Assessee is a statutory authority created by the Govt. of Andhra Pradesh with effect from 24/01/1976 in exercise of power conferred by section 4(1) of water (prevention and control of pollution) Act, 1974. Till AY 2002-03, assessee claimed exemption u/s 10(20) of the Act as a local authority. However, after amendment to the definition of local authority u/s 10(20) with effect from 01/04/2003, by Finance Act, 2002, assessee became liable to pay income-tax. Since assessee failed to file any return of income, even after it became liable to pay tax, AO initiated action u/s 147 of the Act by issuing a notice u/s 148 on 31/10/08 calling upon assessee to submit return of income for AYs. 2004-05 to 2008-09. In response to the notice issued u/s 148, assessee filed its return of income for impugned AY on 04/12/2008 on the basis of unaudited accounts. Subsequently, assessee filed revised return along with statutory audit reports on 04/06/09. AO observed that revised return can only be filed when the omission was not within the knowledge of assessee. As assessee was well aware that the accounts were not audited by the respective due dates, the revised returns filed are not valid in law, therefore, AO ignored both the original as well as revised returns of income.
In course of assessment proceeding, AO while examining the details of receipts and payments of assessee during the year, observed that assessee has applied very meager amount towards the objects for which it is created i.e. prevention and control of pollution and almost no amounts were spent for regulation or for punishing the culprits who violated the norms of pollution control. AO observed that though the assessee claims its activities to be pure charitable nature but in reality assessee has not undertaken any such activity. AO observed that during the year assessee has shown receipts of Rs. 33,23,75,784 together with opening balance of Rs. 25,38,05,153, thus, the total funds available at the hands of assessee for the year under consideration was about Rs. 58 crores, out of which, the amounts applied for various environmental schemes.
On analyzing the data, AO observed that the amount spent towards salaries is three times more than the amounts used for the schemes formulated by the board. It was also noted by AO that the total revenue expenditure is 15% of the available funds and the total amounts applied for various schemes is only 2%. According to the AO, establishment expenditure is approximately 8 times the amounts applied for various schemes. On examining the balance sheet as on 31/03/05, he noticed that the total FDs amounted to Rs. 42.4 crores. Thus, about 70.67% of the available funds was simply lying in the banks as FDs, instead of being utilized in regulatory and enforcement activities for which assessee was created. AO was of the view that the activities pertaining to the schemes formulated by assessee as well as central govt. are not exactly in tune with the statutory functions of the assessee board as contained in section 17 of Water (prevention and control of pollution) Act, 1974 and AIR (prevention and control of pollution) Act, 1981, which are mainly advisory and inspection related functions.
AO after taking into account certain provisions of the concerned Acts, noted that though the assessee board is vested with various powers to prevent and control pollution of water and environment but in a number of instances, the board is found to have failed in enforcing/preventing the violations. In this regard, AO also referred to few instances of violation committed by certain institutions/ establishments. AO also referred to the report submitted by C&AG wherein various lapses/inactions of the board in enforcing the provisions of Act were pointed out. Though, assessee claimed that the provisions of AP Charitable and Hindu Religious Endowments Act, 1987 is not applicable, as the Board cannot be termed as a public charitable institution or endowment, but, AO rejected such submissions of assessee. Finally, AO having noticed the fact that the assessee is neither registered u/s 12AA of the Act, nor approved u/s 10(23C)(iv), held that it is not eligible for availing exemption either u/s 11 or u/s 10(23C(iv). Accordingly, AO treated the surplus of Rs.
Before the CIT(A), assessee apart from challenging the disallowance of exemption claimed u/s 10(23C) also raised additional ground claiming immunity from taxation under article 289 of the Constitution of India. As far as the issue raised in additional ground is concerned, CIT(A) called for a report from AO on the issue.
