.
7. The learned Commissioner of Income Tax (Appeals) failed to appreciate the submissions made by the appellant with respect to amendment to section 58 of the A.P. Housing Board Act. 1956. The Commissioner ought to have appreciated that by virtue of the said amendment with retrospective effect from 1 sI April 2002, the entire surplus of the Appellant stood vested in the consolidated fund of the 19 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board State Government of Andhra Pradesh. It is as if the entire income accruing to the appellant was sliced away and there was diversion of income by over riding title in favour of the Government of Andhra Pradesh.
8. The learned Commissioner of Income Tax (Appeals) has erred in passing the order in the appellant's appeal only for the Assessment Year 2008-09, when the Hon 'ble ITA T had remitted its appeals for the Assessment Years 2004-05.
2005-06 & 2006-07 for fresh consideration and the ppellant had filed fresh written submissions before him. In the fitness of things, the Commissioner of Income Tax (Appeals) should have passed the orders for all the four assessment years together, as the most important Issues are common and the dispute continues from the A.Y. 2004-05.
9. The learned Commissioner of Income Tax (Appeals) has erred in stating in his order that the appellant had claimed itself to be a local authority whereas there was no such pleading by it.
10. The Commissioner of Income Tax (Appeals) has erred in declining the claim of the appellant to the deduction under section 36( I )(xii) by referring to his earlier order passed for the A. Y. 2006-07. which had since been set aside by the Honble ITAT and remitted back to him for fresh consideration. In the process. the learned Commissioner of Income Tax (Appeals) has ignored the fresh submissions and recent rulings submitted by the appellant.
11. The learned Commissioner of Income Tax (Appeals) has failed to appreciate that payment of pension to the employees of the appellant is an admissible expenditure incurred wholly for its business. He has not considered the written submissions of the appellant and the rulings relied upon by it.
12. The learned Commissioner of Income Tax (Appeals) has erred in ignoring the directive of the Government of Andhra Pradesh to the appellant to treat the infrastructure expenditure incurred by it as an expense in its books of account which the Appellant 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.
20ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board
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.
25. The first issue raised by the assessee which is common for all the assessment years under appeal is - Income of the assessee is the income of the State Government, hence, not taxable.
26. In this regard the assessee's written submission reads as under:
The assessee is an extended arm of the State Government, hence, its income is not taxable as per Article 289 of the Constitution of India.
"In the appeal order, the CIT(A) has extracted paragraphs 3, 3.1 to 3.6 from the written submissions made by the appellant on the additional grounds. These extract pertains to the plea that APHB is a creature of statute, clothed with statutory powers and functions under strict supervision, control and direction of the State Government. The CIT(A) has extracted only paragraphs 4 and 4.12 of the written submissions, and not the other paragraphs 4.1 to 4.11 and 21 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 4.13. These relate to the plea that as an instrumentality of the State, for carrying out Government functions, APHB is an extended arm of the Government and not a separate independent entity, which can be subjected to tax. But, the CIT(A) has given a finding that APHB has independent existence, manages its own affairs, does not discharge sovereign functions and is not an extended wing of the Government. While doing so, several submissions by the appellant in paragraphs 4.1 to 4.11 and 4.13 have escaped consideration by the CIT(A).
The CIT(A) has not considered the following plea that APHB is clothed with statutory powers. It could acquire land from the local authorities, compulsorily acquire land under Land Acquisition Act, 1984. It has the statutory power to reconstitute land allotment and dispossess persons by awarding compensation for the purpose of housing schemes. The main plea of the appellant is that it is so pervasively controlled and supervised by the Government under the terms of the statute under which APHB was constituted, that it cannot be regarded as an independent and autonomous entity. It is the extended arm of the Government. The appellant had cited rulings in which the courts have laid down that in similar circumstances, the organisation involved was not considered an entity separate and independent of the Government.
The appellant had argued that APHB is empowered with statutory powers to acquire land, evict any person from the premises, following the procedure laid down in 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 ShriRamtanu 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. 22 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 made by the A.O. in the remand report and has extracted from it at paragraph 5.1 of the appeal order. But the paragraphs no.5.12.1 to 5.12.3 appearing at pages 46 to 54 of the appeal order contain the finding of the CIT(A) in his own words rejecting the contention of the appellant that the income of the APHB can be regarded as that of the Government of Andhra Pradesh , and not taxable in view of the prescription in Article 289 of the Constitution. The appellant finds that these paragraphs containing the findings of the CIT(A) are verbatim reproduction from the pages 17 to 27 of the Remand Report of the A.O. Thus, he has adopted the language and the logic of the A.D. for his own conclusions. The appellant has submitted a rejoinder to the remand report on 15.12.2011, countering the observations of the A.O., which have been adopted by the CIT(A) in his order. However, the submissions made by the appellant in the rejoinder have not been referred to or considered at all by the CIT(A). Some of the important pleas taken in this rejoinder are given below:
i. The appellant is used as an instrument by the State for resource mobilisation. For this land is allotted for exploiting commercially for this purpose.
ii. The employees of APHB are governed by the same terms and conditions as are applicable to the State Government officers. The same order of the Government issued on Pay Commission report applies to the officers of the Government as also of APHB. This is indicative of the fact that APHB is an extended arm of the Government.
iii. The Accountant General of Andhra Pradesh has categorised APHB for civil audit and not for commercial audit. The fact that the Accountant General's office does not conduct commercial audit for APHB and APHB is categorized under the group for civil audit shows that APHB is not being considered as a commercial organization. The Accountant General conducts performance audit of the organizations selected for civil 23 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board audit.
iv. In Blharilalllobray vs. RoshanLalDohray (1984) 1 SCC 551 (SC), the Supreme Court held that, even though the incorporation of a body corporate may suggest that the statute intended it to be a statutory corporation independent of the Government it is not conclusive on the question whether it is really so independent. Sometimes the form may be that of a body corporate independent of the Government 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. RajyaKarmachariKalyan 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 the various departmental authorities of the state particularly the Department of Ford & Civil Supplies. The multiple test indicated to be applied both by the majority and minority view in Pradeep Kumar Biswas vs.Indian Institute of Chemical Biology (2002) 5 SCC
111. (SC) is fully satisfied in the present case for recording a conclusion that the Corporation is covered as an "agency and instrumentality of the State" in the definition of "State" under Article 12 of the Constitution.
vi. The Supreme Court in V.P. AvasEvamVikasParishad vs. Friends Coop. Housing Society Ltd, 1996 AIR 114 :
24ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 1995 SCC Supl. (3) 456, has held that right to shelter is a fundamental right, which springs from the right to residence assured in Art.19( 1)( e) and right to life under Article 21 of the Constitution. The State Government is expected to provide housing facilities to the public and create housing infrastructure ensuring planned urban development. In W.B. Housing Board vs. Brijendra Prasad Gupta (1997) 6 SCC 207, the Supreme Court held that the public purpose is not lost, if the State or Housing Board earns any profit. In Gulam Mustafa vs. The State of Maharashtra (1976) 1 SCC 800, the Supreme Court held that the excess land acquired by the Municipal Committee, when sold in plots for housing colony, it served public purpose. Similarly, the Supreme Court in State of Gujarat vs. SankalchandKhodidas Patel, (1977) 4 SCC 590, has held that the acquisition of land for housing facilities of a Cooperative Society was for public purpose. All the housing schemes of APHB are sanctioned by the Government. The activity undertaken by the APHB at the behest of the Government is a Governmental function carried on for public purpose. The observations of the Supreme Court in above rulings are supportive of the appellant's plea that the housing schemes implemented by APHB are for public purposes and not with any profit motive.
vii. The CIT(A) has laid considerable emphasis on the Supreme Court's ruling in Andhra Pradesh State Road Transport Corporation vs. Income Tax Officer, (1964) 52 ITR 524 (SC)to argue that like APSRTC, APHB is a legal entity distinct from the State. In this case, the Supreme Court had held that the trading activity carried on by APSRTC was not carried on by the State Government nor through its agent. Accordingly, income of APSRTC does not qualify for exemption 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 25 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 written submissions on the additional grounds, relating to the plea of the appellant that APHB discharges statutory functions to carry out the housing schemes of the Government. Since the activities are not undertaken with any profit motive, the receipts cannot be treated as income from business. The CIT(A) has extracted the first part of paragraph 5.2, wherein the constitution bench of the Supreme Court in New Delhi Municipal Council vs. State of Punjab, (1997) 7 SCC 339, has held that where there is no profit motive involved in any activity, it cannot be said that it constitutes trade or business. Significantly, the second part of the paragraph 5.2 has not been extracted in the order of the CIT(A). In this, the appellant has relied on the observation of the Supreme Court in BaburaoShantaram More vs. Bombay Housing Board, 1954 SCR 572 : AIR 1954 SC 153, wherein it was held that Bombay Housing Board as a corporate body was brought into existence for the purpose of framing housing schemes to solve the problem of acute shortage of accommodation in Bombay. In effect, it is a Government sponsored body not having any profit making motive. The same principle applies to the appellant. Accordingly, its activity cannot be regarded as a business. Had this ruling on a Housing Board been taken into account, the decision of the CIT(A) would have been otherwise.
