Income Tax Appellate Tribunal - Delhi
Mussoorie Dehradun Development ... vs Assessee on 2 December, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH "E" NEW DELHI)
BEFORE SHRI G.E. VEERABHADRAPPA, HON'BLE PRESIDENT
AND SHRI RAJPAL YADAV: HON'BLE JUDICIAL MEMBER
ITA No. 830/Del/2010 Assessment Year: 2006-07
ITA No. 853/Del/2011 Assessment Year: 2007-08
Mussoorie Dehradun Development Authority, Vs. Additional CIT,
12- Pitam Road, Range-2,
Dehradun. Dehradun.
(PAN: AAAAM4651Q)
(Appellant) (Respondent)
Appellant by: Shri K. Sampath, Adv.
Respondent by: Shri Raj Tandon, CIT(DR)
ORDER
PER RAJPAL YADAV: JUDICIAL MEMBER The present two appeals are directed at the instance of assessee against the orders of Learned CIT(Appeals) dated 02.12.2009 and 05.01.2011 passed for assessment years 2006-07 and 2007-08.
2. In assessment year 2006-07, the assessee has raised two grounds of appeals. In ground No.2, it has pleaded that Learned CIT(Appeals) has erred in holding that prior period adjustments were not deductible. The learned counsel for the assessee did not press this ground of appeal, hence, it is rejected.
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3. Ground No.1 in assessment year 2006-07, is verbatim same with solitary ground of appeal pleaded in the assessment year 2007-08. The same read as under:
"That on the facts and in the circumstances of the case and in law, the authorities below erred in holding that the claim of the appellant that there was diversion by overriding title in respect of infra-structure contribution is untenable".
4. The brief facts in assessment year 2006-07 are that assessee has filed its return of income on 23.1.2007 declaring nil income. This return was processed under sec. 143(1) on 14.2.2007. The case of the assessee was selected for scrutiny assessment and a notice under sec. 143(2) of the Act was issued on 26.3.2007 which was served upon the assessee on 29.3.2007. In response to the notice, Shri Saurav Gupta, CA appeared. Learned Assessing Officer had issued a questionnaire on 16th September 2008 along with notice under sec. 142(1) and 143(2) of the Act. On scrutiny of the accounts, Assessing Officer found that assessee had claimed to be maintaining an "infru-structure fund" to which a fixed portion of its receipts are credited and out of which infra-structure related expenses are incurred. The amount credited to this account in assessment year 2006-07 is of 3 Rs.11,63,38,117. The assessee had incurred expenses towards development at Rs.3,14,12,303. Assessing Officer has allowed this amount. With regard to the balance of Rs.8,49,25,814, it was submitted by the assessee that State Government has a overriding title on these receipts and, therefore, they do not form part of the total income of the assessee. learned Assessing Officer rejected the arguments of the assessee in respect of diversion of income by overriding title and made the addition of Rs.8,49,25,814. Assessing Officer further found that there is deficit of Rs.1,18,12,436 in the income and expenditure account. He allowed this deficit while computing the total income of the assessee. However, he did not allow the prior period expenses of Rs.61,11,000. In this way, income of the assessee in assessment year 2006-07 has been determined at Rs.7,92,24,378.
5. In assessment year 2007-08, the assessee has filed its return of income on 31.10.2007 declaring nil income. It was processed under sec. 143(1) of the Act. Later on, the case of the assessee was selected for scrutiny assessment and a notice under sec. 143(2) of the Act dated 22.9.2008 was issued and served upon the assessee. In this assessment year, assessee had received gross receipts in the alleged infra-structure fund at Rs.24,67,73,593. It has incurred a sum of Rs.4,39,71,667. The balance amounting to 4 Rs.20,28,01,927 was not included in the total income of the assessee by the assessee on the ground that as per the Office Memorandum issued by the UP Government on 15.1.1998, State Government has a overriding title and thus there is a diversion of this income because of this G.O., it vests in the State Government and not in the assessee. This argument of the assessee has been rejected by the Assessing Officer in this year also. He made the addition of Rs.20,28,01,927 in assessment year 2007-08.
6. Dissatisfied with the action of the Assessing Officer, assessee carried the matter in appeal before the learned CIT(Appeals). Learned First Appellate Authority had made a lucid enunciation of law and facts in assessment year 2007-08. The Learned CIT(Appeals) took into consideration the Office Memorandum issued by the UP Government as well as the provisions of UP Urban, Planning and Dev. Act, 1973 which brought the assessee into existence. After a detailed analysis, Learned First Appellate Authority has observed that there is no overriding title over the alleged infra- structure fund account by the State Government and this amount deserves to be included in the income of the assessee. Learned CIT(Appeals) also observed that assessee is a body corporate. It does not enjoyed the status of a 5 State Government which is exempt from taxation. Accordingly, the apapeals of the assessee have been rejected in both the assessment years.
