M/S. VISAKHAPATNAM URBAN DEVELOPMENT AUTHORITY(VUDA),,VISAKHAPATNAM vs. THE CIT, (EXEMPTIONS),, HYDERABAD

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM (Through web-based video conferencing platform) BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, HON’BLE ACCOUNTANT MEMBER I.T.A. Nos. 682 TO 685/VIZ/2019 (Asst. Years : 2005-06 to 2007-08 & 2010-11) M/s. Visakhapatnam vs. The Addl. CIT, Range-1, Metropolitan Region Visakhapatnam. Development Authority, (Formerly known as Visakhapatnam Urban Development Authority), 8th Floor, VMRDA Complex, Siripuram, Visakhapatnam. PAN No. AAAGV 0571 L (Appellant) (Respondent) I.T.A. Nos. 278 TO 280/VIZ/2015 (Asst. Years : 2005-06, 2006-07 & 2010-11) M/s. Visakhapatnam vs. CIT (Exemptions), Metropolitan Region Hyderabad. Development Authority, (Formerly known as Visakhapatnam Urban Development Authority), 8th Floor, VMRDA Complex, Siripuram, Visakhapatnam. PAN No. AAAGV 0571 L (Appellant) (Respondent) Assessee by : Shri M.V. Prasad, CA. Department By : Smt. M. Kiranmayee, Senior Standing counsel & Shri D.K. Sonawal, CIT DR

Date of hearing : 25/09/2020. Date of pronouncement : 23/11//2020.

2 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) O R D E R PER BENCH:

I.T.A. Nos. 682 to 685/VIZ/2019 filed by the assessee are against the separate orders of ld. CIT(A)-2, Guntur, each dated 30/09/2019 for the A.Ys. 2005-06 to 2007-08 & 2010-11 and the I.T.A. Nos. 278 to 280/VIZ/2015 filed by the assessee are against the separate orders of ld.CIT(E), Hyderabad each dated 31/03/2015 for the A.Ys. 2005-06, 2006-07 & 2010-11. ITA Nos.682 & 683/VIZ/2019 2. Brief facts of the cases for the A.Ys. 2005-06 & 2006-07 are that the assessee filed its return of income declaring total income of Rs. ‘NIL’. The assessment was completed u/sec. 143(3) by an order dated 28/12/2007. Subsequently, the AO reopened the assessment by issue of notice u/sec. 148. The reason for reopening the assessment was that the activities of the assessee are commercial in nature as against the claim of exemption made by the assessee u/sec. 11 on the ground that their objects are not charitable purpose. The income on which the assessee derived from entry fee on parks, general receipts, rents on offices/parks/shops, administration and supervision charges on deposit works, development works, house cost receipts, site cost

3 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) receipts and interest on fixed deposits, sale of plots, houses etc. are found to be commercial in nature according to the AO. Further, the AO is of the view that the main issue in this case is whether the assessee, as a local authority is eligible for exemption u/sec. 11 in lieu of the activities of the local authorities, as the assessee is carrying out sale of sites and houses and earning profits on such real estate activities. The AO issued show cause notice calling for explanation of the assessee as to why the exemption claimed under section 11 should not be denied and assess the income as business income. The assessee filed the explanation and also filed objections for reopening the assessment. However, the AO rejected the objections of the assessee and summarized the activities of the assessee as under:- a. VUDA generates income from sale of houses and plots for self-sustenance. b. It does not have any financial support from State nor Central Government. c. In order to meet the objects as enumerated in Sec.5 of A.P. Urban Development Act, VUDA has taken up certain non-remunerative projects and other development works etc. 2.1 The AO further observed that the VMRDA is functioning like a business enterprise and incurred certain expenditure/ certain loss with ultimate object of earning profits. Therefore, held that the assessee is a business enterprise and not entitled for exemption

4 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) u/sec. 11, accordingly rejected the claim of the assessee. The AO also relied on the order of the ld.CCIT (OSD) in F.No. Asst/VUDA/CIT-1/VSP/2011-12 dated 04/05/2012, wherein the ld.CCIT (OSD) has cancelled the registration u/sec. 12AA(3) w.e.f. 2006-07 and accordingly computed the income at Rs.6,86,13,281/- and taxed the same. While arriving at the total income, the AO brought the sale of houses, sites and widening expenses and interest received to the tax. Against the order of the AO the assessee went on appeal before the ld. CIT(A) and the ld. CIT(A) upheld the order of the AO and dismissed the appeal of the assessee. Against the same, the assessee is in appeal before us. 3. During the appeal hearing, ld.AR submitted that the AO viewed the activities of the assessee are commercial in nature, therefore reopened the assessment without having any fresh information. The ld.AR further submitted that the assessment is reopened after the lapse of 04 years from the end of the relevant assessment year without having any fresh information, hence, the notice issued u/sec. 148 has no legs to stand and the same needs to be quashed. The ld.AR further argued that in the instant case, the AO reopened the assessment on the belief that the activities of