In W.B. Housing Board vs. Brijendra Prasad Gupta (1997) 6 SCC 207, the Supreme Court held that the public purpose is not lost, if the State or Housing Board 26 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board earns any profit. In Gulam Mustafa vs. The State of Maharashtra (1976) 1 SCC 800, the Supreme Court held that the excess land acquired by the Municipal Committee, when sold in plots for housing colony, it served public purpose. Similarly, the Supreme Court in State of Gujarat vs. SankalchandKhodidas Patel, (1977) 4 SCC 590, has held that the acquisition of land for housing facilities of a Cooperative Society was for public purpose. All the housing schemes of APHB are sanctioned by the Government. The activity undertaken by the APHB at the behest of the Government is a Governmental function carried on for public purpose. The Supreme Court in Bajirao T. Kote vs. State of Maharashtra (1995) 2 SCC 442, has held that satisfaction of the State Government regarding existence of public purpose is not open to judicial scrutiny unless there is malafide or colourable 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 Income- tax vs. Surat Art Silk Cloth Manufacturers Association, (1980) 121 ITR 1 (SC). The Bench referred to the views of the learned judge of a Division Bench in an earlier case that an activity generating surplus would automatically mean an activity for profit. In fact, the judge had observed that the advancement of object of 27 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board general public utility must not involve the carrying on or of any activity for profit and if it does, the exemption is forfeited. But the Larger Bench disagreed with this view. It held that the expression "activity for profit" means for the purpose of making profit and connotes the end with reference to which something is done. It is not, therefore, enough that as a matter of fact an activity results in profit but it must be carried on with the object of earning profit. Profit-making must be the end to which the activity must be directed or in other words, the predominant object of the activity must be making of profit. The predominant object of APHB is not making profit but creating housing infrastructure as per the scheme of the Government.
In view of the authoritative rulings of the Supreme Court that surplus by itself does not tantamount to profit motive, the Revenue's conclusion should be rejected. The appellant has already explained that providing housing infrastructure in an orderly manner is a Governmental function and APHB is carrying out such schemes on behalf of the Government. Further, it has earlier explained that by virtue of the statutory provisions, the revenue generated by it is either spent for housing infrastructure or it vests in the consolidated fund of the State. Therefore, there is no profit motive in the activities undertaken by APHB. All its activities are driven by public purpose under the direction of the Government. The CIT(A) has considered a plea which the appellant has not made. He has held that income of APHB is not exempt from tax as its activities are not charitable. For this, he has noted that the housing schemes are not for the poor and that the houses are not sold at subsidised prices. But the appellant has not raised any plea that it is a charitable organisation. What it has argued is that its existence is not with profit motive and it is exemplified by the fact that it serves public purpose.
The appellant would explain that the private parties may be undertaking the activities in the joint venture for their profit motive 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 SooraramPratap Reddy and Others vs. 28 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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-for- profit 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 an activity can be described as trade or business only when it is carried on with profit motive. Accordingly, it held that only where a trade or business is carried on with profit motive, clause (2) of Article 289 would be attracted. Where there is no profit motive involved in any activity carried on by the State Government, the Court held that it cannot be said to be carrying on a trade or business within the meaning of clause (2), merely because some surplus results from such activity. This observation of the Supreme Court squarely applies to APHB.
Agent of State Government APHB has been created under a statute to work as executing agency of the State Government. In Housing Board of Haryana vs. Haryana Housing Board Employees Union, (1996) 1 sce 95 (se), Supreme Court examined the provisions of the Haryana Housing Board Act, 1971. The provisions extracted in the ruling closely resembles those of Andhra Pradesh Housing Board Act, 1956. Some of the provisions of the APHB Act suggest even greater degree of control by the State Government of APHB. The appellant had submitted a section wise comparison between APHB Act and those extracted and analysed by the Supreme Court of Haryana Housing Board Act before the CIT(A) (page 96 of Paper Book - I). After extracting the relevant 29 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board provisions from the Haryana Housing Board Act, the Supreme Court has observed as under:
29. The above provisions clearly spell out that the Board which is basically and essentially a creation of the Act of State Legislature consists of persons appointed by the State Government on salary basis.
The Board's personnel are not elected by the people and there is no element of people's choice being represented in any manner in the constitution of the Board. The Board functions strictly under the supervision and control of the State Government and does not hold or possess a "local fund". What constitutes the fund of the Board has already been specified above.
30. These functions as are indicated in a housing scheme are essentially performed by municipal boards or municipal council which, undoubtedly, are "local authorities" but on that analogy the Haryana Housing Board cannot be treated to be a "local authority" as the extent of control of the State Government under which the Board has to function is so prominently pervasive that it is almost destructive of its 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 30 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board under the close control and supervision of the State Government.
The law of agency contained in sections 182, 212, 213, 222, 223 and 226 of the Indian Contract Act throw light on the relationship between the principal and his agent. The principal always indemnifies the agent for the loss incurred in the course of the business. The agent is required to act in the interest of the principal with due diligence. He is to give accounts of dealings with other principals to his principals. The agent is not to make any profit from the dealings apart from the remuneration received from the principal. The appellant would submit thatall the ingredients of relationship between principal and agent are present in the statutory arrangement between the State Government and APHB. The funds and land are provided by the Government and any surplus over the expenditure incurred for the purposes of the Act vests in the consolidated funds of the State. Though APHB enters into contract in its own name, it can be contended that it is doing so on behalf of the State. Law of agency recognises that an agent can deal with counter parties in his own name and without disclosing the identity of the principal. What is to be seen is whether the profit or loss arising in the course of the dealings of the agent accrues to the principal, and not to the agent. In the arrangement prescribed under APHB Act, all the works done by APHB is assigned to it when the housing schemes are sanctioned by the Government, and when directions are issued by it to APHB. All the expenditure on the administration of APHB is met by the Government. Therefore, APHB as an entity does not suffer any loss or enjoy any profit on its own account. The full accounts of the amounts spent and received are given to the Government. The appellant had earlier cited the Supreme Court' ruling in Housing Board of Haryana case (supra), wherein it has been held that the degree of control and supervision the State Government has over the Housing Board results in the Housing Board not having any semblance of independence. Therefore, the appellant herein (APHB) is acting as an agent in the capacity of executing agency of the State Government. Accordingly, all the receipts arising from the activities of APHB in implementing the housing schemes accrues to the 31 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board principal, the State Government. Since APHB functions under no-pro fit- no-loss basis, it does not have any income at all. If at all, any income arises, it is that of the State Government.
In Andhra Pradesh 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 directions issued by the Government. Most of the income tax demand has been raised by the A.O. with respect to the sale of land and transfer of proceeds to the A.P. Housing Corporation or to the Government. When any land is transferred to or is acquired by APHB, it does not become absolute owner of such land. Section 40-C of the A.P. Housing Board Act, 1956, states that the Government land can be transferred to the "control" of APHB for the purpose of providing housing accommodation. Section 45 empowers APHB to sell, exchange, mortgage or otherwise disposes off any land, building or property "vested" in it, and such action is subject to any rules made by the Government. The Supreme Court in Fruit & Vegetable Merchants Union vs. Delhi Improvement Trust, AIR 1957 SC 344: 1957 SCR 1, has examined 32 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board the meaning of "vest" and held that when the land was transferred from the Government to the Delhi Improvement Trust, it was not to vest in the Improvement Trust absolutely free from all encumbrances. The land did not vest in the Improvement Trust in title but merely in possession, so that the Improvement Trust can use the land for the purpose for which the land is transferred. Placing of the property at the disposal of the Trust does not signify that the Government had divested itself of its title to the property. Similar is the situation with the APHB. The Government has transferred land to APHB for use for its own purpose. It is entitled to require APHB to sell the land and transfer the sale proceeds to either its nominee (AP Housing Corporation) or to itself, for use of such fund for public purpose. There are a number of meetings in the chamber of the Chief Minister of Andhra Pradesh, in which APHB has been given directions for resource mobilisation for the State exchequer. Accordingly, APHB had sold land and transferred the amounts to APHC and the State Government from time to time. The State Government has issued orders directing APHB to treat such payments as expenditure in its accounts. Thus, APHB has been undertaking the activities as and when the Government requires it to do so in the capacity of its agent.