7. Before us, learned counsel for the assessee reiterated his contentions as were raised before the Revenue Authorities Below. He emphasized that assessee collected the funds as per the Office Memorandum of the State Government. It has no control over that fund and the amount has to be incurred in accordance with the directions of the State Government. The Office Memorandum specifically provides that 80% of the amount from this account would be spent on capital expenditure and 20% can be spent on revenue account. On the strength of Hon'ble Karnataka High Court's decision in the case of CIT Vs. Karnataka Urban Infra-structure Dev. Reported in 284 ITR 583, he pointed out that the assessee is a mere nodal agency. It collected the funds as per the authorization of the State Government and incurred those funds as per the mandate of the State Government. Thus, the funds do not vest in the assessee and they cannot form part of the total income of the assessee. In order to appraise us the concept of diversion of income by overriding title, he relied upon the following decisions:
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1. CIT vs. Karnataka Urban Infra-structure Dev. & Finance Corpopration reported in 315 ITR 301;
2. Moti Lal Chhadami Lal Jain Vs. CIT reported in 190 ITR 1.
8. Learned DR on the other hand took us through the provisions of UP Planning and Urban Dev. Act, 1973 by virtue of which assessee came into existence. He referred section 20 which provides the management of finance and accounts of the assessee development authority. He also referred section 41 which contemplates the control of the State Government. He pointed out that the objects of the authority is to promote and secure the development of the developed area according to plan and for that purposes authority shall have the powers to acquire, hold, manage and dispose of land and other properties. The alleged Government Order of the Government of UP does not infuse any special control of the Government of UP, it only provides the collection of fees and how it is to be utilized for the fulfillment of the assessee objects. The assessee has been collecting fees on a large number of counts, namely, development fees, conversion of charges on account of land user, map sanctioned fee, compounding fee, supervision fee, income on housing scheme, car parking income and sample fees etc. 90% of the amounts collected on three counts, namely, development fees, fees collected 7 for giving certificates of change of land user and stamp duty is being transmitted to alleged infra-structure funds. The assessee is unable to point out distinction between other charges collected by it, vis-à-vis this amount as far as its right to collect them. The amounts were collected in its independent rights. They were part of the assessee's funds and there is no overriding title of the State Government over such collection. He took us through the order of the Learned CIT(Appeals) in assessment year 2007-08 and relied upon the orders of the Revenue Authorities Below. He also relied upon the following decisions for apprising us the meaning of concept, diversion of income by overriding title viz. viz application of income. According to him, it is the case of application of income.
1. CIT v Mehsana Dist. Co-op Milk Producers Union 307 ITR 83 (GUJ);
2. Colaba Central Co-op Consumers Stores V CIT 229 ITR 209 (BOM);
3. CIT v Jodhpur Co-Operative Marketing Society 275 ITR 372 (Raj.);
4. Associated Power Co. Ltd. Vs. CIT 218 ITR 195 (S.C); &
5. CIT v Sunil J Kinariwala 259 ITR 10 (S.C).
9. We have duly considered the rival contentions and gone through the record carefully. Before we embark upon an inquiry on the interpretation of 8 alleged office memorandum dated 15.1.1998 issued by the UP Government and its impact on the taxability of the assessee, we would like to take cognizance of few clauses of the UP Urban, Planning and Dev. Act, 1973, which has a direct bearing on the controversy, and which will help us to understand the establishments of the assessee. Thus, section 4 which provides the establishment of a development authority, section 7 which provides objects of the authority, section 20 which provides funds of authority and section 41 which provides control of the State Government are relevant sections, they read as under:
4 The Development Authority-
(1) The State Government may, by notification in the Gazette, constitute for the purposes of this Act, an Authority to be called the Development Authority for any development area.
(2) The Authority shall be a body corporate, by the name given to it in the said notification, having perpetual succession and a common seal with power to acquire, hold and dispose of property, both movable and immovable and to contract and shall by the said name sue and be sued.
(3) The Authority in respect of a development area which includes whole or any part of a city as defined in the [Uttar Pradesh Municipal Corporation Act. 1959), shall consist of the following members namely-
a Chairman to be appointed by the State Government:
a Vice-Chairman to be appointed by the State Government:
the Secretary to the State Government, in charge of the Department in which, for the time being, the business relating, to the Development Authorities is transferred, ex-officio:) the Secretary to the State Government in charge Of the Department of Finance, ex-officio.
the Chief Town and Country Planner, Uttar Pradesh ex-officio:9
the Managing Director of the Jal Nigam established under the Uttar Pradesh Water Supply and Sewerage Act, 1975. ex-officio) the Mukhya Nagar Adhikari, ex-officio:
the District Magistrate of every district any part of W Included in the development area ex-offtcio:
four members to be elected by Sabhasads of the Nag Mahapalika for the said city from amongst themselves, Provided that any such member shall cease to hold office as such as soon as he ceases to be Sabhasad of the (Municipal Corporation):
(j) such other members not exceeding three as may be nominated by the State Government.
