Whether when municipal authorities collect licence fees for putting up hoardings either on municipal land or private land, such receipt is to be treated as business income as per provisions of Sec 28 - NO: HC

THE issue before the Bench is - Whether when municipal authorities collect licence fees for putting up hoardings either on municipal land or private land, such receipt is to be treated as business income as per provisions of Sec 28. And the answer goes against the Revenue.

Facts of the case

The assessee is a Municipal Corporation. For the assessment year 2005-06, the return was not filed by the Corporation. A notice under section 142(1) of the Incometax Act, 1961 for filing the

return was issued, which direction also the assessee did not comply. Eventually, after one round of remand, the proceedings were placed before the Assessing Officer, in which he noted that the assessee claimed exemption of various receipts basing reliance on provisions of section 10(20) of the Act. Such amounts were received for letting out the community halls, market land, rent, planetarium and stadium rent. A sum of Rs. 76.42 lakh was shown as income from hoardings. The assessee stated that the total receipt from such source was Rs. 119.32 lakh and claimed depreciation of Rs. 16.13 lakh and other expenses of Rs. 106.45 lakh. The assessee, thus, claimed net loss of Rs. 3.26 lakh. The Assessing Officer allowed 75% of the gross receipts of Rs. 119.32 lakh as expenditure and taxed the rest of Rs. 29.83 lakh as income of the assessee.

On appeal, the he CIT (Appeals) held that the income such as rental income of community hall, market building, planetarium, stadium and market land, etc. were income from services provided by the assessee. He, therefore, held that such incomes were exempt under section 10(20) of the Act. As regards the income from hoardings of Rs. 76.22 lakh, the CIT (Appeals) followed the earlier order of the Tribunal and held that the same was in the nature of income from other sources and, therefore, exempt under section 10(20) of the Act.

The Revenue carried the matter in appeal, particularly, questioning the exemption granted by the CIT (Appeals) to the income of the municipality from hoardings. Before the Tribunal, the assessee contended that it was a local authority. As per section 10(20) of the Act the income from other sources of such local authority would be exempt. It was contended that the income from the hoardings cannot be treated as a business income of the assessee. The Corporation merely charges the licence fees from the licensees who utilised the space for putting up hoardings. The advertisers approached the licensee and not the Corporation for putting up the advertisements. The Corporation only provided its space on payment of licence fees to the licence holders. Such fees formed only a small part of assets of the Corporation. The Corporation did not carry on such activities on regular basis with an intention to carry on business of that nature. It was pointed out that such income was less than 1% of the total revenue of the Corporation.

The Tribunal in the impugned judgment was prima facie convinced with the argument of the Revenue that such income from the hoardings is liable to be assessed as business income under section 28 of the Act and would not be exempt under section 10(20) of the Act. However, the Tribunal felt bound by the earlier decision of the Coordinate Bench in the case of DCIT v. Jamnagar Municipal Corporation in I.T.A. Nos. 372 and 373/Rjt/2009, in which the Tribunal held in favour of the assessee.

On Appeal before the HC the Revenue's Counsel submitted that the income generated from the hoardings cannot be stated to be income from other sources and must be categorised as business income of the assessee therefore, was not exempt u/s 10(20).

Having heard the parties, the HC held that,

++ Section 10(20) of the Act provides that in computing the total income of the previous year of any person, any income falling within any of the following clauses shall not be included :

"(20) the income of a local authority which is chargeable under the head "Income from house property", "Capital gains" or "income from other sources" or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service [(not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area.]"

++ from the said provision, it can be seen that the income of the local authority, which is chargeable under the head "Income from house property", "Capital gains" or "income from other sources" or from a trade or business carried on by it, which accrues or arises from the supply of a commodity or service within its local jurisdictional area or water or from the supply of water or electricity within or outside its own jurisdictional area would not be included in the total income. The fact that the respondent Corporation is a local authority is not in dispute. The question therefore is whether the income in question can be stated to be "income from other sources" and therefore by virtue of section 10(20) of the Act whether such income would be excluded from the total income of the assessee. On the other hand, if the Revenue is correct in contending that the income from hoardings can be stated to be business income of the assessee, the business carried on by the Municipal Corporation which accrues or arises from the supply of commodity or service within its local jurisdictional area or from the supply of water or electricity within or outside its local jurisdictional area, such exemption may not be available;

++ in the present case, however, we have no hesitation in approving the decision in the case of Jamnagar Municipal Corporation that such income cannot be stated to be business income and must be held to be "income from other sources";

++ Section 28 of the Act pertains to profits and gains of business or profession and provides inter alia that the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year, was chargeable to incometax under the head "Profits and gains of business or profession". The moot question is, can the activity of granting licences and collecting licence fees for permitting hoardings in the Municipal property and collecting licence fees from advertisers putting up hoardings in private property, could be stated to be the business of the assessee. The Bombay Provincial Municipal Corporation Act, 1949, now renamed as Gujarat Provincial Municipal Corporation Act, 1949 (hereinafter referred to as 'the GPMC Act') provides for constitution of Municipal Corporations, their activities, functions, powers, duties, etc. Chapter VI of the GPMC Act pertains to duties and powers of the Municipal Authorities and officers;

++ subsection (2) of section 386 of the GPMC Act provides that except as may otherwise be provided by or under this Act, for every such licence or written permission a fee may be charged as such rate as shall from time to time be fixed by the Commissioner, with the sanction of the Corporation;

++ from the above statutory provisions, it can be seen that the Municipal Corporation has to carry out certain functions of obligatory and some of discretionary character. In carrying out such functions, it has powers granted under the Act. It can generate revenue and apply the same for the purpose of carrying out its functions. Section 386 of the GPMC Act, in particular, authorises the Municipal Corporation to issue licences, permissions and to charge such fees as may be sanctioned by the Corporation;

++ the activity of the Corporation of granting licences for putting up hoardings in its property and also for granting licences to private property owners to put up hoardings, by no stretch of imagination, can be stated to be business of the Corporation. Such licence fees are collected for regulating the activity of putting up hoardings to ensure that it does not damage the public safety and does not offend the public morality and decency. The safety measures, standards of morality and decency, all have to be maintained by the Corporation since such hoardings would be either in the Corporation property or private property, in number of cases on the plots abutting a public street. The Tribunal order calls for no interference;

++ if the Corporation, therefore, permits hoardings to be put up in its property by issuing licences, for which it charges licence fees and also charges licence fees from the owners allowing hoardings to be put up in their private properties, in our opinion, the same cannot be said to be business activity of the Corporation. Such licence fees are collected for regulating the activity of putting up hoardings to ensure that it does not damage the public safety and does not offend the public morality and decency. The safety measures, standards of morality and decency, all have to be maintained by the Corporation since such hoardings would be either in the Corporation property or private property, in number of cases on the plots abutting a public street. We have noticed that the collection from such licence fees is less than 1% of the total revenue of the Corporation. In our opinion, therefore, the view of the Tribunal that such income was not business income, but must be "income from other sources", therefore, calls for no interference.