INCOME-TAX OFFICER vs. PIMPRI CHINCHWAD NEW TOWN DEVELOPMENT AUTHORITY,, PUNE

आदेश / ORDER

PER SUSHMA CHOWLA, JM:

Out of this bunch of appeals, four appeals filed by assessee are against respective orders of CIT(A)-2, Nashik, all dated 26.02.2014 relating to assessment years 2003-04 to 2005-06 and 2008-09 against respective orders passed under section 143(3) r.w.s. 263 / 143(3) r.w.s. 254 / 143(3) of the Income-tax Act, 1961 (in short ‘the Act’). The Revenue has filed Cross Objections and cross appeals against respective appeals of assessee.

ITA Nos.929 to 932/PUN/2014 3 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

Objections and for assessment years 2004-05 and 2005-06, both the assessee and Revenue have filed cross appeals. The issues raised in the present bunch of appeals are co-related and dependent on each other, hence the appeals are being decided by this consolidated order for the sake of convenience. The issues raised in present bunch of appeals are similar and were heard together and are being disposed of by this consolidated order for the sake of convenience. However, reference is made to the facts and issues raised in assessment year 2003-04 in order to adjudicate the issues.

ITA Nos.929 to 932/PUN/2014 4 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

ITA Nos.929 to 932/PUN/2014 5 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

ITA Nos.929 to 932/PUN/2014 6 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

income for that year. The income of ₹ 22,01,555/- at 1/78th part of total receipts were recognized as transfer premium in the year under appeal. The Assessing Officer found that the assessee was entering into 99 years lease with buyers in respect of buildings and plots of land. At the time of entering into lease agreement, huge amount was taken as one time premium and only notional amount of ₹ 1 per year was shown as payable for the balance 99 years. The assessee was treating the said amount of one time premium received as being spread over 99 years and only 1/99th of premium was treated as income during the year. In assessment year 2008-09, the Assessing Officer instead of 1/99th of premium, treated entire years’ receipts as income of assessee and on same lines for assessment year 2003-04. The assessee had recognized only ₹ 1,23,42,928/- at 1/99th part of rent accrued on lease properties.

ITA Nos.929 to 932/PUN/2014 7 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

Maharashtra. The assessee further explained that upto 01.04.2003 it received exemption from income tax under section 10(20A) of the Act. Thereafter, the said exemption was withdrawn by the Finance Act, 2003 and the existing system of accounting was not suitable to work out surplus or deficit arising from the activities carried out by assessee. The assessee thus, considered it appropriate to convert the accounting system into accrual basis of accounting by using Accounting Software Tally. The Assessing Officer vide para 10.2 refers to entries shown in the Balance Sheet and in para 10.3 the receipts shown in Income and Expenditure Account. The total receipts in the hands of assessee were declared at ₹ 17,57,19,565/- against which, the assessee had booked direct expenses of ₹ 11,73,40,782/- and indirect expenses of ₹ 9,74,658/-. Accordingly, surplus of ₹ 5,74,03,924/- was shown in the Receipt and Payment Account, which was claimed as exempt. The income of ₹ 17.57 crores comprised of income from development activities, interest accrued and rent accrued. The Assessing Officer noted that total interest accrued to ₹ 14.06 crores on term deposits held with the banks appearing under the head ‘Investment’ in the Balance Sheet. Further, rent accrued was declared at ₹ 1,23,87,565/- which was the lease premium recognized on constructed properties. The Assessing Officer further noted that income from development activities was ₹ 2.26 crores. However, the income was not fully offered and since the assessee had not offered the profit recognized on sale of plots of ₹ 1.42 crores, income recognized on transfer premium of ₹ 22 lakhs (approx.) and lease premium on constructed properties of ₹ 1.23 crores, the assessee was asked to explain the nature of said entries. After considering reply of assessee and tax audit report and the order passed in assessment year 2008- 09, the Assessing Officer noted that assessee had failed to credit sum of ₹ 18.98 crores being plot premium funds (net credit), ₹ 1.08 crores of properties

ITA Nos.929 to 932/PUN/2014 8 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

premium funds (net credit) and ₹ 1.12 crores of development charges (net credit). The Assessing Officer observed that method of accounting adopted by assessee resulted in substantially deferring recognizing of revenue and receipts. He concluded by holding that instead of recognizing entire receipts of the year and including it in its hands, only a part of these receipts were offered as income in the accounts. The Assessing Officer was of the view that accounting method followed by assessee was defective accounting method. The assessee was following accrual method of accounting, which as per the Assessing Officer was not reflecting real income and was erroneous. It was observed by him vide para 11.4 of assessment order that the assessee had constructed various properties and given them on long term lease of 99 years to various lessees from time to time as per provisions of ‘land disposal rule’ approved by Government of Maharashtra for this purpose. The lease deed was executed between assessee (lessor) and the lessee on consideration of one time premium at the time of lease i.e. ₹ 1 per year for term of lease of 99 years. The Assessing Officer further observed that no further consideration accrues from the lessee during the effective years of lease. However, the revenue was recognized @ 1/99th and the assessee had classified the transaction as operating lease and wherein the income was recognized for only one year at 1/99th part of entire cumulative lease premium receipt. The Assessing Officer further observed that where the assessee had leased the house property on lease for 99 years to the lessee, the entire risk and rewards incidental to ownership of leased assets were also transferred to the lessee, who had right to exploit the benefit including claiming depreciation on it. Where the lessee acquired the benefits of use of leased asset for the entire part of its economic life in return for entering into obligation to pay for that right an amount approximating to the fair value of assets, then the said lease was financial

ITA Nos.929 to 932/PUN/2014 9 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

lease and not operational lease as claimed by assessee. Thus, the assessee had no right to claim depreciation on the commercial and residential properties leased.