CIT(A) did not approve the view of AO that only because assessee has not spent substantial part of its income for the objects of prevention and control of pollution and has earned surplus in the respective AYs, the character of the assessee is non-charitable. He also observed that the expenditure incurred towards salaries of the staff cannot be considered to be towards purposes beyond the aims and objects of the board. CIT(A) observed that considering the nature of functions to be performed by board which is of regulatory, advisory and technical in nature, it has to be performed with the help of officers and staff having requisite technical and scientific qualification. Therefore, payment of salary cannot be a disqualifying factor as far as claim of exemption is concerned. CIT(A) also observed that the observations made by C & AG being in the nature of guidance could not have been considered as basis for denying exemption either u/s 11 or u/s 10(23C)(vi) of the Act. However, CIT(A) noted that assessee is neither registered u/s 12AA nor approved u/s 10(23C)(vi). Therefore, assessee's claim of exemption either u/s 11 or
As far as assessee's claim of immunity from taxation under article 289(1) of the Constitution of India, CIT(A) observed that assessee was no more a local authority for the purpose of income-tax act, after amendment to section 10(20) w.e.f. 01/04/2003. At the same time, assessee is not a part of the state itself. CIT(A) observed that assessee is a distinct legal entity. Hence, income of assessee cannot be said to be the income of the state so as to prevent such income from union taxation. CIT(A) observed that the income generated by assessee does not go to the coffers of the state directly and even does not remain as income of the state. Though, assessee's funds might have been spent as per the directions of the state govt. but the same remain as the fund of assessee board and not of the state govt. CIT(A) analyzing the provisions of article 289(1) of the Constitution of India observed that what is exempt from union taxation is the income of the state and not the income of any authority under the state. CIT(A) observed, if the government exercises its power to dissolve the board, then the properties, funds, debts, etc. of the board devolve thereafter upon the state govt. Till the time of such dissolution all of those belong to assessee itself and not to the state. CIT(A) referring to the decision of Supreme Court in case of Adityapur Industrial Area Development Authority Vs. Union of India and others (2006-TIOL-43-SC-IT), held that even if assessee board has been constituted by the state govt. with a view to fulfill the state obligation under article 48A of the Constitution of India, that fact alone is not sufficient to conclude that income of assessee is the income of state itself, so as to exempt it from union taxation as per article 289 of the Constitution of India. CIT(A) was of the view that the activities carried on by assessee cannot even be said to be as business or trade or any operation of that nature on behalf of the state govt. Even otherwise also, if the operations of the assessee were to be treated to be in the nature of trade or business as the parliament has not made any specific provision regarding taxation of income derived there from, the income earned by assessee will not be immune from taxation. CIT(A) opined that assessee being an independent legal personality distinct from the state and till such time the income earned by assessee goes to its own funds and not to the state coffers, the income earned by assessee will not be free from taxation under article 289 of the Constitution of India. Accordingly, he rejected assessee's claim of exemption under article 289.
As far as assessee's claim of exemption u/s 10(23C)(vi) is concerned, CIT(A) noted that the CCIT vide order dated 10/12/2009 has rejected assessee's claim of approval u/s 10(23C)(vi). However, considering the fact that assessee has filed writ application challenging the order of CCIT, which is still pending in the jurisdictional High Court, he directed the AO to ascertain present status and decide the issue in accordance with the directions of High Court while deciding the writ application.