It may be noted that the sole purpose for which APHB has been constituted is to execute housing schemes. Each housing scheme is formulated for execution with the sanction of the State Government. If the State Government does not accord any sanction, APHB would 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 33 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 submitted that the CIT(A) had passed the order after considering all the facts and contentions raised by the assessee. The learned Departmental Representative submitted that APHB cannot be considered to be an extended arm of the State Government due to the following reasons:
i) State Government does not have any shareholding with the APHB.
ii) The funds given by the State Government for different projects are shown as unsecured loans in the balance sheet and the APHB is also paying huge interest to the Government on such loans.
iii) APHB is doing business activity as a body corporate and earns profits on the sale made by it and its houses/flats to the public. Thus, the real estate business of APHB is neither incidental to the ordinary functions of the State Government nor the Union Government as declared by law under clause (3) of Article 289 of the Constitution. Hence, the Article 289 does not apply to APHB.
28. It is submitted by relying upon the decision of the Hon'ble Supreme Court in the case of APSRTC, 52 ITR 524 and of the 34 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board Hon'ble AP High Court in the case AP State Civil Supplies Corporation Ltd., 149 ITR 497 based on certain principles which are as under:
1) Corporation has a personality which is distinct from the State and, hence, normal income of a corporation cannot be treated as income of State.
2) The corporation is its own master and is answerable as fully as any other person or corporation. It is not the crown and has none of the profits or privileges of the crown. Its services are not civil services and its property is not crowned property. It is as much bound by the Act of Parliament as any other subject of the Kind and corporation constituted through a State Act is of course a public authority and its purposes no doubt are public purposes but it is not a Government department nor do its powers fall within the provisions of the Government and trading activity carried by the corporation is not a trading activity carried on by the State Departmental nor is it a trading activity carried on by a State through its agencies appointed in that behalf.
3) State may issue a notification under the Statute under which the corporation is constituted providing expressly or by necessary implication that the income derived by the corporation from its trading activity would be income of the State.
It is submitted that application 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 35 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 Somprakash Rekki Vs. Union of India [1981] 51 Company Case 71 have laid down certain tests, which are
i) If the entire share capital of the Corporation is held by the Government it would go a long way towards indicating that the corporation is instrumentality or an agency of the Government. Existence of deep and pervasive State control may be an indication that the corporation is a State agency or an instrumentality whether the corporation enjoys monopoly status it is state conferred or state protected.
ii) If the functions of the corporation are of public importance and closely related to the governmental 36 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board functions it would be relevant factor on classifying the corporation as an instrumentality or an agency of the Government.
iii) Specifically if a department of government is transferred to a corporation it would be a strong factor supportive of the inferences of the corporation being an instrumentality or agency of the government.
iv) Even if a Corporation meets all the tests to be termed as instrumentality of the state in such case also it is held that an instrumentality is different from the state and its income cannot be equated to that of the state.
29. It is further submitted that company as defined in section 2(17) of the Act includes any Indian company, any body corporate incorporated by or under the laws of a country and any institution, association or body whether incorporated or not. A State undertaking incorporated under the companies Act is not outside the definition of company. 'Person' defined u/s 2(31) includes a company. Income derived by any person is liable to charge of income tax u/s 4 of the Act. It was submitted that the assessee has not claimed exemption under any of the provisions of the IT Act, but, under Article 289 of the Constitution of India. It was submitted that what is exempt from taxation under Article 289(1) is the income of a state and not the income of the instrumentality or an agency of a state. The income of the company being distinct from the income of the state, immunity from taxation provided under Article 289(1) of the Constitution is not attracted. It was submitted that if the newly brought in amendment in section 58(7) of the APHB Act, applicable retrospectively will be interpreted to mean that income of the 37 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board Corporation is that of the state it would imply that the 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, 1961, even though, their net surpluses are transferred to the consolidated funds of the Government. Relying upon the decision of the Hon'ble Supreme Court in the case of APSRTC V/s. ITO, 52 ITR 524 and in case of Municipal Commissioner of Dumdum Municipality V/s. Indian Tourism Development Corporation and others, and Adityapore Industrial Area Development Authority V/s. Union of India, 153 Taxman 17, it is submitted that APHB is a distinct legal entity and it is not a state Government per se. It is submitted that all the Directors of the APHB are nominated by the Government of 38 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board Andhra Pradesh, therefore, it is convenient on their part to influence the Government of AP to pass a legislation in the AP Housing Board Act by introducing the provision of sub-section (7) of section 58 retrospectively with a clear intent to circumvent the provisions of IT Act, 1961 and to make sure that the surplus of the assessee is given the colour of being exempt from taxation. It is submitted that such amendment brought into the APHB Act is clearly repugnant to Article 73 read with Article 254 of the Constitution of India. It is submitted that the repugnancy becomes more apparent from the fact that the APHB had filed return of income claiming deduction u/s 80-IB. It prepares its own income and expenditure account and balance sheet which is duly certified by Chartered Accountant and filed along with returns of income. It furnishes a tax audit report u/s 44AB of the IT Act. It is submitted that APHB is a distinct legal entity being a body corporate and is not an instrumentality of the Government of AP or an extended arm of the state Government. It was submitted that APHB is not an authority as envisaged under Article 12 of the Constitution as it does not have the power to act as Government of AP. It is only a Board formed for the purpose of housing constituted with a limited mandate under the APHB Act, 1956. In support of such contention, the learned Departmental Representative relied upon the following decisions:
1. Punjab Urban Development Authority, 103 TTJ 988
2. Jalandhar Development Authority, 124 TTJ 598
3. Jammu Development Authority, ITA No. 30/Asr/2011
31. The learned Departmental Representative submitted that the returns filed for the relevant assessment years would give an indication that for the AYs 2004-05 and 2006-07 the assessee itself filed return of income admitting income under the head 39 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board '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-tax Appellate Tribunal to claim that its income is exempt from being taxed under the IT Act, 1961 due to retrospective amendment carried out in the APHB Act, 1956 in the year 2010. It is submitted that the assessee having voluntarily complied with tax audit provisions and commercial audit provisions year after year clearly shows that it recognised its liability under the income-tax Act. It is submitted that irrespective of the retrospective amendment effected to the APHB Act, assessee's liability under income-tax Act would not change because the assessee itself filed return of income declaring taxable income and claimed deduction u/s 80-IB. It is submitted that having filed its return of income the only way the assessee can claim that its income is not taxable is by way of filing revised 40 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board return of income u/s 139(5) of the Act. Since the assessee has not filed any revised return claiming exemption from tax the claim of the assessee on legal grounds as well as on fact cannot be accepted.
32. The learned Departmental Representative finally submitted that in an identical case decided by the Hon'ble Bombay High Court in case of Vidharbha Housing Board V/s. ITO, 92 ITR 430, the Bombay High Court after relying upon the decision of the Hon'ble Supreme Court in case of APSRTC V/s. ITO (supra) held that the income and property of the board could not be regarded as income and property of the state Government, hence, the immunity claimed under Article 289(1) of the Constitution will not be available. It is submitted that the asesssee's case clearly fits in to the aforesaid case decided by the Hon'ble Bombay High Court and in view of the ratio laid down therein the income of the assessee cannot be held to be the income of the state under Article 289(1) of the Constitution of India.
33. We have considered the elaborate submissions made by both the parties orally at the time of hearing as well as through their respective written submissions. We have also perused materials placed on record as well as in the paperbooks. We have carefully applied our mind to the catena of decisions cited before us by both the parties. Before dwelling upon the merits of the contention of the parties we consider it necessary to narrate certain facts.
34. The assessee, APHB was formed under the AP Housing Board Act, 1956 of the state legislature. The main object of formation of the APHB as set out in the preamble of the APHB Act, 1956 is to 41 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 income. The assessee challenged the assessment before the First Appellate Authority and having failed there, approached the Income-tax Appellate Tribunal, Hyderabad Bench.
35. In course of hearing before the Income-tax Appellate Tribunal, the assessee raised certain additional grounds claiming its income to be not taxable in view of the amendment brought retrospectively to the APHB Act by introduction of sub-section (7) of section 58. The additional grounds having been raised for the first time before the Tribunal, it remanded the matters back to the CIT(A) for consideration of additional grounds as well as the other grounds. In the meanwhile, assessment for the AY 2007-08 and 2008-09 were also completed and the assessee's appeal 42 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board against the assessment orders were pending before the CIT(A). It will be pertinent to mention here that for the AY 2007-08 and 2008-09 also the assessee had filed its return of income declaring income under the head 'income from house property' and 'income from other sources' and for the assessment year 2007-08 claimed deduction u/s 80-IB of the IT Act. After the retrospective amendment effected in the year 2010 to the APHB Act by introduction of sub-section (7) of section 58 of the APHB Act, the assessee claimed that the income earned by it is the income of the State.