ITA Nos.929 to 932/PUN/2014 10 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

that entire consideration received was the income of assessee for the same year in which it was received. He also held that there was no justification for deferring income by spreading the amount already received to a period of 99 years. Finally, it was observed by the Assessing Officer that the assessee was not obliged to provide any services or incurred any expenditure over the period of 99 years in terms of agreement. The Assessing Officer also held that transaction amounted to transfer of asset and was chargeable as capital gains.

ITA Nos.929 to 932/PUN/2014 11 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

not furnish cost details in respect of plots transferred in the current year. The assumption of assessee that cost increases in each year and profit remains exactly 10% was not supported or established by the accounting data of assessee and hence, was not accepted. Rejecting the explanation of assessee that percentage of application fund for assessment year was 106% and was above 100% for assessment year 2004-05, the Assessing Officer held that working of percentage of application of funds worked out by assessee was an incorrect method of accounting.

ITA Nos.929 to 932/PUN/2014 12 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

aforesaid directions, the Commissioner passed an order dated 28.06.2010 and granted registration under section 12AA of the Act w.e.f. 01.04.2002 with direction to Assessing Officer that registration granted under section 12AA r.w.s. 12A of the Act was not conclusive in respect of claim of exemption under sections 11 to 13 of the Act while processing the return of income. The Department also filed an appeal against order of Tribunal before the Hon’ble Bombay High Court.

ITA Nos.929 to 932/PUN/2014 13 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

assessment under business income also. The Assessing Officer observed that since entire receipts were considered as taxable, expenditure considered as capital expenditure would not be allowed and taxable income was determined at ₹ 21.89 crores and the assessment was made under the head ‘business income’.

ITA Nos.929 to 932/PUN/2014 14 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

―4.7 A perusal of the above chart reveals following position. a) The appellant applied for 12A, which was rejected initially, but accorded later on by the Honorable ITAT with effect from 01/04/2002 (i.e. A.Y. 2003-04). As such, assessments of the appellant will have to be concluded in the frame-work of Section 11 of the ITA, 1961. b) The returns of earlier years prior to A.Y. 2008-09 were filed by the appellant without considering the exemption u/s 11, as the issue of registration u/s 12A was pending then, though a note as to claim of exemption was submitted with return of income. c) When the tax disputes of earlier years prior to A.Y. 2008-09 (and prior to the time of grant of 12A by the Honorable ITAT) reach the ITAT, the ITAT set-aside the disputes observing that the assessments ought to be done de-novo as the entire gamut (situation) has changed after grant of registration u/s 12A. d) As such, what emerges is that, the appellant’s income for all the years is required to be computed as per section 11 and 12 of the ITA, 1961.

ITA Nos.929 to 932/PUN/2014 15 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

was not charging any fees / toll charges. However, these infra expenses had to be considered for computing income in the hands of assessee. Another point which was raised by assessee was that the assessee created budget of expenses in ensuing year and the same were approved by the State Government i.e. application of funds was under the control of Government authorities. Another point which was raised was that the assessee was required to refund premium of land allotment if any customer wishes to surrender the allotted plot, which clauses were missing in private enterprises. The assessee stressed that it was entering into lease agreements with various parties for allotment of lands and constructed units, where the period of lease was 99 years but it receives premium at the time of allotment. As per agreement with the respective parties, the advance premium on land / constructed units was refundable to the lessee of the plot if lessee decides to cancel lease. Hence, the assessee did not have contractual right to appropriate the entire premium to Income and Expenditure Account, that is why it recognized 1/99 advance lease premium on constructed units as income of each year. However, the Assessing Officer has considered entire amount of premium as income and added the same in the hands of assessee. The assessee also explained various contractual terms of agreement of non- assignment, reversion of possession after completion of lease period, non- mortgage of leasehold rights without consent of authorities. The assessee stressed that accounting method it was following needs to be adopted, wherein 10% of profit was estimated on land allotment. It was also explained that the assessee had not claimed proportionate cost on such lands since the said cost was incurred over the period of many years. Further, the assessee had also not claimed any deduction on account of infra development cost incurred, which again was incurred over period of many years. Thus, the assessee objected to

ITA Nos.929 to 932/PUN/2014 16 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

the proposal of Assessing Officer in taxing entire receipts as income in the hands of assessee. In this regard, reliance was placed on Dandekar Committee Report. In another submissions, the assessee pointed out that it should be allowed grant of land cost of past years as deduction since the entire land revenue for next 99 years was considered as revenue for the current year. The assessee then pleaded that benefit of accumulation of income as per Form No.10 was available to the assessee and same should be allowed. Another plea raised by assessee before the Commissioner was that since it was recognizing only 1/99th part of building lease revenue and in case the entire lease revenue received in a year needs to be considered as eligible revenue, then the quantum of revenue for past years regarding 1/99th revenue need to be removed on logical reasoning. Similar plea was raised in respect of creating entire proceeds on plots leased premium to account called as ‘plots premium account’. Every year 10% of said premium used to be taken to Profit and Loss Account. However, the Assessing Officer had added entire credits to plots premium account, which had resulted in double taxation. The next plea raised by assessee was that claim of depreciation on leased building. It was stressed that where the lease period was 99 years and the same was operating lease, then the lessee was required to vacate building / premises and handover the properties back to the assessee at the end of lease period. Since the income from use of property was being offered to tax, then related depreciation on the same ought to be considered before working out taxable income of assessee for the respective years. In this regard, assessee placed reliance on the ratio laid down in CIT Vs. Institute of Banking Personnel Selection reported in 264 ITR 110 (Bom) and DIT Vs. Framjee Cawasjee Institute reported in 109 CTR 463 (Bom). The next plea was against benefit of accumulation through Form No.10. The said claim was not made during the course of assessment