(4) The appointment t of the Vice-Chairman shall be whole time.
(5) The Vice-Chairman shall be entitled to receive from the funds of the Authority such salaries and allowance-and be governed by such conditions of service as may be determined by general or special order of the State Government in this behalf.
(6) A member referred to in Clause (c) Clause (d) Clause (e) or Clause (f) of Sub-section (3) may instead of attending a meeting of the Authority himself depute an officer, not below the rank of Deputy secretary in the department, in the case of a member referred to In Clause (c) or Clause (d) and below the rank of Town Planner in the case of a member referred to in Clause (e) and not below the rank of Superintending Engineer in the case of a member referred to in clause (f) to attend the meeting. The officer so deputed shall have the right to take part in the proceedings of the meeting and shall also have the right to vote.
(7) The Authority in respect of a development area other than that mentioned in Sub-Section (3) shall consist of a Chairman, a Vice Chairman and not less than five and not more than eleven such other members, including at least one member from Municipal Boards and Notified Area Committees having each jurisiction in the development area, who shall hold office for such period and on such terms and conditions as may be determined by general or special order of the State Government I this behalf.
Provided that the Vice-Chairman or a member other than an ex-officio member of the Authority may at any time by writing under his hand addressed to the State Government resign his office and on such resignation being accepted shall be deemed to have vacated his office. (8) No act or proceedings of the Authority shall be invalid by reason of the existence of any vacancy in, or defect in the constitution of, the Authority. 10
x x x x x x x x x x x 7. Objects of the Authority.-
The objects of the Authority shall be promote and secure the development of the development area according to plan and for that purpose the Authority shall have the Power to acquire, hold, manage and dispose of land and other property, to carry out building, engineering, mining and other operations, to execute works in connection with the supply of water and electricity to dispose of sewage and to provide and maintain other services and amenities and generally to do anything necessary or expedient for purposes of such development and for purposes incidental thereto:
Provided that save as provided In this Act nothing contained in this Act shall be construed as authorising the disregard by the Authority of any law for the time being in force.
x x x x x x x x x 20. Fund of the Authority.- (1) The Authority shall have an maintain its own fund to which shall be credited- all moneys received by the Authority from the State Government by way of grants, loans, advances or otherwise:
(b) all moneys borrowed b the Authority from source y the State Government by way of loans or debentures;
all 1[fees, tolls and charges] received by the Authority under this Act:
all moneys received by the Authority from the disposal of lands, buildings and other properties, movable and immovable and 11 all moneys received by the Authority by way of rents and profits or in any other manner or from any other source, (2) The fund shall be applied towards meeting the expenses incurred by Authority in the administration of this Act and for no other purpose;
(3) Subject to any directions of the State Government, the Authority may keep in current account of any Scheduled Bank such sum of money out of its fund as it may think necessary for meeting its expected currents requirement and invest any surplus money in such manner as it thinks fit.
(4) The State Government may, after due appropriation made by Legislature by law in that behalf, make such grants, advances and loans to the Authority as that Government may deem necessary for the performance of the functions of the Authority under this Act and all grants, loans and advances made shall be on such terms and conditions as the State Government may determine.
(5) The Authority may borrow money by way of loans or, debentures from such sources (other than the State Government) and on such terms and conditions as may be approved by the State Government.
(6) The Authority shall maintain a sinking fund for the repayment of moneys borrowed under Sub-section (5) and shall pay every year into the sinking fund such sum as may be sufficient for repayment within the period fixed of all moneys so borrowed.
The sinking fund or any part thereof shall be applied in or towards, the discharge of the loan for which such fund was created, and until such loan is wholly discharged it shall not be applied for any other purpose. Budget of the Authority:- 1) The Authority shall prepare in such and at such time every year as the State Government may specify a budget in respect of the financial year next ensuing, showing the estimated receipts and expenditure of the Authority.
(22. Accounts and Audit:- 1).-The Authority shall maintain proper accounts and other relevant records and prepare an annual statement of accounts including the balance sheet in such form as the State Government may specify.
(2) The accounts of the Authority shall be subject to audit annually by the Examiner, Local Fund Accounts:
Provided that in place of or in addition to the Examiner, Local Fund Accounts, the State Government may entrust and audit to the Accountant General, Uttar Pradesh or Comptroller and Auditor General of India or to any other Auditor on such terms and conditions, in such manner, for such period and at such times as may be agreed upon between him and the State Government.12
The rights, authority and privileges of any person conducting audit under Sub-Section (2) shall -
(i)in the case of Examiner, Local Fund Accounts, be the same as he has in connection with the audit of the accounts of local authority;
(ii) in the case of the Accountant General, Uttar Pradesh or as the case may be, the Comptroller and Auditor General of India, be the same as he has in connection with the audit of Government accounts, and
(iii)in the case of any other auditor, be as prescribed;and, in particular, he shall have the right to demand production of books, accounts, connected vouchers, papers and other documents and to inspect the office of the Authority.