36. From the aforesaid narration of fact, it is very much clear that, but, for the amendment to the APHB Act made by the state legislature in the year 2010 the assessee all along had been voluntarily filing its return of income by recognizing its income. It is also a fact that the assessee all along was claiming deduction u/s 80-IB of the Act. Only after the amendment to section 58 of the APHB Act, was made the assessee made a claim that its income is not taxable under the IT Act, by claiming immunity under Article 289(1) of the Constitution of India. The main thrust of the argument of the learned AR of the assessee for claiming immunity from taxation under the IT Act, 1961 are broadly the following reasons:
1. The APHB is a creature of statute, clothed with statutory powers and functions under supervision, control and direction of the state Government. It is an instrumentality of the state for carrying out Government functions and as such is an extended arm of the Government and not a separate independent entity which can be subjected to tax.43
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2. The state 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 carry out housing schemes of the Government of providing of housing infrastructure in an orderly manner is a governmental function and APHB is carrying out such schemes on behalf of the Government. Further as provided under the statutory provisions the revenue generated by the Board is either spent for housing infrastructure or it vests in the consolidated fund of the state.
8. APHB has been created under a statute to work as an executing agency of the state Government. All the 44 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board ingredients relationship between principal and agent are present in the statutory arrangement between the state Government and APHB. The funds and land are provided by the Government and any surplus over the expenditure is incurred for the purposes of the Act vests in the consolidated fund of the state. Though APHB enters into contract in its own name but in effect it is doing so on behalf of the state. In law of agency what is to be seen is whether the profit or loss arising in the course of the dealing of the agent accrues to the principal and not to the agent.
37. The learned counsel for the assessee taking us through various provisions of the APHB Act,1956 had submitted that the State Government exercises pervasive control over the Board. To emphasize such contention he referred to the transfer order of one Shri G. Sai Prasad and appointment of law officer. He submitted that the Board cannot take any decision on its own but every action of the Board has to be with the approval of the Government. In this context the learned counsel referred to the minutes of meeting held in the chamber of the chief minister. He further submitted that Rajiv Gruha Kalpa scheme is a scheme of the State Government and the Board is only implementing it as an agency of the Government. He further submitted that for mobilizing resources by way of sale of land the Board is utilized as a tool. It was submitted that the mode and manner of maintaining the accounts is also as per the direction of the Government. For mortgaging also permission is required. In sum and substance it is the contention of the learned counsel that the state Government exercises pervasive control and the Board as such is not an independent autonomous body but is an extended arm of the state Government. It is the submission of the learned 45 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board counsel that the income of the Board therefore, in effect, is the income of the State Government, 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-à-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, there would 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. But difficulties arise when we are dealing with trade or business carried on by a corporation established by a State by using a notification under the relevant provisions of the Act. The corporation, though statutory, has a personality of its own and this personality is distinct from that of the State or other shareholders. It cannot be said that a shareholder owns the property of the corporation or carries on the business with which the corporation is concerned. The 46 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board doctrine that a corporation has a separate legal entity of its own is so firmly rooted in our notions derived from common law that it is hardly necessary to deal with it elaborately; and so, prima facie, the income derived by the appellant from its trading activity cannot be claimed by the State which is one of the shareholders of the corporation."
39. The Hon'ble Supreme Court after analyzing the different clauses of Article 289(1) in the context of the claim made by the assessee held as under:
"The main point which we are examining at this stage:
is the income derived by the appellant from its trading activity, income of the State under article 289(1) ? In our opinion, the answer to this question must bein the negative. Far from making any provision which would make the income of the corporation the income of the State, all the relevant provisions emphatically bring out the separate personality of the corporation and proceed on the basis that the trading activity is run by the corporation and the profit and loss that would be made as a result of the trading activity would be the profit and loss of the corporation. There is no provision in the Act which has attempted to lift the veil from the face of the corporation and thereby enable the shareholders to claim that despite the from which the organization has taken, it is the shareholders who run the trade and who can claim the income coming from it as their own. Section 28 which provides for the payment of interest clearly brings out the dualty 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 47 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 the income of the corporation. All that section 30 requires is that a part of that income may be entrusted to the State Government for a specific purpose of road development. It is not suggested or shown that when such income is made over to the State, it becomes a part of the general revenue of the State. It is income which is impressed with an obligation and which can be utilized by the State Government only for the specific purpose for which it is entrusted to it. Therefore, we are satisfied that the income derived by the appellant from its trading activity cannot be said to be the income of the State under article 289(1), and if that is so, the facts that the trading activity carried on by the appellant may be covered by article 289(2) does not really assist the appellant's case. Even if a trading activity falls under clause (2) of article 289, it can sustain a claim for exemption from Union taxation only if it is shown that the income derived from the said trading activity is the income of the State. That is how ultimately, the crux of the problem is to determine whether the income in question is the income of the State, and on this vital test, the appellant fails."
40. Even though the learned AR has tried to impress upon us that the Assessee Board is nothing but an extended arm of the Government or part of the Government, but, in our view, it is not so. Sub-section (2) of Section 3 of the APHB Act, 1956 reads as under:
"The Board shall be a body corporate having perpetual succession and a common seal and may sue and be sued in its corporate name and shall be competent to acquire and hold property both moveable and immoveable and to contract and do all things necessary for the purpose of this Act."48
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41. A reading of the aforesaid provision makes it clear that the assessee is a body corporate having perpetual succession and a common seal and it can sue and be sued in its corporate name. The said provision also makes it clear that the Board shall be competent to acquire and hold property both movable and immovable and to contract and do all things necessary for the purposes of the Act. Sub-section (3) of section 3 of the Act provides that the Board shall be deemed to be a local authority for the purposes of Land Acquisition Act, 1894. The Constitution of the Board shall be as per section 4 of the APHB Act. As per the aforesaid provision, the Board 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 loans from 49 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board the central or state government or a local authority or any individual or body, whether incorporated or not for all or any of the purposes of the Act. It also provided that government shall every year make a grant to the Board of a sum equivalent to the administrative expenses of the Board. Section 58(4) provides that all moneys received by the Board, 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. An amendment was made to section 58 by Act No. 12 of 2010 by introducing sub- section (7) with retrospective effect from 01/04/2002. The newly introduced sub-section (7) provides that the surplus net revenue after meeting the expenditure of the Board shall vest in consolidated fund of the State of Andhra Pradesh. Section 59 of the Act as it stood earlier provided that all property, the Board fund and all other assets vesting in the Board shall be held and applied by it, subject to the provisions and for the purposes of the Act. However, the earlier section 59 was substituted by a new section 59 by Act No. 12 of 2010 with retrospective effect from 01/04/2002. The amended section 59 reads as under:
"59. Application of the fund: subject to the provisions contained in sub-section (7) of section 58 all property, the Board fund and all other assets vesting in the Board shall be held and applied by it, subject to the provisions and for the purposes of this Act."
Section 81 of the Act empowers the Government to dissolve the Board.
42. On going through the aforesaid provisions it becomes clear that the Board has an independent identity distinct from the State Government. The Board is also constituted for the purpose of carrying out the work as envisaged under the preamble of the Act. The Board certainly cannot be equated with the Government 50 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board or a department of the Government as it does not perform any of the duties of the Government or a Government department. It is quite obvious that the Board is a statutory body performing statutory functions distinct from the state Government. It may be a fact that the state Government exercises some amount of control over the functioning of the Board similar to control exercised over all other government corporation and public sector undertakings but that does not 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-à-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 an agent acting on behalf of the State Government, it would be clear that the property and income of the board would be the property and income of the State Government, but if that be not the case and if the board under relevant provisions of the Act is a separate legal entity discharging functions enjoyed upon it on its own and not as an agent or department of the State Government, then clearly the immunity claimed by the petitioner board under article 289(1) of the Constitution would not be available to it. In our 51 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board view, with the possible exception of the provision contained in section 32A, none of the other features pointed out by Mr. Thakar shows at all that the board is a department of the State Government or is its agent and even the provisions of section 32A dones not indicate that. Under that section all moneys recoverable by the board under the Act or under any agreement are declared to be recoverable as arrears of land revenue and Mr. Thakar urged that this provision showed that the board will have to be regarded as recoveries of the State Government, otherwise these would not have been made recoverable as arrears of land revenue. In our view, it is not possible to accept this submission of Mr. Thakar, for, all that section 32A provides for is merely indicate a mode a recovery and simply because a particular mode of recovery which is generally available to the State Government for making its recoveries has been made available to the board for making its recoveries, it cannot mean that the said recoveries becomes recoveries of the State Government or that the recoveries made by adopting that particular mode become recoveries made by the board for and on behalf of the State Government. Similarly, the provision under which the board has been deemed to be a local authority for the purposes of the Land Acquisition Act could not be suggestive of an inference which would favour or support the petitioner's contention. In fact, the provision contained in section 3(3) is a deeming provision which implies that but for the said provision the board would be not a local authority, and what is more, it has been declared local authority for the purposes of certain enactment, namely, the Land Acquisition Act, which only facilitates acquisition of properties for the board. The features that the board as a corporate body has no power to raise share capital or that its 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.52
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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 that some members of the board could be nominated by the Speaker of the Legislative Assembly and by the State Government. The provision contained in section 12 of the Act would be a clear pointer to the board being a separate entity distinct from the State Government. Under that section the board shall have its own fund and such fund is to get augmented by acceptance of grants, subventions, donations or gifts as well as loans from the Central or the State Governments and obviously the board would be paying interest on such loans. Now, if the board were the department of the Government or an agent undertaking various activities for and on behalf of the Government, no provision would have been made enabling the board to borrow loans from the State Government or to pay interest thereon to the State Government, for, it is inconceivable that a party would by interest to itself. This provision, in our view, is a clear pointer to the fact that the Board is a distinct entity apart from the State Government and not department or an agent of the State Government. On the other hand, this provision clearly suggests that the board is a separate entity, possesses its own property, assets or funds and undertakes the various activities on its own account. The other provision which, in our view, is of a clinching character is the one to be found in section 40(2) of the Act. That provision indicates as to what should happen to the property and assets of the board upon its dissolution being made by the State Government. Under sub-clause (a) of sub-section (2) of section 40 it is provided that with effect from the date specified in the notification under sub-section (1), all properties, funds and dues which are vested in or realizable by the board shall vest in and be realizable by the State Government. If the board was acting as department of the State Government or was merely as agent undertaking the activities for and on behalf of the State Government, it was utterly unnecessary to make the provision of the type indicated above. The very fact that provision has been made in section 40(2)(a) that upon the dissolution of the board all properties funds and dues recoverable by the board shall vest in the Government clearly shows that the board is a distinct 53 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board entity and is not an agent or a department of the State Government. Similarly, section 40(2)(b) is further indication in the 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 undertaking the activities enjoined on it not as an agent of the State Government but on its own. If that the position which really emerges from examination of the several provisions of the Act, it seems to us very clear that the income and property of the board could not be regarded as income and property of the State Government, with the result that the immunity claimed by the petitioner-board under article 289(1) of the Constitution is clearly not available to the petitioner-board. In our view, therefore, on an examination of the provisions of the Act, the contention raised by Mr. Thakar must fail."