ITA Nos.929 to 932/PUN/2014 17 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

proceedings but before the appellate proceedings and the CIT(A) was asked to allow the same. The assessee then, pointed out that for assessment years 2005-06 and 2008-09, the Assessing Officer had rejected accumulation claim made through Form No.10 on the ground of defect therein. It was stressed before the CIT(A) that since there was huge confusion with regard to computation of income, as such, reliance may not be placed on Form No.10 already filed and the assessee be allowed to submit corrected Form No.10.

ITA Nos.929 to 932/PUN/2014 18 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

income vide Form No.10, wherein it was noted by the CIT(A) that the assessee had accepted that Form No.10 was not filed during the course of assessment proceedings. However, same was filed with CIT(A) and then Assessing Officer on 11.02.2014 and 14.02.2014, respectively, requesting condonation of delay in filing the said Form No.10 late. Since the assessee had furnished Form No.10 late before the Assessing Officer, the CIT(A) was of the view that decision on Form No.10 and accumulation was yet to be taken and hence the issue raised was held to be premature and dismissed. Vis-à-vis enhanced claim of accumulation of income, request being made in Form No.10, the CIT(A) observed that confusion in working out correct claim for accumulation appeared to be bonafide. Reference was made to CBDT circular No.273, dated 06.02.1980, which specifically allows the Assessing Officer and CIT(A) to accept belated submission of Form No.10 and allow the condonation of delay. Coming to last issue of depreciation on leased assets, this plea of assessee was also not accepted. The next plea of assessee which was raised was the aspect of WDV for the purpose of working out eligible depreciation. The Assessing Officer had re-worked the WDV of assets by considering explanation 4 to section 32 of the Act, wherein depreciation was to be compulsorily allowed for working out business income. It was pleaded that since upto assessment year 2002-03, income of assessee was exempt, there was no occasion to visit section 32 of the Act. Further, reference was made to definition of WDV under section 43(6) of the Act, which state that WDV should be based on depreciation actually allowed. To the definition, Explanation 6 was added by the Finance Act, 2008 with retrospective effect from 01.04.2003 i.e. effective from assessment year 2003-04 onwards. By this Explanation, it was clarified that when the assessee was not required to compute income under the Income-tax Act and was thus, not providing depreciation under the Income-tax Act, value of

ITA Nos.929 to 932/PUN/2014 19 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

assets after depreciation actually provided should be considered as WDV of assets as on 01.04.2002 i.e. opening WDV for assessment year 2003-04. The assessee claimed that this issue stands covered by Explanatory Note to Finance Act, 2008, clause 14 and hence, the question of opening WDV has to be decided for assessment year 2003-04. The CIT(A) in view of specific provisions of Explanation 6 to section 43(6) of the Act, held that it only appropriate to allow depreciation on brought forward block of assets of the assessee. For assessment year 2003-04, one issue which was decided by CIT(A) was that the Assessing Officer had to frame assessment de-novo after order of Tribunal allowing registration under section 12A of the Act w.e.f. 01.04.2002. Hence, the income needed to be computed strictly as per section 11 of the Act, since the whole gamut of assessment had changed, then Assessing Officer could not sustain addition of ₹ 5.74 crores made in the first round of assessment and the Assessing Officer was directed to delete the same.

ITA Nos.929 to 932/PUN/2014 20 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

available to the assessee for development into a township. The assessee was carrying on two-fold activities i.e. offering plots of land on lease basis and also constructing premises and giving them to the ultimate user again on lease basis. The overall period of lease was 99 years and if it is transferred, then for balance period premium is received. In case it is transferred in midway then original lessee gets refund on proportionate basis for balance period of lease and purchaser pays market value of the premium for balance period of lease. The assessee was following mercantile / accrual system of accounting. Referring to the order of Assessing Officer, the assessee points out that it talks of the claim of assessee that corresponding cost be allowed. The Assessing Officer treated the assessee’s lease as financial lease and did not allow depreciation on assets and / or corresponding costs. The learned Authorized Representative for the assessee stressed that in case lease premium is treated as income of assessee on accrual basis, then land cost needs to be allowed and also cost of construction on infrastructure is to be allowed along with depreciation on leasehold premises and also depreciation on infra cost. It was fairly pointed out that expenditure on infra cost for the respective years was allowed by the Assessing Officer. However, the Assessing Officer denied depreciation on the ground that it was finance lease.

ITA Nos.929 to 932/PUN/2014 21 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

a) Land cost of earlier years needs to be allowed though no breakup could be given before the CIT(A);

b) Land acquired in current year was claimed and allowed as application of income but the Revenue was not in appeal on this issue i.e. in assessment year 2008-09;

c) Depreciation on leased building, where the leased buildings were given on lease from past years and assessee claimed depreciation on it;

d) The Assessing Officer had allowed application of income on cost of leased buildings in the respective years of purchase but had denied depreciation on the ground that it amounted to double deduction.