The accounts of the Authority, as certified by the Auditor or any person appointed by him in that behalf, together with audit report thereon shall be forwarded to the State Government annually or at such times as may be directed by it. The State Government may issue such directions to the Authority as it may deem fit and the Authority shall be bound to comply with such directions.
(5) Any expenditure, incurred by the Auditor in connection with the audit shall be payable by the Authority to the auditor).
x x x x x x x x x x
41. Control by State Government.-
(1) The [Authority),the Chairman or the (Vice-Chairman] shall carry out such directions as may be issued to it from time to time by the State Government for the efficient administration of this Act.
(2) If in, or in connection with, the exercise of its powers and discharge of its functions by the [Authority, the Chairman or the Vice-Chairman) under this Act any dispute arises between the authority, the Chairman or the Vice- Chairman) and the State Government the decision of the State Government on such dispute shall be final.
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(3) The State Government may, at any time, either on its own motion or on application made to it in this behalf, call for the records of any case disposed of or order passed by the [Authority or the Chairman) for the purpose of satisfying itself as to the legalitv or propriety of any order passed or direction issued and may pass such order or issue such direction in relation thereto as it may think fit:
Provided that the State Government shall not pass an order prejudicial to any person without affording such person a reasonable opportunity of being heard.
(4) Every order of the State Government made in exercise of the powers conferred by this Act shall be final and shall not be called ii question In any court.]
10. On perusal of this Act and the prefatory note, it would reveal that State Government of Uttar Pradesh had felt the inadequacy of existing local body and other authorities to tackle the requirement of problems of town planning and urban development needs. According to the Government, the existing local body and other authorities inspite of their best efforts have not been able to cope with these problems to the desired extent, therefore, the necessity was felt to create instititons like the assessee which are at par with Delhi Development Authority. In this background, assessee authority has came into existence. From perusal of sub-section (2) of section 4 extracted above, it would reveal that assessee authority is a body corporate having perpetual succession and a common seal with power to acquire, hold and disposed off property, both moveable and immoveable and to contract and 14 sell by the said name sue and sued. Under the UP Urban Development Act, 1973, the government had made the provisions for its source of income and, therefore, the assessee had been given powers to collect certain fees and charges in the process of its functioning, as discernible from perusal of section 20 of the Act, the State Government has exercised some control over the assessee under sec. 41 of the Act.
11. From perusal of the record, it reveals that assessee has source of income from more than 18 counts, out of that certain incomes are of miscellaneous income, rental income, interest income on FDRs. Apart from these general incomes, it has been authorized to collect fees and charges. Learned CIT(Appeals) in assessment year 2007-08, noticed all these details in a tabular form on page 3 of the impugned order. From perusal of this table, it revealed that all the incomes are retained by the assessee in its main account except the charges/fees collected on four counts. These are development fees, conversion charges of land user, stamped duty and fees on regularization of colonies. The 90% of the amounts collected under these heads were retained in the alleged infra-structure fund account. According to the assessee, the government had issued a Memorandum on 15.1.1998 and by virtue of this Office Memorandum, there is diversion of income at source 15 which relates to this infra-structural fund account and, therefore, the amounts transmitted in this account do not belong to the assessee. Before adverting ourselves to the alleged office memorandum and how it to be construed, we would like to refer the decisions relied upon by the parties, in order to understand the concept of diversion of income on account of overriding title..
12. The first decision referred by the Learned DR is of Hon'ble Gujarat High Court in the case of CIT vs. Mehsana District Co-operative Milk Producer (supra). The facts in this decision are that assessee is a co-operative society. According to it, as per sub-section (2) of sec. 67 of the Co-operative Societies Act, 1962. It was required to maintain a reserve fund by which at least 1/4th of the net profit of the society are required to be carried to such reserve fund every year. According to the assessee, the reserve fund is not a free fund and hence before the profits are transferred to the reserve fund at the appropriate rate, there is a diversion at source by virtue of section 67(2) of the Co-operative Societies Act, which operate as a overriding title. Alternatively, it was claimed that transfer of these amounts to the reserve fund be allowed as a business expenditure. Hon'ble Gujarat High Court has gone through section 67(2) of the Co-operative Societies Act and observed 16 that this section provides that reserve fund may be used in the business of the society. If it is not used for the purpose of the business then the question about investing reserve fund in the specified category of investment and thereafter utilizing the same for the object of specified fund by the State Government would arose. Hon'ble Court has held that sub-section (2) of sec. 67 authorizes the assessee to use the fund for its business purposes and only in the events of its non-user by the assessee for the business, the question of investment in some specified reserve fund or its user for some other purpose at the instance of the government would arise. Thus, there cannot be a case where the income would not be received by the assessee. Hon'ble Court has held that there is no diversion of income by overriding title.