On further appeal by the assessee, ITAT held that,
++ examining the Water (prevention and control of Pollution) Act, 1974 vis-à-vis the provisions contained under Article 289 of the Constitution of India, it is evident that the powers/functions exercised by the board cannot be considered to be in the nature of trade or business. Therefore, clause (2) and (3) of Article 289 may not be applicable to the facts of assessee's case. The only provision under which assessee can possibly claim immunity from taxation is clause (1) of Article 289. On a plain reading of the said clause, it is clear that only property or income of state is exempt from union taxation. The expression 'income of a state' as incorporated under Article 289(1) has to be interpreted to mean, the income of the state govt. itself and not the income of some authority other than the state, such as statutory authority or board which is a independent/separate juristic entity, even though it may be owned or controlled by the state govt. Provisions of both the water (prevention and control of pollution) Act, 1974 and Air (prevention and control of pollution) Act, 1981, make it clear that the funds of the board are its own funds and does not belong to the state govt. Only in case of supersession of the board, the property of the board vests with the state govt. Therefore, until such supersession the fund of the board is distinct from the fund of state govt. Considered in the aforesaid perspective, the income/receipts of the Board cannot be considered to be the income/receipts of the state govt. It also cannot be disputed that assessee is an independent/separate juristic entity distinct from the state govt., though, the state may be exercising control over the board. Further, the facts and materials on record also make it clear that the income/receipts of the board remain as its own funds and not transferred to the coffers of the state govt. In the aforesaid facts and circumstances when the income/receipts of the board remain with the board itself and not transferred to the state govt. such income/receipt has to be considered as income/receipt of the board and not of the state govt. Therefore, such income/receipt cannot be immune from taxation under article 289(1) of the Constitution of India;
++ The Supreme Court in Adityapur Industrial Area Development Authority Vs. Union of India & Others (2006-TIOL-43-SC-IT) held that exemption can be claimed under Article 289(1) of the Constitution of India only if the income can be said to be the income of the state govt;
++ Considered in the light of the ratio laid down by the Supreme Court as aforesaid and facts involved in the present appeal, under no circumstances it can be held that the income/receipts of the assessee is that of the state govt. This is because, not only assessee is a distinct and separate legal/juristic entity but funds of the assessee also belong to assessee. The principles laid down by the Supreme Court squarely applies to the facts of the case of assessee;
++ the entire issue can also be looked into from another angle. As can be seen till AY 2002-03, assessee had been claiming exemption u/s 10(20) by treating itself to be a local authority. Moreover, assessee has also applied for registration u/s 12AA of the Act as a charitable institution and has also been granted such registration in pursuance to the directions of the ITAT. Furthermore, it is a fact on record that assessee has also applied for approval u/s 10(23C)(iv) of the IT Act, and approval has also been granted to assessee from AY 2009-10 onwards. From the aforesaid facts, it becomes clear that assessee by its own actions considers itself to be a separate legal entity distinct from the state govt. That being the case, the income/receipts of the board has to be treated as its own income and not of the state govt. In the aforesaid facts and circumstances, we agree with the CIT(A) that assessee cannot get immunity from taxation under article 289 of the Constitution of India;
++ as far as the next issue relating to claim of exemption u/s 10(23C)(iv) of the Act is concerned, considering the fact that assessee's writ application is pending before the Jurisdictional High Court, the directions of the CIT(A) was upheld;
++ now coming to the issue raised in additional grounds, AR has submitted that the actual receipts as per the revised return is Rs. 19,46,56,470 as against Rs. 32,77,52,980 considered by AO. After considering the submissions of assessee vis-à-vis the facts and materials on record, the AO was directed to verify this aspect and adopt the correct figure after affording a reasonable opportunity of being heard to assessee in the matter.
In course of assessment proceeding, AO while examining the details of receipts and payments of assessee during the year, observed that assessee has applied very meager amount towards the objects for which it is created i.e. prevention and control of pollution and almost no amounts were spent for regulation or for punishing the culprits who violated the norms of pollution control. AO observed that though the assessee claims its activities to be pure charitable nature but in reality assessee has not undertaken any such activity. AO observed that during the year assessee has shown receipts of Rs. 33,23,75,784 together with opening balance of Rs. 25,38,05,153, thus, the total funds available at the hands of assessee for the year under consideration was about Rs. 58 crores, out of which, the amounts applied for various environmental schemes.
On analyzing the data, AO observed that the amount spent towards salaries is three times more than the amounts used for the schemes formulated by the board. It was also noted by AO that the total revenue expenditure is 15% of the available funds and the total amounts applied for various schemes is only 2%. According to the AO, establishment expenditure is approximately 8 times the amounts applied for various schemes. On examining the balance sheet as on 31/03/05, he noticed that the total FDs amounted to Rs. 42.4 crores. Thus, about 70.67% of the available funds was simply lying in the banks as FDs, instead of being utilized in regulatory and enforcement activities for which assessee was created. AO was of the view that the activities pertaining to the schemes formulated by assessee as well as central govt. are not exactly in tune with the statutory functions of the assessee board as contained in section 17 of Water (prevention and control of pollution) Act, 1974 and AIR (prevention and control of pollution) Act, 1981, which are mainly advisory and inspection related functions.