ITA Nos.929 to 932/PUN/2014 22 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

ITA Nos.929 to 932/PUN/2014 23 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

was uncalled for. Then referring to page 31 of order of CIT(A), contention No.6 with regard to form No.10 and pages 35 and 36, it was pointed out that where the assessee trust was not recognized under section 12A of the Act, there was no question of filing form No.10 in original proceedings and additionally the revenue was recognized and in any case, the revenue recognition i.e. 1/99th lease premium was reasonable method. The learned Authorized Representative for the assessee pointed out that the CIT(A) has in para 18 held that income had to be computed as per section 11 of the Act. Referring to series of cases, it was pointed out that first of all, land cost is to be allowed against recognized income in the hands of assessee and reliance was placed on the following decisions:- a) Calcutta Co. Ltd. Vs. CIT (1959) 37 ITR 1 (SC), where it has been recognized that few liabilities to be accounted for against sale proceeds of the said land.

b) CIT Vs. Institute of Banking Personnel Selection reported in 264 ITR 110 (Bom) for the proposition that commercial profits have to be worked out after providing for allowance for normal depreciation.

c) CBDT Circular No.005P, dated 19.06.1968, wherein instructions were given with regard to assessability of income of charitable trust (paras 3 and 4)

d) CIT Vs. Mumbai Metropolitan Regional Iron & Steel Market Committee (2015) 378 ITR 103 (Bom)

e) ACIT Vs. Punjab Urban Development Authority (2014) 100 DTR 118 (Chd)(Trib), wherein it was directed that corresponding expenditure which has been expended by assessee is to be allowed as deduction in cash system.

ITA Nos.929 to 932/PUN/2014 24 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

ITA Nos.929 to 932/PUN/2014 25 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

to commercial entities. It was further pointed out that cases which were relied upon by the learned Authorized Representative for the assessee were following mercantile system of accounting, whereas the assessee was following cash system of accounting. Our attention was drawn to observations of Tribunal at page 2 in ACIT Vs. Punjab Urban Development Authority (supra), wherein it was held that income and expenditure cannot be shifted when there is change in system of accounting. Regarding depreciation, it was also pointed out that Assessing Officer had re-computed WDV and the CIT(A) has given relief and for this, reliance was placed on the order of Assessing Officer. With regard to deliberations on financial lease, the learned Departmental Representative for the Revenue placed reliance on the order of CIT(A).

ITA Nos.929 to 932/PUN/2014 26 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

area measurements working in respect of area sold during different assessment years and also area constructed before 2002 but not sold upto assessment year 2013-14. Another statement was filed regarding distribution of area after 31.03.2002; both for residential, commercial and housing scheme. The learned Authorized Representative for the assessee further sought time to furnish evidence and matter was adjourned. The assessee was also directed to file cost of construction of constructed units; cost of open land as on 01.04.2002 and infra cost as on 01.04.2002. The assessee in this regard furnished written submissions, copy of which was handed over to the learned Departmental Representative for the Revenue, who sought time to go through the same. The assessee also furnished certain details with regard to working of land area, which was possessed by assessee and part of which was developed and the assessee then gave some working of land cost both for the sale of land and portion of land utilized for construction. He also then took us through working of constructed premises cost which needs to be apportioned year-wise in order to work out the income in the hands of assessee. In addition, the learned Authorized Representative for the assessee pointed out that the issue of assessability of lease premium in the hands of assessee now stands covered by decision of the Hon’ble High Court of Madhya Pradesh in M.P. Audyogik Kendra Vikas Nigam (Indore) Ltd. Vs. ACIT reported in 98 taxmann.com 191 (MP), wherein it has been held that for accounting purpose, 1/99th lease premium is to be taken as revenue in the hands of assessee. In this regard it was pointed out that the said decision was neither quoted before the Tribunal while arguing appeal against order passed under section 263 of the Act nor was it referred in the said order. However, it was solitary decision on the point and the facts of said case and the facts of assessee were similar and the assessee stood at better position, wherein it was local authority created

ITA Nos.929 to 932/PUN/2014 27 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

for the purpose and the assessee before the Hon’ble High Court of Madhya Pradesh was a company. It was then pointed out by the learned Authorized Representative for the assessee that where the treatment of one time lease premium was treated as advance rent and has been approved by the Hon’ble High Court, then in the absence of any contrary decision on this point wherein the issue of lease premium of said controlled Government Corporation was involved have been decided, then the said decision of the Hon’ble High Court becomes binding on the Tribunals operating all over the country. For this proposition, reliance was placed on the decision of the Hon’ble Bombay High Court in CIT Vs. Godavaridevi Saraf reported in 113 ITR 589 (Bom) and also decision of Pune Bench of Tribunal in Bhagini Nivedita Sahakari Bank Ltd. Vs. DCIT (2018) 100 taxmann.com 375 (Pune-Trib.). On the last date of hearing, the learned Authorized Representative for the assessee furnished tabulated details and pointed out that the land utilized for the purpose was 179.02 Hectors, which was valued at ₹ 1.74 crores, cost of construction of same was ₹ 12.92 crores. This cost of land and cost of construction was to be apportioned over the period from 01.04.2002 to 31.03.2014 on the basis of land transferred and tenements sold. The learned Authorized Representative for the assessee also pointed out that there was still balance area available with the assessee of 55.37 Hectors and constructed area of 2171 sq.mtrs. The learned Authorized Representative for the assessee also referred to second note on the addition on account of infra cost and it was pointed out that same was proportionate over the whole construction cost and was already added. However, depreciation on such infrastructure and development has to be allowed. It was also pointed out by the learned Authorized Representative for the assessee that the assessee had already claimed expenditure on purchase of assets as application of money which has been allowed in the hands of