13. The next judgment referred by the Learned DR is if Hon'ble Mumbai High Court in the case of Colaba Central Co-operative Consumer Stores. In this case, the assessee is a cooperative society registered under the Maharashtra Societies Act, 1960. Under the scheme of financial assistance to the consumer co-operative under the centrally sponsored scheme, the State Government contributed to the share capital of the assessee co- operative society a sum of Rs.21 lacs. An agreement was entered into between the State Government and the assessee society for that purpose. 17 According to the agreement, the share capital contribution of the state was to continue for a period of 10 years unless extended by the Registrar. For the purpose of enabling the co-operative societies, to repay the government shares capital contribution within the specified period, the co-operative societies were required to set aside necessary amount for a fund known as the "Government Share Capital Redemption Fund" before arriving at their profits for the purposes of appropriation under sec. 65(2) of the Maharashtra Co-op Societies Act. The amount standing to the credit of the Government Shares Capital Redemption Fund had to be deposited by the assessee as fixed deposits with the Central Finance Agency or invested in government loan and securities in consultation with registering authorities as contemplated under sec. 70 of the Maharashtra Co-op Societies Act, 1960. The assessee society was not entitled to use the fund standing to the credit of the above account in its business of wholesale stores. The assessee society in the previous year relevant to assessment year 1975-76, set apart a Rs.2,10,000 for repayment of the government shares capital contribution and transferred the amount to the government shares capital redemption fund account. The assessee claimed the deduction of the above amount in computing its business income. It claimed that this income cannot form part of total income of the assessee because of diversion of income at source. The 18 claim of the assessee was rejected by the Assessing Officer and upheld up to the ITAT. Hon'ble Mumbai High Court has considered the judgment of the Hon'ble Supreme Court in the case of Associated Power Company Ltd Vs. CIT reported in 218 ITR 195 and held that the amount appropriated to the government shares capital redemption fund belonged to the assessee. It never got diverted to anybody. According to the Hon'ble High Court, the mandate of section 70 of the Maharashtra Co-op Societies Act directing the assessee to set aside a part of its profit provided under the Act and crediting it to the Government Shares Capital Redemption Fund and restricting its user in the business of the wholesale stores of the assessee would not make any difference because the amount was merely kept apart for being used by the assessee for redeeming its shares capital i.e. buying back its own shares. Thus, the amount standing to the credit of the fund was always remained with the assessee and there is no diversion of income by overriding title. Hon'ble High Court has also considered the judgment of the Hon'ble Supreme Court in the case of CIT vs. Sheetal Das Tirath Das reported in 41 ITR 367 and Ors.
14. The next judgment relied upon by the Learned DR is of Hon'ble Rajasthan High Court in the case of CIT vs. Jodhpur Co-op Marketing 19 Society (supra). In this judgment also, the question fallen for consideration of the Hon'ble High Court was whether the amount of net profit transferred to reserve fund of the society under Rule 68 of the Rajasthan Co-op Societies Rule 1966 can be termed as expenses incurred wholly and exclusively for the purpose of business and is allowable deduction. The Hon'ble Court has found that as per Rajasthan Co-op Societies Act, 1965, assessee was to create a reserve fund whereby 25% of its net profit is to be credited to the said reserve fund. The assessee claimed that the said amount does not remain under the control of the assessee and it goes under the control of Registrar, Rajasthan Co-op Societies, therefore, it does not form part of the assessee's real income and for that reserve it was sought to be excluded from the computation of the total income. Alternatively, it claimed deduction under sec. 37 of the IT Act on account of business expenditure. Hon'ble Court has examined the provisions of Rajasthan Co-op Societies Act, namely, sections 62, 63 and Rule 68 and thereafter held that the reserve fund did not go to any other party then the assessee itself. The concept of diversion of income by overriding title is that income reaches to the party other than the assessee by reasons of a pre-existing title to it. As a matter of fact on interpretation of Rejasthan Co-op Societies Act, 1965, Hon'ble Court 20 had arrived at a conclusion that there is no pre-existing title to the alleged fund by any other person then the assessee.