43. The Hon'ble Bombay High Court while coming to such conclusion also followed the ratio laid down by the Hon'ble Supreme Court in case of APSRTC V/s. ITO (supra) and held as under:
15. In this context it would not be out of place to refer to the judgment of the Supreme Court in the case of Andhra Pradesh State Road Transport Corporation v. Income-tax Officer. In that case a similar question based on the provisions of the article 289(1) of the Constitution was raised and immunity from Union taxation 54 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board thereunder was claimed by the Andhra Pradesh State Road Transport Corporation, and on an examination of the relevant provisions of the Road Transport Corporation Act, 1950, under which the Andhra Pradesh State Road Transport Corporation was constituted the court came to the conclusion that the trading or business activity that was being carried on by the Andhra Pradesh State Road Transport Corporation was not carried on by that corporation either as department of the State Government or as an agent on behalf of the State Government, but the corporation indulged in concerned trade or business activity on its own and it was held that the immunity claimed by that corporation under article 289(1) of the Constitution was not available to it. In that case there were provisions of that Act which showed that the bulk of the capital necessary for the establishment of the corporation had been contributed by the State Government, a small portion by the Central Government and a few shares were held by some individuals; the provisions of the Act also indicated that the activity of the corporation was controlled by the State and in particular there was a provision to be found in section 30 of the Act for making over surplus receipts to the State Government after disbursements 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 capital which could be subscribed by private individuals, there was not such provision for raising any share capital for the petitioner-housing board, under the Madhya Pradesh Housing Board Act, 1950; it was also pointed out that there was a glaring difference between the nature of activity undertaken by the Andhra Pradesh State Road Transport Corporation and the nature of activity undertaken by the petitioner-board, as, for instance, the activity undertaken by the 55 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board former entity was in the nature of trading activity, while the activity undertaken by the petitioner-board could not be regarded as any trading activity in any sense of the term; further, it was pointed out that since profit motive was absent in the instant case before us, there was no question of making any provision for making over surplus receipts to the State Government which was feature which appeared clear under section 30 of the Road Transport Corporations Act, 1950. In the first place, in spite of the aforesaid peculiar features which obtained under the Road Transport Corporations Act, 1950, the Supreme Court took the view that the A. P. State Road Transport Corporation was distinct entity. Secondly, as stated earlier, the distinguishing features mentioned by Mr. Thakar may be relevant on the point of attracting the exemption under section 4(3)(i) and not on the issue which has been raised. The principal question involved both in that decision as well as in the case before us has been whether the income and the property of the board could be regarded as the income and property of the State Government and on that question the provisions of the Madhya Pradesh Housing Board Act, 1950, especially provisions of sections 3, 4, 12 and 14, clinchingly indicate that the petitioner-board cannot be regarded as department or an agent of the State Government and will have to be regarded as separate legal entity distinct from the State Government, and, therefore, the income and property of the board could not be regarded as the income and the property of the State Government. In other words, the relevant provisions concerning a particular entity established under a particular enactment would have to be considered for deciding the question and, in our view, as stated earlier, the provisions of the Madhya Pradesh Housing Board Act, 1950, clearly indicate that the board, its property and income cannot be regarded 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 56 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 housing activity as a commercial venture not as an agent of the state but independently. Therefore, the income derived from sale of housing project would certainly be the income of the assessee Board and not of the state Government. Furthermore, in case of a principal and agent relationship, the agent is entitled for certain commission for the services rendered by it. In the present case, there is no such consideration for which the APHB acts as an agent of the state Government for carrying out the housing schemes of the state Government. Only because sub-section (7) to section 58 was brought into the APHB Act by way of an amendment in 2010 giving retrospective effect from 2002, which provided for vesting of the surplus fund in consolidated fund of the state Government it cannot be said that the income earned by the assessee is actually the income of the state Government. In fact a similar provision u/s 30 of the APSRTC Act, provided for vesting of the surplus fund with the State Govt. In spite of such provision, the Hon'ble Supreme Court held that APSRTC is a distinct statutory corporation and the property and income of APSRTC is not the income of the State.
45. The chargeability of the income to tax is as per the charging section contained u/s 4 of the IT Act, 1961. The retrospective amendment made to the APHB Act by Act 12 of 2010 cannot dilute the effect of the provisions contained under the income-tax Act, which is an Act of the Parliament hence has overriding effect 57 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board over an Act of the State Legislature. It is a fact on record that the plea taken by the assessee that Board's income is the income of the state Government was not there until introduction of sub- section (7) to section 58 of the APHB Act in 2010. That is the reason the assessee had never taken this stand all these years. In fact the assessee had all along filed returns declaring income and claiming deduction u/s 80-IB of the 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 the income from housing projects were treated as business by the assessee. The assessee has not revised this stand by filing any revised return. Only after the amendment was made to the APHB Act in the year 2010, the assessee came forward with a claim that its 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 58 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 case the assessee is also required to discharge its liability under the Income Tax Act. Even section 58(7) cannot be construed in a manner to mean that the income of the Board is the income of the State. On the contrary, what sub-section (7) of section 58 says that after meeting all expenditures, the surplus revenue shall vest with the consolidated fund of the State Government, but, that does not make the income of the Board the income of the State Government. The learned AR has relied upon a number of decisions of the Apex Court in his submissions. However, in none of the decisions, the ratio laid down is in the context of chargeability of income under the Income-tax Act vis-à-vis Article 289(1) of the Constitution of India. Therefore, though there is no dispute with regard to the ratio laid down in those decisions, however, they are not applicable to the facts of the case of the assessee. It will be pertinent to mention here that the learned AR placed strong reliance upon the judgment of Hon'ble Supreme Court in case of Housing Board of Haryana Vs. Haryana Housing Board Employees Union and Others [1996] 1 SCC 95. In this context, the learned AR drawing a parallel between the provisions of Haryana Housing Board Act, 1971 and APHB Act, 1956 submitted that the Hon'ble Supreme Court on considering the provisions of Haryana Housing Board Act has held that the control of the Government is so pervasive that the Board does not have even a semblance of independence. It was submitted that in assessee's case also due to the control of the State Government the assessee does not have any independent existence. The aforesaid decision of the Hon'ble Apex Court is not applicable to 59 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board the assessee firstly because the observation made by the Hon'ble Supreme Court was in the context of whether Haryana Housing Board is a local authority and secondly the Hon'ble Supreme Court was not considering the issue whether income of the Board is the income of the State Government. On the other hand, the decision of the Hon'ble Supreme Court in case of APSRTC Vs. ITO (supra) and of the Hon'ble Bombay High Court in case of Vidarbha Housing Board Vs. ITO (supra) are directly on the issue. In aforesaid view of the matter, we hold that assessee's income cannot be held to be the income of the state and as such cannot be exempt from taxation under Article 289 of the Constitution of India. As a corollary 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 that the surplus revenue after meeting all expenditure including income tax can alone be transferred to the Government of Andhra Pradesh. While dealing with this issue, the CIT(A) 60 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board has completely overlooked the following rulings cited by the appellant in the rejoinder and written submission on the original grounds. In CIT vs. Sitaldas'Iirathdas (1961) 41 ITR 367 (SC) and MotiLal ChhadamiLal Jain v. CfT [1991J 190 ITR 1 (SC) , the Supreme Court has held that where the obligation is not self-imposed or gratuitous, and it flows out of an antecedent and independent title, it will constitute diversion of income by overriding title. In CfT vs. Nizam Sugar Factory Ltd. (2002) 253 fTR 68 (AP), under Molasses Control Order, 1972, one third of the sale price of molasses was required to be set apart from construction of storage tanks. The amount was claimed by the assessee as not taxable having been diverted by overriding title under the authority of the law. The High Court found that the assessee had no control over the fund, and the same was diverted from the source and did not reach it. Therefore, it was not taxable. Similar view was taken in the following cases:
• SomaiyaOrgeno-Chemicals Ltd. vs. CIT
(1995) 216 ITR 291
• CIT vs. New Horizon Sugar Mills (P) Ltd.