ITA Nos.929 to 932/PUN/2014 28 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

assessee. Referring to decision of Hon’ble High Court, it was pointed out that benefit of accumulation needs to be allowed and because of insertion of Explanation 6 to section 43(6) of the Act, where any of the person comes from the exempt era i.e. income being taxable w.e.f assessment year 2003-04, then on this the CIT(A) has already allowed the relief vide para 17 in assessment year 2003-04. Referring to order of the Hon’ble High Court of Madhya Pradesh in M.P. Audyogik Kendra Vikas Nigam (Indore) Ltd. Vs. ACIT (supra), wherein in the case of said case it was arm of Government, where the income was taxable then the same has to be taxed over period of 99 years. The learned Authorized Representative for the assessee pointed out that obligation on the lessor that if any person surrenders lease after period of 5 years, then 93/99 years premium had to be returned; this was contractual liability of assessee. However, the Tribunal in such circumstances had held that accounting is to be done of the whole receipt on the date of entering into agreement, ignoring the submissions of assessee on surrender of lease after lock in period of 5 years.

ITA Nos.929 to 932/PUN/2014 29 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

ITA Nos.929 to 932/PUN/2014 30 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

in case the surplus is determined at a higher figure than the one declared by assessee, then the assessee should be given an opportunity to file revised form No.10 in this regard. The connected issue raised by assessee is depreciation on assets, cost of which has been allowed as application of income in the hands of assessee. The case of Revenue on the other hand, is that revenue though is taxable in the hands of assessee but the cost of construction and all other costs including infra cost was incurred during earlier period and the same should not be allowed as deduction in current year. Similarly, in respect of depreciation on assets and its WDV, the issues were raised by Department against claim of assessee. This is without prejudice to the plea of assessee before the authorities below and even before us that the income which needs to be assessed in the hands of assessee is 1/99th of lease premium and not the whole lease premium. In this regard, the learned Authorized Representative for the assessee has relied on the terms of lease and also latest decision of the Hon’ble High Court of Madhya Pradesh in M.P. Audyogik Kendra Vikas Nigam (Indore) Ltd. Vs. ACIT (supra).

ITA Nos.929 to 932/PUN/2014 31 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

sub-section (a) is invariably to ‘income’ and not to ‘total income’. Further vide para 3 it is explained that in case of business undertaking held under trust, its income would be the income as shown in accounts of the undertaking. Under section 11(4) of the Act, it is provided that any income of business undertaking, determined in accordance with provisions of the Act, which is in excess of income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious and hence, would be charged to tax under sub-section (3). As only income disclosed would be eligible for exemption under section 11(1) of the Act, the permitted accumulation of 25% would be calculated with respect to this income. Clause (4) refers to income derived by the trust from house property, interest on securities, capital gains or other sources and it is provided that the word ‘income’ should be understood in its commercial sense.

ITA Nos.929 to 932/PUN/2014 32 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

cannot be determined unless and until the expenses or the obligations which have been incurred are set off against the receipts. The expression "profits and gains" has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom—whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date.

ITA Nos.929 to 932/PUN/2014 33 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

completion of assessment and in the case where there was only technical plea raised by Revenue, then that should not take away the benefit accruing to the assessee, in law. In view of chequered history of case pertaining to registration under section 12A of the Act, it was observed that rigors of section have been somewhat diluted by Revenue’s understanding and the issuance of circular. The said circular contemplated condonation of delay in filing documents, which would enable the assessee to avail of the benefits. The circular No.273, dated 03.06.1980 does not dispense with the filing of form No.10. The Commissioner is only vested with the powers to accept the same after the specified period. In such circumstances and where the objects of trust were found to be genuine, the Assessing Officer was directed to carry out de-novo assessment and assessee’s claim for benefit of exemption under section 11 of the Act deserved acceptance.

ITA Nos.929 to 932/PUN/2014 34 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

has been incurred should also be allowed on matching principle. For applying matching principle, reliance was placed on the decision in Calcutta Co. Ltd. Vs. CIT (supra) and it was held that for determining true profits, cost incurred by assessee towards construction of houses and plots, which has been accumulated in the books was also to be recognized. The Tribunal further held that in case where cash system of accounting was followed, then whatever expenditure has been incurred in cash during the year has to be allowed. In the case before the Tribunal, the assessee had neither offered installments as income nor claimed expenditure. So, it was held that installments received had been rightly included in the income of assessee, therefore, corresponding expenditure which has been incurred in cash towards construction of such houses and flats was also to be allowed.