5 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) the assessee are commercial in nature. The commercial activities specified by the AO in the notice issued u/sec. 148 are the sale of plots, constructed houses, saplings and development charges etc. which were examined by the AO at the time of original assessment. The ld.AR further submitted that the ld.CCIT (OSD) has passed the order cancelling the registration granted u/sec. 12AA vide order dated 04/05/2012 for the same reasons, which were mentioned in the reassessment order and the ld. CIT(A)’s order. The reasons for reopening the assessment were mentioned in page No. 19 of ld. CIT(A)’s order and from which it is found that assessee was carrying the commercial activities like sale of plots, constructed houses, sale of plants, saplings etc. which were mentioned in earlier paragraphs of this order. Subsequently, the assessee went on appeal before the ITAT against cancellation of registration u/sec. 12AA(3) and the Hon'ble ITAT passed a detailed order in ITA No.295/VIZ/2012, dated 20/03/2020 and restored the registration. The activities which were observed by the ld.CCIT(OSD) stated to be commercial in nature were examined by the Hon'ble ITAT in its detailed order in para 2.6 & 3.3. The ITAT also gave a finding in para 5 of its order that the above activities of the assessee does not fall under the

6 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) commercial activities and hence, restored the registration. The ITAT considered the objects of the assessee, method for disposal of lands as enshrined in Andhra Pradesh Urban Areas (Development) Act, 1975 and held that the activities of the assessee cannot be held to be commercial in nature. Taking the support from the order of the Hon'ble ITAT, ld.AR argued that the assessee is not carrying on any commercial activity and is carrying the activities in accordance with the objects of the society and hence denying exemption u/sec. 11 by the AO is bad in law, therefore requested to set aside the order of the ld. CIT(A) and the AO and to allow the appeal of the assessee. 4. On the other hand, Ld. senior standing counsel Ms.Kiranmayee vehemently opposed for restoration of original assessment and for allowing exemption u/sec. 11 and argued that lower authorities have given clear finding that the assessee society is carrying on commercial activities, therefore submitted that no interference is called for in the order of the ld. CIT(A). ITA No.684/VIZ/2019 5. For the A.Y. 2007-08, the assessee filed its return of income admitting total income at Rs. NIL and claimed exemption u/sec. 11 of the Act. The assessment was completed u/sec. 143(3) by

7 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) order dated 30/03/2009 and the AO determined the total income at Rs. 2,23,99,842/-. Subsequently, the ld.CIT(E) has taken the case for revision u/sec. 263 and found that the AO has applied the provisions of ‘set-off and carry forward of losses’ erroneously in this case which is not applicable in the case of the trusts, thus held that assessment was erroneous and prejudicial to the interests of the revenue. Accordingly, passed the order setting aside the assessment made u/sec. 143(3) dated 30/03/2009 and directed the AO to redo the assessment denovo. The assessee went on appeal before the ITAT against the order u/sec. 263 and the ITAT in its order dated 08/08/2011 held that the quantification of losses in trust income do result in prejudice to the interest of revenue, therefore the ITAT upheld the setting aside of the order u/sec. 263. However, the ITAT modified the order u/sec. 263 and directed the AO to redo the assessment denovo duly examining the claim of the assessee. Accordingly, the AO for giving effect to the order of the ITAT issued show cause notice and called for explanation of the assessee. Meanwhile, ld.CCIT (OSD) passed an order u/sec. 12AA(3) cancelling registration vide order in F.No. Asst/VUDA/CIT-1/VSP2011-12, dated 04/05/2012. Consequent to the passing of the order cancelling the registration, the AO