15. The next judgment relied upon by the Learned DR is of Hon'ble Supreme Court in the case of Associated Power Co. Ltd. (supra). The facts of this case are that assessee is a company engaged in the business of generation of electricity and distribution thereof to consumers. It is governed by the Electricity Supply Act, 1948. By virtue of provisions of Electricity Supply Act and the schedules thereunder, the assessee company was required to maintain a reserve account where it credited a sum of Rs.46,460 out of its revenue's to such contingency reserve account. It claimed the deduction of this amount which was rejected by the Assessing Officer. The learned Appellate Assistant Commissioner allowed the claim of assessee relying upon the decision of Hon'ble Kerala High Court rendered in the case of Cochin State Power & Allied Corporation Vs. CIT reported in 93 ITR
582. The ITAT found a diversion of opinion amongst various Hon'ble High Courts, therefore, made a direct reference to the Hon'ble Supreme Court under sec 257 of the Income-tax Act, 1961. Hon'ble Supreme Court while taking note of clauses (iii)(iv) and (v) of 6th Schedule to the Electricity Act observed that assessee was required to maintain a contingency reserve, the 21 contingency reserve shall not be drawn upon during the currency of license except to meet such charges as the State Government may approve as being:
(a) expenses or loss of profits arising out of accidents, strikes or circumstances which the management could not have prevented;
(b) expenses on replacement or removal of plant or works other than expenses requisite for normal maintenance or renewal;
(c) compensation payable under any law for the time being in force and for which no other provision is made; (2) On the purchase of the undertaking, the contingencies reserve, after the deduction of the amounts drawn under sub-
paragraph (1) shall be handed over to the purchaser and maintained as such contingencies reserve:
"Provided that where the undertaking is purchased by the Board or State Government, the amount of the Reserve computed as above shall, after further deduction of the amount of compensation, if any, payable to the employees of the outgoing licensee under any law for the time being in force, be handed over to the Board or the State Government, as the case may be."
16. The Hon'ble Court while explaining the clause (v) of 6th Schedule extracted supra, had observed that these are to meet expenses or recoup loss of profit arising out of accidents, strike or other circumstances which the 22 electricity company could not have prevented; to meet expenses on replacement or renewal of plant or works; and for payment of compensation required by law for which no other provisions had been made. These are all expenses which the electricity company had to incur. The reservation is made so that the money is always available for meeting these expenses and supply of electricity is not interrupted. For the same reasons, payment out of the contingency reserve can be made only with the State Government's approval. According to the Hon'ble Court, money in the contingency reserve belongs to the electricity company only. The Doctrine of diversion of income by diversion of an overriding title is quite in-opposite. The doctrine applies when by reason of an overriding title or obligation, income is diverted and never reaches the person in whose hands it is sought to be assessed. The contingency reserve in that case has to be credited from the existing reserve or from the revenues of the undertaking, the money put into the contingency reserve reaches electricity company and are not diverted away from it. The Hon'ble Court has rejected the contention of the assessee for excluding the amount credited in the contingency reserve from the total income.
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17. The next judgment referred by the Learned DR is again of the Hon'ble Supreme Court in the case of CIT vs. Sunil J. Kinariwala (supra). In this case, the assessee is a partner in the partnership firm known as "Kinariwala R.J. K. Industries, Ahmedabad. He was having a 10% shares therein. On December 27, 1973, he created a trust namely "Sunil Jeevan Lal Kinariwala Trust". By a deed of settlement assigning 50% out of his 10% right title and interest (excluding capital as a partner in the firm and a sum of Rs.5,000 out of his capital in the firm in favour of the said trust. There are three beneficiaries of the trust, namely, assessee's brother's wife, assessee's niece and the assessee's mother. In assessment year 1974-75, he claimed that as 50% of the income attributable to his shares from the firm stood transferred to the trust resulting in diversion of income at source, the same could not be included in his total income for the purpose of his assessment. The ITO rejected the claim on the ground that it was a case of application of income and not diversion of income at source; he also found that section 60 of the Act was attracted as only income without a transfer of assets was settled. The revenue took the matter in appeal before the Learned First Appellate Authority who allowed the appeal of the assessee and the ITAT reversed the order of the AAC. Hon'ble High Court relying on the judgement of Hon'ble Supreme Court in the case of CIT vs. Bhagyalaxmi & Company reported in 24 55 ITR 660 and Murlidhar Himat Singka Vs. CIT reported in 62 ITR 323 held that on assignment of 50% shares of the assessee in the firm, it became the income of the trust by overriding title and it could not be added in the total income of the assessee. Hon'ble Supreme Court reversed the order of the Hon'ble High Court and restored that of the Assessing Officer. Hon'ble Court has observed that there is a clear distinction between a case where a partner of a firm assigns his shares in favour of a third person and a case where a partner constitutes a sub-partnership with his shares in the main partnership. The observation of the Hon'ble Supreme Court on pages 17 & 18 are worth to note in this connection:
It is apt to notice that there is a clear distinction between a case where a partner of a firm assigns his share in favour of a third person and a case where a partner constitutes a sub-partnership with his share in the main partnership.
Whereas in the former case, in view of section 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership except, of course, to receive that part of the profits of the firm referable to the assignment and to the assets in the event of dissolution of the firm, but in the latter case, the sub-partnership acquires a special interest in the main partnership. The case on hand cannot be treated as one of a sub-partnership, though in view of section 29(1) of the Indian Partnership Act, the Trust, as an assignee, becomes entitled to receive the assigned share in the profits from the 25 firm not as a sub-partner because no sub-partnership came into existence but as an assignee of the share of income of the assigner- partner.
In this view of the matter, it is unnecessary to consider the alternative contention based on section 60 of the Act.