(2003) 128 Taxman 300 (Mad) : (2000) 244
ITR 738 (Mad) Commissioner of' Income-tax
vs. PandavapuraSahakaraSakkareKharkane Ltd, (1992) 198 ITR 690 (Kar.) In CIT vs. New Horizon Sugar Mills P. Ltd., (2004) 269 ITR 397 (SC) and CIT vs. Ambur Co-op. Sugar Mills Ltd., (2004) 269 ITR 398 (SC), the Supreme Court has dismissed civil appeals by the Revenue on this issue. It should be noted that in all these cases, there was no plea the amount was taxable on the ground that Income Tax Act will prevail over the Molasses Control Order. Income tax law applies to income recognised by the above principle considered by the court. The CIT(A) should not have ignored the importance of these rulings on the plea taken by the appellant on the issue of diversion of income by overriding title."
48. The learned Departmental Representative has submitted that there is no diversion of income by overriding title as the income has already accrued to the assessee board and after meeting its expenditure whatever surplus revenue remains is transferred to 61 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board consolidated fund of the State Government of AP. Therefore, it is only 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 in Consolidated fund of the State of Andhra Pradesh. Such surplus revenue shall be transferred to the State Government of Andhra Pradesh into such account on quarterly basis, as the State Government from time to time instruct or advice the Board in this behalf. As amended by Act No. 12 of 2010 and provisions shall be deemed to have come into force with effect from 1 s t April, 2002."
51. A reading of the aforesaid provision would make it clear that only after accrual of income to the assessee and after meeting all its expenditure the surplus net revenue shall vest in consolidated fund of the Government. It further provides that such surplus 62 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board revenue shall be transferred to the state Government of AP on quarterly basis as per the instruction or advice of the Government. Therefore, so far as the accrual of income is concerned, there is no dispute to the fact that the income has already accrued to the assessee. Only after the accrual of income to the assessee the surplus has been diverted to the Government account. The Hon'ble Supreme Court in case of CIT V/s. Sri Sitaldas Tirathdas, 41 ITR 367 (SC) held as follows:
"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 the income of the assessee. 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 reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable."
52. The same principle has also been reiterated in other decisions relied upon by the assessee. Therefore, considering the principles laid down in the aforesaid decision the assessee having diverted a part of the income after it has accrued to it the diversion of such income can only be considered to be an application of income and not diversion of income by overriding title. Therefore, 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.
63ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board
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 Govt. had demanded payment of which was complied with. The appellant is a wholly owned government organization and it is to obey the dictates of its master. The purpose of the expenditure is within the mandate of the appellant. Unless it carries out the orders of its sole owner, the State Government, its business will be in jeopardy. The appellant is not a commercial organization but developmental organization. Its structure and function are like that of the government though given a separate shape. Generation of some surplus in course of its operation does not necessarily make this wholly owned government body an organization with profit motive. This aspect has also been explained in detail in the rejoinder on the remand report of A.O. with supportive case laws. Funding of the infrastructure created by the A.P. State Housing Corporation at the behest of State Government is incidental to the main activity of the appellant. It did directly benefit from this expenditure as such infrastructure was meant for the houses sold by it. Its existence and purpose are served as long as it plays direct or indirect role in dealing with and satisfying the need of housing accommodation in the State. The expenditure in question is in course of its normal business operation which, though, had not taken place previously. The appellant is working in a dynamic socio-economic environment and keeping in view the changing need the necessity of such expenditure had arisen.64
ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board In the earlier proceedings, the A.O. and CIT(A) have wrongly concluded that the amount paid to A.P. State Housing Corporation under the order of the State Government was capital expenditure. Development of housing facility is the purpose for which the appellant has been constituted. The State Government has set up several executing agencies to provide housing accommodation and create housing infrastructure. It is the ultimate decision making authority as to which agency is to execute which work for this purpose. The State Government, in its wisdom, had decided that certain housing infrastructure facilities are to be developed by A.P. State Housing Corporation, and that the appellant would transfer the stipulated amount to the Corporation for this purpose. Therefore, the purpose for which the amount is to be spent is very much connected with the activities undertaken by the appellant.
In Lakshmiji Sugar Mills 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, the expenditure was capital in nature. Rejecting this argument, the Supreme Court held that it is no doubt true that the advantage secured for the business was of a long duration, but it was not an advantage in the capital field, because no tangible or intangible asset was acquired by the assessee, nor there was any addition to or expansion of the profit 65 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board making apparatus of the assessee.
In CIT vs. Coats Viyella India Ltd. (2002) 253 ITR 667 (Mad.), the assessee had made payment to the Government for construction of new bridge, providing access to the assessee's factory for its workmen and movement of goods. The High Court held that the assessee did not acquire any ownership over the bridge and there was no addition to the value of the assets owned by it. Therefore, the payment made to the Government was revenue expenditure. In Navsari Cotton and Silk Mills Ltd. (1982) 135 ITR 546 (Guj.), the assessee discharged an effluent causing health hazard, which was protested by the citizens of the area. Apprehending a spate of suits therefrom, and in view of the Municipality being unable to remedy the situation, and prevent litigation, the assessee made contribution to the Municipality for providing underground pipeline through the municipal land for disposal of effluents. It was argued that the purpose of this expenditure was to avoid losing market, customers and goodwill. The High Court accepted this and held that the expenditure was allowable under section 37 the LT. Act. In Joint Commissioner of Income Tax vs. Deverson Industries Ltd. (2007) 290ITR (A.T.) 287 (ITAT
- Ahm), the assessee had paid an amount to the State Government to help villagers affected by effluent discharged from the assessee's factories and such amounts were paid to Municipal Corporation for treating effluents. It was argued by the assessee that the expenditure was laid out to protect its business as an ongoing entity and to avoid possible protracted litigation. The Tribunal held that the assessee had business reasons to participate in a scheme framed by the High Court to make contributions for this social cause. Therefore, the entire expenditure incurred was deductible. In view of these rulings, the appellant would submit that the amount paid to A.P. State Housing Corporation was not capital, but revenue expenditure.
The CIT(A) had observed that the amount paid to A.P. State Housing 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 66 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 Board. Hence, these housing regulations have to be considered as mandatory in character, having binding statutory force. We are, therefore unable to agree with T.U. Mehta, J's conclusion that Disposal of Property Regulations framed by the Housing Board in exercise of its statutory power under S.74(b) are not statutory in character. We hold that they are, of necessity, to be treated as statutory in character for the reasons aforesaid. However, that does not advance the case of the learned Advocate for the petitioners an inch further. Even though' regulation 33 of the Regulations is statutory in character, the directions issued by the State of Gujarat in exercise of its statutory powers under S.82 cannot be said to be in any way inconsistent with this regulation.
The second reason is that under S.82 of the Act, the State of Gujarat is entitled to give directions to the Housing Board for the purposes of the Act and if these directions are not found to be arbitrary or illegal, they are binding on the Housing Board and they would supersede any of the earlier contrary decisions of the Housing Board and impose a special obligation on the Housing Board to comply with such directions. As seen earlier, by S.24 of the Act, it is the duty of the Housing Board to incur expenditure and undertake works of such housing schemes as it may consider necessary from time to time, subject to the control of the State Government. Thus, control of the State Government is all pervasive in connection with any of the housing 67 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board schemes undertaken by the Board.
Thus, the payment to A.P. State Housing Corporation was done in the manner prescribed in the A.P. Housing Board Act, under which the appellant has been constituted. Therefore, such payment is part and parcel of its regular business. Accordingly, the amount should be treated as revenue expenditure laid out wholly for the purpose of its business under section 37 of l.T. Act.