AO after taking into account certain provisions of the concerned Acts, noted that though the assessee board is vested with various powers to prevent and control pollution of water and environment but in a number of instances, the board is found to have failed in enforcing/preventing the violations. In this regard, AO also referred to few instances of violation committed by certain institutions/ establishments. AO also referred to the report submitted by C&AG wherein various lapses/inactions of the board in enforcing the provisions of Act were pointed out. Though, assessee claimed that the provisions of AP Charitable and Hindu Religious Endowments Act, 1987 is not applicable, as the Board cannot be termed as a public charitable institution or endowment, but, AO rejected such submissions of assessee. Finally, AO having noticed the fact that the assessee is neither registered u/s 12AA of the Act, nor approved u/s 10(23C)(iv), held that it is not eligible for availing exemption either u/s 11 or u/s 10(23C(iv). Accordingly, AO treated the surplus of Rs.
Before the CIT(A), assessee apart from challenging the disallowance of exemption claimed u/s 10(23C) also raised additional ground claiming immunity from taxation under article 289 of the Constitution of India. As far as the issue raised in additional ground is concerned, CIT(A) called for a report from AO on the issue.
CIT(A) did not approve the view of AO that only because assessee has not spent substantial part of its income for the objects of prevention and control of pollution and has earned surplus in the respective AYs, the character of the assessee is non-charitable. He also observed that the expenditure incurred towards salaries of the staff cannot be considered to be towards purposes beyond the aims and objects of the board. CIT(A) observed that considering the nature of functions to be performed by board which is of regulatory, advisory and technical in nature, it has to be performed with the help of officers and staff having requisite technical and scientific qualification. Therefore, payment of salary cannot be a disqualifying factor as far as claim of exemption is concerned. CIT(A) also observed that the observations made by C & AG being in the nature of guidance could not have been considered as basis for denying exemption either u/s 11 or u/s 10(23C)(vi) of the Act. However, CIT(A) noted that assessee is neither registered u/s 12AA nor approved u/s 10(23C)(vi). Therefore, assessee's claim of exemption either u/s 11 or
As far as assessee's claim of immunity from taxation under article 289(1) of the Constitution of India, CIT(A) observed that assessee was no more a local authority for the purpose of income-tax act, after amendment to section 10(20) w.e.f. 01/04/2003. At the same time, assessee is not a part of the state itself. CIT(A) observed that assessee is a distinct legal entity. Hence, income of assessee cannot be said to be the income of the state so as to prevent such income from union taxation. CIT(A) observed that the income generated by assessee does not go to the coffers of the state directly and even does not remain as income of the state. Though, assessee's funds might have been spent as per the directions of the state govt. but the same remain as the fund of assessee board and not of the state govt. CIT(A) analyzing the provisions of article 289(1) of the Constitution of India observed that what is exempt from union taxation is the income of the state and not the income of any authority under the state. CIT(A) observed, if the government exercises its power to dissolve the board, then the properties, funds, debts, etc. of the board devolve thereafter upon the state govt. Till the time of such dissolution all of those belong to assessee itself and not to the state. CIT(A) referring to the decision of Supreme Court in case of Adityapur Industrial Area Development Authority Vs. Union of India and others (2006-TIOL-43-SC-IT), held that even if assessee board has been constituted by the state govt. with a view to fulfill the state obligation under article 48A of the Constitution of India, that fact alone is not sufficient to conclude that income of assessee is the income of state itself, so as to exempt it from union taxation as per article 289 of the Constitution of India. CIT(A) was of the view that the activities carried on by assessee cannot even be said to be as business or trade or any operation of that nature on behalf of the state govt. Even otherwise also, if the operations of the assessee were to be treated to be in the nature of trade or business as the parliament has not made any specific provision regarding taxation of income derived there from, the income earned by assessee will not be immune from taxation. CIT(A) opined that assessee being an independent legal personality distinct from the state and till such time the income earned by assessee goes to its own funds and not to the state coffers, the income earned by assessee will not be free from taxation under article 289 of the Constitution of India. Accordingly, he rejected assessee's claim of exemption under article 289.