For the aforementioned reasons, we are of the view that the order under challenge cannot be sustained. It is, accordingly, set aside. Consequently, the share of the income of the assessee assigned in favour of the Trust has to be included in the total income of the assessee. The questions are, accordingly, answered in favour of the Revenue and against the assessee.
18. The learned counsel for the assessee on the other hand mainly relied upon by the decision of Hon'ble Karnataka High Court in the case of CIT vs. Karnataka Urban, Infra-structure Development & Finance Corporation reported in 284 ITR 582 which has been followed by the Hon'ble Karnataka High Court in subsequent assessment year of this very assessee reported in 315 ITR 301. The facts of this case are that respondent Karnataka Urban, Infra-structure Development Corporation is a fully Karnataka State Government owned company. It was appointed as a nodal agency for the implementation of the Mega City Scheme worked out by the planning commission of the Ministry of Urban & Employment for Development of Urban Infra-structures to Bangalore City. The Central Government has 26 provided the money to the assessee for implementing the said scheme. The money received from the Government of India was parked by the assessee in various bank deposits during the unutilized period. The interest earned during the year on these deposits was transferred to the Mega City Scheme account directly with an appropriate disclosure in the note to the accounts.
The assessee has been involved in other projects of developed of infra- structure apart from the activity as a nodal agency for the implementation of the Mega City Scheme undertaken by the Government of India. The interest earned and received from the Central and State Governments and deposited in various banks was treated as an income of the assessee. The issue before the Hon'ble Court was about the taxability of such interest income in the hands of the assessee. Hon'ble Court has observed that interest income was not taxable in the hands of the assessee. The learned counsel for the assessee pointed out at the time of hearing that this case is fully applicable on the facts of the present case.
19. On an analysis of the judgments, we find that the Hon'ble Supreme Court in the case of Sunil J. Kinariwala(supra) has quoted a paragraph from the earlier judgment of the Hon'ble Supreme Court in the case of CIT vs. Sheetal Das Tirath Das reported in 41 ITR 367 wherein Hon'ble Supreme Court has propounded that true tests of diversion of income on account of 27 overriding title is whether the amount sought to be deducted, in fact, never reached to the assessee as his income. No doubt, there are obligations in every case but the nature of obligation would be a decisive facts. According to the Hon'ble Court, there is a difference between amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be part of the income of the assessee. If the obligation income is diverted before it reaches the assessee, it cannot be claimed as deduction but where the income is applied to discharge an obligation after such income reaches to the assessee then it can be claimed as a deduction. In other words, the mere fact that the assessee has an obligation to apply a certain amounts out of its income for a particular purpose cannot make it a case of diversion of income by overriding title.
20. Let us consider the Office Memorandum dated 15.1.1998 and how it provides a diversion of income on account of overriding title i.e. how the income would vest in the State Government. This Memorandum reads as under:
Uttar Pradesh Government Residential Department-l No. : 152/9/Aa-I-1998 Lucknow dated January 15, 1998 Office Memorandum Development Authorities for the development of infrastructure in the cities and for the development of the income and its sources and their partly disposal as according it has been decided and as per the order of the Governor these directions have been given.28
1. That the income of the Development Authorities described in Clause 5 will not be deposited in ordinary pool but it will be deposited in separate account which will be exclusively for residential infrastructure.
2. That this account will be under the Development Authorities but the amount deposited in this account will be spent by a committee under the Chairman-ship of commissioner and their directions. This committee will have members or their representatives of District Magistrate, Vice Chairman, Development Authorities, Chief City Office, Municipal Corporation, Executive Officer, Municipal Parishad and Water Corporation.
3. That the expenditure on the said account will be under the directions and as per the Government orders which is passed by time to time.
4. That minimum 80% of the amount spent from this account shall be on account of capital expenditure and maximum 20% shall be on account of revenue expenditure.
5. The following amounts will be deposited in the said account.
a)The change of Low standard land use to the high standard land use, the 90 % of conversion charges and rest 10 % will be of development authority.
b)For the planning and development of the land outside the city area and for the approval of the sanctioned map the 90% of development charges and strengthening charges and rest 10 % will be of development authorities.
c)That unauthorized colonies of the city which is under the residential area as per master plan, the development charges for the sanctioned map and the amount taken under the said scheme if minimum 80% of the land deposit the development charges then only that particular area will be developed and that the every work done under the said development area and the income accrued from the development charges, the 90% and the rest 10% part for the Development Authority.
d)The amount received from the compounding fees from the unauthorized construction the 50 % and rest 50 % part for the development authority.
e)The income from the properties which have been freehold from the development authorities 90 % and rest 10 % part for the development authority.
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f) That the land plots sold by development authorities and there will be 10% of surcharge on the value of the said plot the 100% of the said income.
g)That the income received from the registration of the sale deeds the 90% and rest 10% part of development authorities.