ITA Nos.929 to 932/PUN/2014 35 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

state of affairs as on that date and stated various assets and liabilities at their historic cost. Till 31.03.2002, the assessee was not preparing any Balance Sheet and / or Profit and Loss Account. The Balance Sheet as on 01.04.2002 was the opening balance of various assets and liabilities of assessee, which has not been disturbed by the Assessing Officer and CIT(A). The assessee adopted rent model for offering its revenue from the lease premium. As such, 99 years lease premium was spread over entire 99 years life of the lease agreement period. The assessee thus, did not claim deduction of land cost, constructed area cost, infra cost and depreciation on infra cost in the return of income filed from assessment year 2003-04 onwards. Thereafter, the assessee filed returns from time to time, though with delay in the initial years. The return for assessment year 2003-04 was filed on 11.07.2008 and in response to notice under section 148 of the Act on 28.03.2008 declaring nil income claiming exemption under section 11 of the Act. The assessment in the case was completed under section 143(3) r.w.s. 148 of the Act assessing income at ₹ 7.42 crores. The Revenue authorities rejected the rent model of offering revenue adopted by assessee; instead, the entire lease premium were taxed in the year of registration of lease deed and the said method was applied as appropriate method for computing taxable income in the hands of assessee. The plea of assessee before the authorities below was that in case the model of taxing entire lease premium is adopted, then the concept of matching principle should be applied as a corollary. The related cost i.e. land cost, constructed area cost, infra cost and depreciation on infra cost should be allowed to assessee. The said issues were raised before the Assessing Officer and CIT(A) in the respective years but the same were not accepted in toto. The assessee filed an appeal against order of assessment. The CIT(A) allowed the issue of depreciation partially. Both the assessee and Revenue filed an appeal

ITA Nos.929 to 932/PUN/2014 36 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

before the Tribunal. Before decision of Tribunal, the Commissioner issued notice under section 263 of the Act and passed order under section 263 of the Act on 07.03.2011. The Tribunal set aside the issue of depreciation in respect of Revenue appeal and directed adjudication under the consideration, since the registration under section 12A of the Act was available. The Assessing Officer was thus, directed to compute income in terms of sections 11 and 12 of the Act. The Tribunal passed this order on 30.12.2011. Simultaneously, on the same day, the Assessing Officer passed an order under section 143(3) r.w.s. 263 of the Act on 30.12.2011 determining income at ₹ 27.63 crores. Against the said order, appeal was filed before the CIT(A), who clearly acknowledged that the whole gamut of assessment had changed because of registration granted under section 12A of the Act. The CIT(A) thereafter, decided the issue and the assessee is aggrieved by the same and hence, the appeal before us. Meanwhile, the Tribunal has also decided appeal filed against order of Commissioner passed under section 263 of the Act.

ITA Nos.929 to 932/PUN/2014 37 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

Once the manner of recognizing income in the hands of assessee undergoes change, then corresponding expenditure which has been incurred by assessee either in earlier years or during the year under consideration need to be appropriated. Undoubtedly, the assessee had purchased the piece of land in earlier years i.e. the years of regime 10(20A) exemption. The assessee had developed part of the land for establishing a township in the area and out of balance part, some plots of lands were carved out and sold to individual lessees; on other portion of land, the assessee had constructed tenements which were again leased to various lessees. The concept of matching principle requires that when the revenue is assessed in the hands of assessee, then corresponding expenditure needs to be appropriated and allowed as deduction, as what is to be taxed in the hands of assessee is ‘income’ and not the ‘total revenue’ earned by it. Applying the propositions laid down as referred in the paras hereinabove, we find merit in the plea of assessee in application of matching principle of claim of expenditure on account of various items.

ITA Nos.929 to 932/PUN/2014 38 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

2 Area Area Land in possession of PCNTDA is Total constructed area of as per the certificate given by PCNTDA as of 31/3/2002 is PCNTDA dated 27/11/2018. taken from the certificate of PCNTDA dated 27/11/2018 Cost Total land cost of Rs.774.86 lacs Cost is taken from the Opening Total cost of constructed area Balancesheet of PCNTDA as of of Rs.12399.72 lacs is taken 31/3/2002 from the Opening Balancesheet as of 31/3/2002 3 On an overall basis, PCNTDA has (Not applicable) confirmed that, land area of about 50% is used for creating various INFRA facilities and balance 50% land area is used for various developments to be used for own purpose or to be used for leasing purpose. 4 Area Same as step 2 above Balance 50% area of land is considered available for various usages by PCNTDA as per letter dated 27/11/2018 Cost Though only 50% of acquired area is considered as available for development and further usage, 100% of land cost is considered for the further proration 5 Area Area On an overall basis, PCNTDA has (Not applicable) confirmed that, land area of about 200 hectors (supported by Google image) is used for construction of premises for leasing. Cost As approx area of 200 hectors is Cost utilized for construction premises, As approx area of 200 hectors the proportionate land cost has is utilized for construction been reduced from the total land premises the proportionate cost cost and taken to the has been added to the cost of Construction cost working table. constructed premises. 6 Area Area The said area is balance derived Same as step 4 above land area which is available for develop & lease.