As far as assessee's claim of exemption u/s 10(23C)(vi) is concerned, CIT(A) noted that the CCIT vide order dated 10/12/2009 has rejected assessee's claim of approval u/s 10(23C)(vi). However, considering the fact that assessee has filed writ application challenging the order of CCIT, which is still pending in the jurisdictional High Court, he directed the AO to ascertain present status and decide the issue in accordance with the directions of High Court while deciding the writ application.
On further appeal by the assessee, ITAT held that,
++ examining the Water (prevention and control of Pollution) Act, 1974 vis-à-vis the provisions contained under Article 289 of the Constitution of India, it is evident that the powers/functions exercised by the board cannot be considered to be in the nature of trade or business. Therefore, clause (2) and (3) of Article 289 may not be applicable to the facts of assessee's case. The only provision under which assessee can possibly claim immunity from taxation is clause (1) of Article 289. On a plain reading of the said clause, it is clear that only property or income of state is exempt from union taxation. The expression 'income of a state' as incorporated under Article 289(1) has to be interpreted to mean, the income of the state govt. itself and not the income of some authority other than the state, such as statutory authority or board which is a independent/separate juristic entity, even though it may be owned or controlled by the state govt. Provisions of both the water (prevention and control of pollution) Act, 1974 and Air (prevention and control of pollution) Act, 1981, make it clear that the funds of the board are its own funds and does not belong to the state govt. Only in case of supersession of the board, the property of the board vests with the state govt. Therefore, until such supersession the fund of the board is distinct from the fund of state govt. Considered in the aforesaid perspective, the income/receipts of the Board cannot be considered to be the income/receipts of the state govt. It also cannot be disputed that assessee is an independent/separate juristic entity distinct from the state govt., though, the state may be exercising control over the board. Further, the facts and materials on record also make it clear that the income/receipts of the board remain as its own funds and not transferred to the coffers of the state govt. In the aforesaid facts and circumstances when the income/receipts of the board remain with the board itself and not transferred to the state govt. such income/receipt has to be considered as income/receipt of the board and not of the state govt. Therefore, such income/receipt cannot be immune from taxation under article 289(1) of the Constitution of India;
++ The Supreme Court in Adityapur Industrial Area Development Authority Vs. Union of India & Others (2006-TIOL-43-SC-IT) held that exemption can be claimed under Article 289(1) of the Constitution of India only if the income can be said to be the income of the state govt;
++ Considered in the light of the ratio laid down by the Supreme Court as aforesaid and facts involved in the present appeal, under no circumstances it can be held that the income/receipts of the assessee is that of the state govt. This is because, not only assessee is a distinct and separate legal/juristic entity but funds of the assessee also belong to assessee. The principles laid down by the Supreme Court squarely applies to the facts of the case of assessee;
++ the entire issue can also be looked into from another angle. As can be seen till AY 2002-03, assessee had been claiming exemption u/s 10(20) by treating itself to be a local authority. Moreover, assessee has also applied for registration u/s 12AA of the Act as a charitable institution and has also been granted such registration in pursuance to the directions of the ITAT. Furthermore, it is a fact on record that assessee has also applied for approval u/s 10(23C)(iv) of the IT Act, and approval has also been granted to assessee from AY 2009-10 onwards. From the aforesaid facts, it becomes clear that assessee by its own actions considers itself to be a separate legal entity distinct from the state govt. That being the case, the income/receipts of the board has to be treated as its own income and not of the state govt. In the aforesaid facts and circumstances, we agree with the CIT(A) that assessee cannot get immunity from taxation under article 289 of the Constitution of India;
++ as far as the next issue relating to claim of exemption u/s 10(23C)(iv) of the Act is concerned, considering the fact that assessee's writ application is pending before the Jurisdictional High Court, the directions of the CIT(A) was upheld;
++ now coming to the issue raised in additional grounds, AR has submitted that the actual receipts as per the revised return is Rs. 19,46,56,470 as against Rs. 32,77,52,980 considered by AO. After considering the submissions of assessee vis-à-vis the facts and materials on record, the AO was directed to verify this aspect and adopt the correct figure after affording a reasonable opportunity of being heard to assessee in the matter.
No comments:
Post a Comment