By order (Atul Kumar Gupta) Secretary
21. On a conjoint reading of this Memorandum vis-à-vis the provisions of UP Urban, Planning & Development Act, 1973, it would reveal that an authority was given to the assessee for collecting certain fees and charges in the process of its functioning. If the State Government had collected the fees and charges and then given the same to the assessee for doing its work, it would be the assessee's income. Thus, it does not make any material difference to the situation if the government has allowed the assessee to collect fees and charges directly instead of infusing the funds by it in the assessee. According to section 20, extracted supra, the assessee could retain the funds collected by it under this Act. Thus, its powers to collect the funds are already in existence under sec. 20 of the Act. It has to credit the fees and charges collected by it to its own funds and which is to be applied towards fulfillment of assessee's object.
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22. The nature and scope of the so called 'infra-structure fund' has to be understood in the light of statutory contexts available in section 20 of the UP Urban, Planning and Development Act, 1973. As observed earlier, section 20 contemplates that all the fees tolls and charges have to be credited by the assessee to its own funds and to be applied towards meeting the expenses incurred by the authority in the administration of the Act and not other purposes. If we go through the office memorandum then it would reveal that paragraph 1, contemplates that the income of the development charges described in clause 5 of the Memorandum will not be deposited in ordinary pool but it will be deposited in a separate account which will be exclusively for residential infra-structure. This clause shows that firstly the fees and charges collected by the assessee in clause 5 of the Memorandum would be income of the development authority but it will not be deposited in ordinary pool rather it will be earmarked to ensure the development of residential infra-structure. The object of incurrence is the application of income and not diversion of income at the source. No distinction is provided in the receipts collected by the assessee in the shape of fees and charges on 18 counts noticed by the Learned CIT(Appeals) on page 3 of the order passed in assessment year 2007-08. The Memorandum only provides a regulatory mechanism for incurring the expenses and carving out a preferential area of 31 the assessee's objects. Thus, Learned First Appellate Authority in assessment year 2007-08 has rightly observed that arguments of the assessee demonstrating the 'infra-structure funds' as a separate entity, independent of assessee is a fiction. There is nothing in the memorandum to this effect. It only talks of a designated bank account in which a fixed portion of assessee's receipts would be deposited and out of which expenses would be incurred with the approval of an Empowered Committee. All these receipts also form part of the normal receipts of the assessee. We further find that expenses incurred by the assessee out of this fund has already been allowed by the Assessing Officer. Learned CIT(Appeals) further took cognizance of the Empowered Committee referred in the Memorandum as well as in the Act and observed that such committee is not alien to the assessee. The role of the committee is of regulatory in nature which only acts in furtherance of fulfillment of assessee's objects. Learned First Appellate Authority also observed that at the time of hearing a query was raised to the assessee regarding demonstration of material exhibiting the establishment of independent identity of so called infra-structure funds at its own. The inquiry on this angle revealed the there was no such entity called the infra-structure funds. It is just a name given to the earmarked bank account. There are no separate account or audit. The Empowered Committee is concerned with 32 only giving approval for specific items of work to be done by the assessee and not administration of the funds. The funds form part of the assessee's balance sheet and was audited in the course of audit of its own account. This also indicates that there is nothing called 'infra-structure funds'. It is just a bank account which is designated for crediting the specific part of the assessee's receipt. The important factor is that alleged fund has to be used for the fulfillment of assessee's objects.
23. As far as the decision relied upon by the learned counsel for the assessee is concerned, we find that Hon'ble Karnataka High Court has specifically observed that assessee was appointed as a nodal agency for implementing certain central and State Governments objects. Hon'ble Court further observed that it is not the case of the revenue that the assessee was carrying on any business or activities of its own while implementing the scheme in question. Thus, the decision of Hon'ble Karnataka High Court cannot help the assessee. The assessee is not to be regarded as a State. It is not registered under sec. 12A of the Act and claimed the benefit of exemption under sections 11 and 12 of the Act. There is no distinction between the other receipts collected by the assessee and taken to the main account which if remained unutilized would be amenable to tax. The alleged 33 memorandum does not create any overriding title of the State Government at the source of collection of the alleged fees/charges. It only regulates how the funds so collected by the assessee is to be incurred for the fulfillment of its objects and which sector has to be given preference. Thus, it only suggests application of income. Considering all these factors and the detailed reasoning given by the Learned First Appellate Authority particularly in assessment year 2007-08, we do not find any merit in these appeals, they are rejected.
12. In the result, both the appeals of the assessee are rejected.
Decision pronounced in the open court on 02.12.2011
Sd/- Sd/-
( G.E. VEERABHADRAPPA) ( RAJPAL YADAV )
PRESIDENT JUDICIAL MEMBER
Dated: 02 /12/2011
Mohan Lal
Copy forwarded to:
1) Appellant
2) Respondent
3) CIT
4) CIT(Appeals)
5) DR:ITAT
ASSISTANT REGISTRAR
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