Cost Cost Total cost incurred on The proportionate cost is derived constructed premises including on the basis of total land cost & proportionate land cost total land area as to the considered through step no 5 proportion of balance derived area

ITA Nos.929 to 932/PUN/2014 39 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

7 Area Area Land which is leased out prior to Constructed premises which is 31/03/2002 is as per certificate of leased out prior to 31/03/2002 PCNTDA dated 27/11/2018 Cost Cost Proportionate cost has been Proportionate cost has been worked out the basis of total land worked out the basis of total cost & total land area as to the constructed area & total proportion of area sold prior to construction cost as to the 01/04/2002 proportion of area sold prior to 1/04/2002 8 Area Area Land leased out during Constructed Area leased out 01/04/2002 till 31/03/2014 is as during 01/04/2002 till per certificate of PCNTDA dated 31/03/2014 is as per certificate 27/11/2018. The year wise area of PCNTDA dated 27/11/2018. leased out is also mentioned in The year wise constructed area the said certificate dated leased out is also mentioned in 27/11/2018 the said certificate dated 27/11/2018. Cost Cost Proportionate cost has been Proportionate cost has been worked out the basis of total land worked out the basis of total cost & total land area as to the land cost & total land area as to proportion of area sold from the proportion of area sold from 1/04/2002 till 31/03/2014. 1/04/2002 till 31/03/2014 The appellant is eligible to claim The appellant is eligible to the said proportionate cost in a claim the said proportionate year in which area is leased out. cost in a year in which area is leased out. 9 Area Area Balance Area is available to Balance area is available to leased out is derived from above lease out on 31/03/2014 is as steps per certificate of PCNTDA dated 27/11/2018. Cost Cost Balance cost available to claim as Balance cost available to claim on 31/03/2014 is derived from is derived from above steps above steps

Step Particulars Land Constructed Area No. Area Amount Area Amount Hectors Rs. In lacs (SQ Meters) Rs. In lacs 1 Total Notified Area to 2586.55 3,96240.80 PCNTDA 2 Land in possession / 1586.72 774.86 3,96,240.80 12,399.72 constructed area as on 31/3/2002

ITA Nos.929 to 932/PUN/2014 40 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

3 Presumption of 50% land 50% Not Not used for INFRA applicable applicable 4 Developed Land Area / 793.36 774.86 3,96,240.80 12,399.72 constructed area 5 Less: Area on which -200.00 -195.34 195.34 construction carried out 6 Available area of Land for 593.36 579.52 3,96,240.80 12,595.06 lease / constructed area 7 Less: Area leased prior to -358.97 -350.60 -3,53,394.97 -11,233.14 31/03/2002 8 Less: Area leased after -179.02 -174.85 40,674.83 1,292.91 1/04/2002 till 31/03/2014 9 Balance area available as 55.37 54.08 2,171.00 22,535.29 on 31/03/2014

ITA Nos.929 to 932/PUN/2014 41 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

said land at ₹ 1.75 crores needs to be appropriated year-wise and allowed as land cost against revenue booked on entering into lease deed with lessees (year-wise).

ITA Nos.929 to 932/PUN/2014 42 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

as deduction in the hands of assessee, from year to year, as the assessee gets appropriate benefit of infra cost by way of charging the lease premia from the respective lessees. The assessee has also raised an additional ground of appeal for allowing depreciation on opening infra cost and also on infra cost incurred from year to year. Our attention was drawn to Paper Book-4 i.e. Balance Sheet for assessment year 2003-04 as on 31.03.2003, wherein infra cost has been declared at ₹ 40.56 crores. In addition, the assessee has pointed out that it has also booked infra cost relating to water and drainage system at ₹ 3.72 crores, depreciation on which also is being claimed by assessee. The assessee in this regard has made the following submissions:- “INFRA cost relating to constructed area (leased / used) – In the Balancesheets, there are separate INFRA costs w.r.t. constructed premises, appearing under the head of ―properties Constructed‖. This cost is specific to the leased out / own used constructed area. As per the MATCHING principle, such costs are required to be pro-rated over the entire construction cost and claimed on proportionate basis. The said cost is part of cost of constructed premises and this step is already considered in the above working. INFRA cost relating to Water & drainage system – In the Balancesheet as of 31/3/2002 (i.e. opening balancesheet), cost of Rs.372.31 lacs is shown under this head. Further, the said item appears in the grouping of fixed assets. As per facts, this INFRA cost is incurred for the overall area of activity of PCNTDA. In other words, the said cost does not relate specifically to leased out land area or leased out constructed area. Appellant has been claiming depreciation on the said cost and the I-T department has been granting the same every year. Hence, there is no dispute about depreciation of this INFRA cost item. Depreciation on INFRA costs appearing in MISC EXPENDITURE – In the opening balancesheet as of 31/3/2002, cost of Rs.3919.00 lakhs is appearing. The said cost is accumulation of various costs relating to creation of roads, creation of parks, water tanks, bridges, etc. Now, this INFRA cost is an asset used by PCNTDA for its overall activity. Ownership of the said asset (i.e. INFRA facilities) vests with PCNTDA. In other words, ownership of such INFRA facilities does not get transferred to any users / lessees. Considering this aspect, PCNTDA is eligible to claim depreciation on cost of such INFRA facilities / INFRA assets. These INFRA costs are incurred on an ongoing basis / regular basis. Learned I-T authorities have simply allowed costs incurred in each year on these INFRA facilities. However, the learned I-T authorities ought to have granted depreciation on these INFRA facilities costs which includes opening balance as on 31/3/2002 as well as yearly costs incurred thereafter. PCNTDA keeps reliance on the apex court ruling in the case. CIT vs Rajasthan & Gujarati Charitable Foundation Poona – 89 taxmann.com 127 (SC).‖

ITA Nos.929 to 932/PUN/2014 43 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

ITA Nos.929 to 932/PUN/2014 44 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

ITA Nos.929 to 932/PUN/2014 45 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

were transferred in earlier years and only part of premium for the year under consideration was offered to tax. The Assessing Officer is directed to adopt correct figures of current year and exclude the figures relating to earlier years.