8 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) assessed the entire income as business income denying exemption u/sec. 11 of the Act. Against which the assessee went on appeal before the ld.CIT(A) and the ld. CIT(A) upheld the order of the AO and dismissed the appeal of the assessee. ITA No. 685/VIZ/2019 6. For the A.Y. 2010-11, the assessee filed its return of income admitting total income at NIL and claimed exemption u/sec. 11 of the Act. The assessee declared excess of income over the expenditure to the extent of Rs. 19,64,93,528/- and after all the deductions declared gross total income of Rs. 17,78,55,338/-, out of the said amount of Rs. 17,78,55,338/- the assessee has claimed the set-off of excess of expenditure over income of earlier years amounting to Rs. 4,00,73,212/- and also claimed set-off of deficit arose due to acquisition of assets from earlier year’s accumulation amounting to Rs. 7,60,04,257/-. However, the assessee has claimed exemption u/sec. 12AA and has shown that this amount was applied and accumulated as per section 11 of the Act. 6.1 Consequent to the order passed by the ld.CCIT (OSD) vide order in F.No. Asst/VUDA/CIT-1/VSP2011-12, dated 04/05/2012 registration granted to the assessee u/sec. 12A was cancelled and

9 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) the activities of the assessee are held to be commercial in nature. Therefore, following the order of the Ld.CCIT (OSD), AO passed the assessment order u/sec. 143(3) dated 15/02/2013 denying exemption u/sec.11 and assessed the total income at Rs.20,51,09,507/-. Against which the assessee went on appeal to the ld. CIT(A) but not succeed in its appeal, the ld. CIT(A) dismissed the appeal of the assessee, hence, the assessee is in appeal before the Tribunal. 7. In all the above cases, ld. senior standing counsel vehemently supported the orders of the lower authorities, whereas ld.AR argued that the entire activities of the assessee are held to be charitable in nature as decided by the ITAT in its order dated 20/03/2020, thus requested to set aside the orders of the lower authorities and allow the exemption u/sec. 11 of the Act and compute the income u/secs. 11 to 13 of the Act. 8. We have heard both the parties and perused the material placed on record. 9. In all the above appeals for the A.Ys. 2006-07 to 2007-08 & 2010-11 the main reason for denying the exemption u/sec. 11 is treating the activities of the assessee as commercial in nature because the assessee is engaged in the activities of sale of plots,

10 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) constructed houses, collection of various fees etc. From the assessment orders the reasons for reopening are ascertained to be sale of plots, constructed houses, sale of plants, saplings etc. and levying development charges for services rendered by it. The reasons for reopening was extracted by the ld. CIT(A) in page 19 of her order which reads as under:- “VUDA is not pursing a charitable purpose as “stipulated” but it is actually a commercial concern. The goals of so-called public utility advanced by VUDA are not among the specific activities laid down by section 2(15) and it is conducting a commercial activity of sale of plots, constructed houses, sale of plants, saplings etc. and levying development charges for services rendered by it. Therefore, there is reason to believe that the assessee VUDA is wrongly claiming exemption under section 11 of the Act and there is escapement of income from tax.” 9.1 Similarly from the assessment order it is found that more or less for the same reasons mentioned above the AO held that the assessee is not a charitable organization, but a commercial organization for collecting the following fee apart from sale of plots:- (i) Entry fee on parks (ii) General receipts (iii) Rents on offices/parks/shops (iv) Administration and supervision charges on deposit works (v) Administration and supervision charges on development works (vi) Administration and supervision charges on hose cost receipts.

11 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) (vii) Administration and supervision charges on site cost receipts (viii) Interest on fixed deposits etc. For the same reasons, the ld.CCIT (OSD) in his order dated 04/05/2012 held that the assessee is in commercial activities and accordingly cancelled the registration. On appeal this tribunal has considered the above issues in detail in its order dated 20/03/2020 and held that the assessee is carrying on the activities in accordance with the objects and purpose for which it was established and there is no commercial activities. Accordingly, restored the registration and directed the AO to grant exemption u/sec. 11 to the assessee. Orders passed for the A.Ys. 2005-06 to 2007-08 & 2010-11 are covered by the order of this tribunal in ITA No.295/VIZ/2012, dated 20/03/2020, hence, we set aside the orders of the lower authorities and direct the AO to allow the exemption u/sec. 11 and compute the income as per secs. 11 to 13 of the Act. Accordingly, appeals of the assessee are allowed. 10. The assessee also raised technical issue in their written submissions in respect of appeals in ITA No.682 & 683/VIZ/2019 and argued that in these cases reopening of assessment is bad in law, since, the notice u/sec. 148 was issued beyond 04 years