This expenditure is definitely a charge on income and not an application of income as held by the CIT(A). In case of application of income, there is discretion with the person making the payment as to pay it or otherwise, whereas in case of obligatory or compulsory payment the same has to be charge on income. In the instant case, the payment by the appellant to A.P. State Housing Corporation as per the order of Government was nothing but statutory obligation 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 report for these years as also for the A.Y. 2008-09 for which the CIT(A) has passed the appeal order. In this situation, the CIT(A) should not have relied upon verbatim reproduction of the part of the earlier order for the A. Y. 2006-07 in his order for A.Y. 2008-09. The appellant finds that the language of paragraphs 6.14 to 68 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 6.20 of the present order has been copied from the paragraphs 6.13 to 6.17 of the earlier appellate order for the A.Y. 2006-07, which has been remanded. Observations and conclusions in the earlier order passed on 30.10.2009 of the CIT(A) cannot be expected to take into account the submissions made and rulings relied upon by the appellant in the present proceeding. In this process, some errors have crept into the appeal order:
i. At paragraph 6.17 of the appeal order for A.Y.2008-09, the CIT(A) has, mentioned that Government orders quoted by the appellant does not in any way indicate that any money is to be paid to the State Government in lieu of lands provided. But the CIT(A) has missed out the content of the letter dated 23.12.2005 from the Government of Andhra Pradesh, extracted by him at page 39 of his order. The heading of this letter states" Utilisation of an amount to the extent of value of Government lands to be paid to the Government by the APHB for infrastructure development of Rajiv GruhaKalpa". At paragraph 3 in this letter, it is stated that infrastructure cost up to the extent of value of land to be paid to the Government by the APHB will be utilised for infrastructure development under Rajiv GruhaKalpa scheme. In the event of shortfall, the Government will allot additional land to APHB. Further, in the Minutes of Meeting held in chamber of Hon 'ble Chief Minister, extracted at page 41 of the order of the CIT(A), it is noted that APHB would remit Rs.150 crore in October and Rs.400 crore in Nov. and another Rs.400 crore in December by leveraging land allotted to it. At page 55-56 of the appeal order, the CIT(A) has extracted GORT No.432 of Government of Andhra Pradesh. At paragraph 2 to 4 in this, it is mentioned that land has been allotted to APHB for which it has to pay the land value to the Government, which will bear the cost of infrastructure. In the event of shortfall, the Government will allot additional land. The significance of these have been missed out by the CIT(A) for the simple reason that his discussion and conclusion 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 69 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 IT A T 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 its own capacity and has referred to section 14 to state that the Vice Chairman shall make every contract on behalf of APHB. However, he has not referred to several other provisions which are important to decide the extent of autonomy enjoyed by APHB. The proviso to section 14 mandates that no contract involving expenditure of Rupees more than the limitation as may be fixed by the Government shall be made without the previous sanction of the Government. This amount was mentioned in this proviso as Rs.3,0001- till the amendment of the Act in 2010. The CIT(A) has given the finding that APHB is controlling its own affairs and is independent in entering into contracts and taking loans. Therefore, in paragraph 5.8.1 and 5.8.2, he has argued that APHB is not functioning as an agent of the State Government. He has not referred to section 21 of the APHB Act, which clearly states that subject to the control of the Government, Board may incur expenditure and undertake works for framing and execution of housing schemes. Section 60 allows APHB the freedom to incur expenditure not exceeding Rs.10,0001- in extreme urgency, which is not included in the annual programme sanctioned by the Government. Section 62(1) permits APHB from time to time, with the previous sanction of the Government and subject to the provisions of the APHB Act and to such conditions as may be prescribed in this behalf, burrow any sum required for the purpose of the Act. Section 79 empowers the State Government to give direction to APHB and overrule any decision or order of it. These provisions, severely restricting the freedom to operate, spend, enter into contracts and 70 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board borrow money have not been referred to or discussed in the order of the CIT(A)."
55. The CIT(A) while upholding the disallowance of the aforesaid expenditure has opined that for claiming a particular expenditure it is to be examined whether there is any nexus between the main activity of the assessee and the expenditure in question. It was further held by the CIT(A) referring to various govt orders, as per which according to the claim of the assessee an amount of Rs. 1180 crores was transferred to AP State Housing Corporation, that the main objective of the APHB to make and implement schemes for providing of housing accommodation is by selling the houses to prospective buyers at the market rate. For this purpose, it acquires lands, 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 71 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board the purpose of business. An expenditure which is exclusively laid out for the purpose of business is a revenue expenditure and, therefore, allowable. On appreciation of the facts on record, it is quite evident that the amount of Rs. 1180 crores was not spent by the assessee board for the purpose of its business. The said amount was transferred to AP State Housing Corporation at the directive of the Government for implementing certain housing projects. The assessee is no way connected with implementing the project. This cannot be said to be an expenditure laid out wholly and exclusively for the purpose of business. The decisions relied upon by the learned AR are factually distinguishable as in those cases there was nexus between the expenditure incurred and the business of the assessee. Therefore, in our view the revenue authorities were correct in disallowing such expenditure.
57. In ground No. 11, the assessee has raised the issue of disallowance on account of payment of pension to employees. In this regard, the following submissions have been made by the assessee:
"On allowablity of payment of pension to employees as deduction for computing taxable income, the CIT(A) has reproduced paragraph 15 - 16 from the written submission on the original grounds by the appellant. He has given a finding that the pension has not been routed through a pension fund and therefore is not an expense chargeable to the Profit and Loss Account, without citing any legal provision or ruling. He has not referred to paragraph 17 of the written submission by the appellant. In this, it had relied on the Supreme Court's observation in Gordon Woodroffe Leather Mfg. Co. v. CIT (1962) 44ITR 551 (SC), in which the Court has held that pension is allowed as a deduction, when concerned employees had expectation of getting it as terms of the employment. Following this ruling, the Kerala High Court in Travancore Rubber and Tea Co. Ltd. vs. State of Kerala (1999) 239 ITR 351 (Kerala), observed that the pension paid to an employee who has gone out of service, 72 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board can, in no case, be said to be a gratuitous payment. Therefore, the court held that it is allowable as deduction for computing taxable income. The appellant had submitted that the terms of the employment the employees of APHB are the same as are applicable to the State Government employees. Since the employees are entitled to post-retirement pension, the same is allowable in view of the above quoted rulings. The CIT(A) has not considered these rulings."
58. The learned 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 disallowance in a mechanical manner. It is not forthcoming what are the details asked for by the AO and on failure on the part of the assessee to furnish such details, the disallowance was made. The lower authorities have not disputed the fact that pension amount has 73 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board been paid. It is also a fact that Pension is payable as per the service conditions. That being the case it is an allowable deduction. The decisions cited by the learned AR also support such view. Accordingly, we direct the Assessing Officer to delete the addition made.
60. The next issue relates to estimation of income from Singapore project. This issue arises in appeals being ITA Nos. 1216, 1217 & 1218/H/12 for the assessment years 2004-05, 2005-06 and 2006-07.
61. In course of assessment proceedings, the AO on examining the income and expenditure statement filed with the return noticed that the assessee though had shown income and expenditure towards sale of flat at Singapore project (Pocharam) but actually as per assessee's own admission the same represent the advance received from the prospective buyers of the flats being built at Pocharam. The AO, therefore, held that since the sale of flats have actually not taken place, the advances received cannot be treated as income and similarly the expenditure claimed also cannot be considered. He, therefore, excluded both the income and expenditure. The CIT(A) also sustained such exclusion made by the AO by endorsing the view of the AO. During the appeal proceedings, the first appellate authority was of the view that the housing project undertaken by the assessee was under construction during the previous year. He was further of the view that the project being a construction project and being in the nature of construction contract undertaken by the 74 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board assessee it ought to have disclosed the annual income from this project. He, therefore, asked the assessee to explain as to why no income from the project has been offered for taxation as per the percentage of completion method of accounting. The assessee was further asked to furnish the amount of estimated profit as per the percentage of completion method of accounting for Singapore project. Though the assessee submitted its reply to the query made by the first appellate authority, the CIT(A) was not convinced to the same and he proceeded to estimate the profit from the Singapore project by applying the rate 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 uls 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 IT AT in ITA No.1143/Hyd.l2006 dated 13.07.2007 in Madhava Constructions Pvt. Ltd. vs. CIT. In that, the ITAT had held that, though prescription for estimating contract income at 8% in section 44AD is applicable where the gross receipts of the contractor is up to Rs.40 lacs, the same percentage can be applied for estimating income for turnover exceeding Rs.40 lacs. The 75 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board CIT(A) was clearly wrong in applying the prescription meant for contractor to the appellant who is not a contractor. Further, this percentage is applied to gross receipts and not to expenditure incurred during the year. Further, it does not prevent an assessee from claiming that the actual profit from the business is lower than what is ascertained on the basis of estimating at 8% of the turnover. In Pyarelal Mittal vs. Assistant Commissioner of Income-tax, (2007) 291 ITR 214 (Gau.), it was held that income has to be deduced from the books of account and other documents furnished and there is no scope for any conjectures and surmises. Similarly, in M. Durai Raj vs. CIT, (1972) 83 ITR 484 (Ker) , the High Court has held that the A.O. was not correct in ignoring the book entries and estimating the income.