ITA Nos.929 to 932/PUN/2014 46 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

assessee trust. The Assessing Officer had re-worked the WDV of assets by allowing depreciation for one year. However, in view of Explanation 6 to section 43(6) of the Act, we find no merit in the issue raised by Revenue in this regard. We have already held in the paras hereinabove that the assessee is entitled to claim depreciation on the assets on WDV starting from 01.04.2002 and cost of assets is to be adopted, since the assessee in earlier years was not filing any return of income in 10(20A) era of exemption.

ITA Nos.929 to 932/PUN/2014 47 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

ITA Nos.929 to 932/PUN/2014 48 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

Secondly, it was contended that, lease premium appearing liability side are in the nature of Capital Receipt.

ITA Nos.929 to 932/PUN/2014 49 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

was neither relied on nor referred before Tribunal during appeal against order under section 263 of the Act.

ITA Nos.929 to 932/PUN/2014 50 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

years premium had to be returned. Such a liability was contractual liability of assessee. In the facts before the Hon’ble High Court of Madhya Pradesh, it was noted that land was transferred through the Government of Madhya Pradesh and apart from there, assessee was also authorized to purchase / acquire land of its own. The assessee was undoubtedly, managing and leasing the said land as an independent owner of land, the sums equated as land premium was used for incurring expenditure to develop the land and maintaining industrial infrastructure. The Hon’ble High Court held that there was no denial that the transaction had to be taxed under the Income-tax Act, unless the same is exempted by a particular provision of the Act. The assessee was offering 1/99 of land premium (out of total land premium received by it during the year) as taxable. The assessee claimed that lease premium was not its income before the Hon’ble High Court, so it was decided that the said land premium was the income of assessee to be taxed under the Income- tax Act. Vide para 31 it was held that from the perusal of clauses of memorandum, it was revealed that the assessee was in the business of leasing out of land and getting rental income as well as premium, therefore, the land premium is nothing but a revenue receipt in the form of advance rent, which has loosely been named as land premium. The Hon’ble High Court noted that the assessee itself had offered 1/99th portion of such land premium as revenue receipt to be taxed in the year under consideration, which goes to prove that the nature of receipt is revenue. Reference was made to decision of the Hon'ble Supreme Court in the case of Member of the Board of Agricultural Income-tax v. Sindhur Chaudhurani (1957) 32 ITR 169 (SC) and it was held as under by Hon’ble High Court of Madhya Pradesh:- ―34. In the case of Member of the Board of Agricultural Income-tax v. sindhur Chaudhurani (1957) 32 ITR 169 (SC) the Salamis/Premium were not at all dependent on the payment of the rent charged whereas, in the instant case, the land premium is nothing but advance rent fully depdent on the rent of

ITA Nos.929 to 932/PUN/2014 51 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

rent. Further in that case, the Salami was defined as lump sum non recurring receipt of money paid by tenant to landlord before making a settlement of holding. Whereas, in the case under reference, where leasing of plot is for 99 years and there is no provision and conditions in the agreement to suggest the modality of transfers and renewable after 99 years.” (highlight provided by us) 56. The Hon’ble High Court vide para 35 after relying on the decision of Hon'ble Supreme Court in Ukhara Estate Zamindaries (P.) Ltd. v. CIT (1979) 120 ITR 549 (SC) observed as under:- ―35. The case Ukhara Estate Zamindaries (P.) Ltd. v. CIT (1979) 120 ITR 549/2 Taxman 402 (SC) relied by the appellant, is also distinguishable from the facts of the instant case. In that case, the assessee was himself a lessee who took over the Zamindari Properties of a family for 99 years. The lease items comprised of coal bearing lands/mines, government promissory note, jewellery, arrears of rent etc. The appellant granted several sub leases for 90 years to various companies and received salami as well as compensation for compulsory acquisitions. This was a single lease by the appellant and receipt of salami by granting of sub leases for management of real property as an owner of lease hold interest was construed and treated as capital asset. Whereas in the instant case, the land was given by the State Government and the assessee has transferred the same on long term lease and earned rental income as well as the advance rent in the form of land premium. The issue has been dealt with by all the authorities considering all the aspects of the case and recording their finding. (highlight provided by us)

ITA Nos.929 to 932/PUN/2014 52 ITA Nos.944 & 945/PUN/2014 CO Nos.78 & 79/PUN/2014

applying dictate of Hon’ble High Court of Madhya Pradesh. Accordingly, this plea is dismissed. The grounds of appeal on merits are thus, allowed in favour of assessee.

Order pronounced on this 27th day of June, 2019.

Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 27th June, 2019. GCVSR आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : 1. अऩीऱाथी / The Appellant; 2. प्रत्यथी / The Respondent; 3. आयकर आयुक्त(अऩीऱ) / The CIT(A)-2, Nashik; 4. The CIT-V, Pune; ववबागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, ऩुणे “फी” / DR 5. ‘B’, ITAT, Pune; 6. गार्ड पाईऱ / Guard file. आदेशािुसार/ BY ORDER, सत्यावऩत प्रतत //True Copy// वररष्ठ तनजी सधिव / Sr. Private Secretary आयकर अऩीऱीय अधधकरण ,ऩुणे/ ITAT, Pune