12 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) without having any fresh information. Since we have allowed the appeals on merits, this issue is of academic importance, hence we consider that it is not necessary to adjudicate the issue. 11. Similarly for the A.Y. 2007-08 the assessee also raised technical issue stating that in the original assessment passed u/sec. 143(3) dated 30/03/2009, the AO allowed set-off of carry forward losses, which is incorrect in the case of trusts whose income is assessed as per secs. 11 to 13 of the Act. For the same reason the ld.CIT(E) has taken up the case for revision u/sec. 263. On appeal the ITAT directed the AO to redo the assessment after examining the set-off of losses claimed by the assessee whether to allow or not to allow. Whereas the AO travelled beyond his jurisdiction and taxed the income denying exemption u/sec. 11 which is not in accordance with the directions of the ITAT, therefore argued that on this ground also the order of the ld.CIT(E) needs to be set aside. Since we have allowed the exemption in this case on merits, we considered it is not necessary to adjudicate this issue. Accordingly, appeals of the assessee are allowed.

13 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) ITA Nos.278 to 280/VIZ/2015 12. Facts of the case are that the AO passed the assessment order u/sec. 143(3) r.w.s. 147 of the Act for the A.Ys. 2005-06. The ld.CIT(E) called for the record and found that the assessee claimed the depreciation of Rs. 85,20,358/- and contribution to other agencies Rs. 28,84,300/- and held that the assessment order passed by the AO is erroneous and prejudicial to the interests of the revenue, since the assessee’s registration granted u/sec. 12A was cancelled and the assessee was no more entitled for exemption u/sec. 11 of the Act. 13. For the A.Y. 2006-07, the reason for taking the case for revision u/sec. 263 was also in respect of contribution to the other agencies. For the A.Y. 2010-11, the reason for taking up the case for revision in allowing the expenditure in respect of contribution to other agencies, which includes a sum of Rs. 13.68 lakhs incurred on renovation of circuit house/Governor bungalow. The assessee explained that the expenditure was stated to be incurred for advertising, showcasing the tourism and historical places that were maintained by the VUDA. Not being convinced with the explanation of the assessee the ld.CIT(E) revised the order u/sec. 263 and set aside the assessment order with a

14 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) direction to examine the issue and redo the assessment after proper verification of the issues giving opportunity to the assessee. Against the orders of the Commissioner (Exemptions) the assessee is in appeal before this tribunal. 14. Ld.AR argued that in the instant case though ld.CCIT (OSD) cancelled the registration, the ITAT Visakhapatnam Bench has restored the registration u/sec. 12A, therefore argued that income needs to be computed as per sections 11 to 13 of the Act and the assessee is entitled for exemption u/sec. 11 of the Act. Therefore, requested to set aside the order of the ld.CIT(E) passed u/sec. 263 and allow the appeal of the assessee. 15. On the other hand, ld.DR vehemently relied on the orders of the lower authorities. 16. We have heard both the parties and perused the material placed on record. 17. The reason for taking the case for revision u/sec. 263 was the denial of exemption u/sec. 11 of the Act as observed by the ld.CIT (E) in his order at para 3.3. In the instant case, this Tribunal vide its order dated 20/03/2020 reported in [2020] 116 taxmann.com 711 (Visakhapatnam–Trib.) restored the registration and set aside the order of the ld.CCIT (OSD). Therefore, in the

15 ITA Nos. 682-685 /VIZ/2019 ITA Nos. 278-280/VIZ/2015 (M/s. Visakhapatnam Metropolitan Region Development Authority) instant case, the income required to be computed u/secs. 11 to 13 of the Act, therefore we set aside the orders of the ld.CIT(E) passed u/sec. 263 and direct the AO to pass the orders as per the provisions of sections 11 to 13 of the Act. Accordingly, the appeals of the assessee are allowed for statistical purpose. 18. In the result, appeals filed by the assessee in ITA Nos. 682 to 685/VIZ/2019 are allowed and ITA Nos. 278 to 280/VIZ/2015 are allowed for statistical purpose. Order Pronounced in open Court on 23/11//2020. sd/- sd/- (V. DURGA RAO) (D.S. SUNDER SINGH) Judicial Member Accountant Member Dated: 23/11/2020. vr/- Copy to: 1. The Assessee - M/s. Visakhapatnam Metropolitan Region Development Authority, (Formerly known as Visakhapatnam Urban Development Authority), 8th Floor, VMRDA Complex, Siripuram, Visakhapatnam. 2. The Revenue – a) The Addl. CIT, Range-1, Visakhapatnam. b) CIT (Exemptions), Hyderabad. 3. The Pr.CIT-2, Visakhapatnam. 4. The CIT(A)-2, Guntur. 5. The D.R., Visakhapatnam. 6. Guard file. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.