Though the CIT(A) was informed during the appeal proceeding that the appellant was following cash system of accounting for Singapore Project', still then he went on to apply Accounting Standard - 7 to determine income of the appellant on percentage completion method, which is not applicable to the appellant. The appellant engages contractors for construction of houses. It is not a contractor itself. It is selling flats on installments. Therefore, Accounting Standard - 7 (Revised 2002) prescribed by the Institute of Chartered Accountants of India is not applicable to it for recognition of income from its activity of selling flats after getting the same constructed by the contractors. In this regard, the appellant relies on the decision in Mls Unique Enterprises vs. Income Tax Officer, Mumbai, 010- (ID2)-GJX-0394-TBOM : 2010-(TIOL)-737- ITAT - Mum, wherein it has been held that the AS-7 cannot be applied to enterprises which are in the business of real estate developers. AS-7 is also not applicable to an assessee following cash system of accounting. It is applicable to those following mercantile system only. This was so held in DCITvs. Mls Stup Consultants Pvt. Ltd., 2011-(ID1)-GJX-
2653-TBOM: 2011-TIOL-642-ITAT - Mum. It is further submitted that, when the appellant had been maintaining regular books of accounts 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.
76ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board
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 section 44AD of the Act is applicable only in a case of contractors where the turnover is less than Rs. 40 lakhs. In the present case, neither the assessee is a contractor nor its receipts are less than Rs. 40 lakhs. Therefore, estimation of income by applying the rate of 8% that too on the expenditure by invoking the provisions of section 44AD is not justified. If the department is of the view that there is a profit element which has not been disclosed by the assessee, it has to be determined after properly verifying the books of account and other evidences and not merely on presumption and guess work. We, therefore, remit this issue to the file of the Assessing Officer who shall decide the same in accordance with law after affording reasonable opportunity of being heard to the assessee. We also direct the assessee to cooperate with the Assessing Officer by producing all its books of account and other relevant documents for verification. If the assessee will not produce its books of account the Assessing Officer will be at liberty to complete the 77 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board assessment to the best of his judgment. We may further add that while deciding this issue the Assessing Officer shall also consider allowability or otherwise of the assessee's claim of deduction u/s 80IB of the Act.
65. In the result, assessee's appeals being ITA No. 717/Hyd/12 for AY 2008-09 is partly allowed and ITA Nos. 1216, 1217 & 1218/H/12 for the assessment years 2004-05, 2005-06 and 2006- 07 are partly allowed for statistical purposes.
ITA NO. 715/Hyd/2011 for AY 2007-08 by the assessee
66. The facts are identical to the appeals of the assessee dealt earlier in this order. The learned Sr. Counsel Shri S. Ravi appearing for the assessee has filed a written submission submitting as under:
"Among various grounds that are raised in the Memorandum of Appeal one ground relates to the amendments made to the AP Housing Board Act, 1958 (hereinafter referred to as "the Act") retrospectively. This ground is common to all the years under consideration including the ones where another learned Counsel has appeared. This Memorandum is confined to the under mentioned ground, but all the grounds are pressed before the Hon'ble Tribunal.
Briefly stated, section 58 of the Act deals with Board's fund under Chapter VII captioned Finance, Accounts and Audit. Having regard to the extensive control that is exercised by 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 1 st April, 2012.
Under the Constitution of lndia, 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 78 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 the touchstone of Schedule VII to the Constitution of India, or different classes of people are discriminated while legislating thereby offending Article 14 of the Constitution of India, or the legislation is contrary to any of the Fundamental Rights guaranteed by the Constitution of India.
(ii). In the present case, there is not even a challenge to the Act as amended, and fullest and widest meaning should be given to section 58(7) of the Act.
By this amending provision it is made explicit that the surplus after incurring expenditure vests in the Government of Andhra Pradesh. The limited right of the Appellant Board is only to apply the income and that too as a trustee of the Government of Andhra Pradesh for incurring expenditure. There is a statutory divestment of the income at source.
The following judgments show that upon such legal right in a third party the income does not belong to the tax-payer at all:
• The Commissioner of Income-tax, Bombay City- II V. Shri Sitaldas Tirathdas AIR 1961 SC 728 • Motilal Chhadami Lal Jain V. Commissioner of Income Tax, Delhi (1991) 190 ITR 1 (SC) • Delhi Tourism & Transport Development Corporation Ltd. V. Deputy Commissioner of Income-tax (1996) 56 ITD 524 79 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board (Del) In view of the above, it is submitted that the income does not accrue or arise for the Appellant and it cannot be taxed in its hands."
67. The learned DR reiterated the submissions made in case of other appeals.
68. We have heard rival contentions and perused the relevant materials on record. In view of our detailed discussion and finding in ITA No. 717/Hyd/12(supra), we hold that the income earned by the assessee is not the income of state and as such the assessee is assessable under the income tax act.
69. So far as the disallowance of infrastructure expenditure of Rs. 784,32,00,000/- on account of payment made to AP State Housing Corporation is concerned, in view of our finding in Paragraph 56 we uphold the order of the revenue authorities and dismiss the ground raised by the assessee.
70. In respect of the addition of an amount of Rs. 3,31,168/-, perusal of the order of the CIT(A) it is to be seen that the assessee has not reconciled the difference by submitting any explanation. Hence, in that view of the matter, the addition made is sustained.
71. So far as the ground raised with regard to disallowance of claim 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 80 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board 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 revenue73. 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 assessee and added the amount by observing that the discrepancies pointed out were not reconciled by the assessee. In course of the proceeding before the first appellate authority, the assessee contended that the Board disbursed the amounts to various divisions or branches for expenditure in accordance with the indents received from the divisions which are termed as LOC. The amounts transferred to various divisions enable them to incur the expenditure. Thereafter, the accounts statements are sent to 81 ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board the Head office which reconciles the same under various heads. It was further submitted that the reconciled amounts can be verified from the bank balances. The CIT(A) called for a remand from the Assessing Officer on the submissions made by the assessee. The Assessing Officer in the remand report stated that the assessee could not produce details during the assessment proceedings to reconcile the difference. The CIT(A) after considering the submissions of the assessee, deleted the addition made by observing in the following manner:
"7.2 I have gone through the various submissions and the facts of the case and I find that the issue of letters of credit and transfer of funds is an ongoing process. At any point of time there will be some differences which require reconciliation. The AO has not identified specific expenditures which have been incurred over and above the authorization or which are not allowable as per the Income Tax Act. I also find that the LOCs are internal instruments by which accounting is done vis-à-vis the various branches. Even during the remand proceedings the AO has not given a specific finding on the expenses which are disallowable, I, therefore, find force in the argument of the appellant. Accordingly, the addition of Rs. 1,31,01,383/- is ordered to be deleted."
75. The learned Departmental Representative submitted before us that the assessee had explained that the amounts disbursed by the Head Office and the divisions have no other source and so the amounts spent had to be out of funds disbursed through LOC's and deposited in the bank account. The assessee's explanation was considered satisfactory because by applying this logic the divisions can never spend more than what is received. Whereas exactly that is the case before the Assessing Officer. Since the assessee could not reconcile properly the addition made by the Assessing Officer was justified.
82ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board
76. The learned AR on the other hand supported the order of the CIT(A).
77. We have heard rival submissions and perused the materials on record. On perusal of the order of the CIT(A), we find that the Assessing Officer has not been able to identify the specific expenses which are disallowable, hence, the CIT(A) deleted the addition made by the Assessing Officer. After going through the finding of the CIT(A), we do not find any reason to interfere with the same, as the Assessing Officer has failed to substantiate the basis for disallowance not only at the time of assessment proceeding but during the remand also. Accordingly, we uphold the order of the CIT(A) on this issue and dismiss the grounds raised by the department.
78. In the result, appeal of the revenue being ITA No. 1292/Hyd/2012 is dismissed.
79. To sum up, ITA No. 717/H/12 is partly allowed, ITA No. 715/H/11 and ITA Nos. 1216, 1217, & 1218/H/12 are partly allowed for statistical purposes and ITA No. 1292/H/12 is dismissed.
Order pronounced in the open court on 31 st May, 2013.
Sd/- Sd/-
(CHANDRA POOJARI) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, dated the 31 st May, 2013
kv
83
ITA Nos. 1216-18/H/12 & 717/H/12 & 715/H/11 AP Housing Board Copy forwarded to:
1. M/s Andhra Pradesh Housing Board, 5-4-400, Gruhakalpa, M.J. Road, Hyderabad - 500 001.
2. DCIT, Circle 5(1), Hyderabad
3. CIT (A)-IV, Hyderabad.
4. CIT concerned, Hyderabad.
5. The DR, ITAT, Hyderabad.