M/S. SEZ INDORE LIMTED,INDORE vs. THE DCIT CIRCLE -3(1), INDORE

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ITA 206/IND/2016Status: DisposedITAT Indore21 March 2018AY 2010-11177 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the expenses debited to the profit and loss account were for day-to-day maintenance and administrative work and not for capital nature, directing the AO to delete the addition. The issue of land premium was considered debatable, and the CIT(A)'s view was affirmed.

What were the facts?

The assessee, Madhya Pradesh Audyogik Kendra Vikas Nigam (Indore) Limited (MPAKVN) and SEZ Indore Limited, appealed against additions made by the Assessing Officer (AO) and confirmed by the CIT(A). The additions primarily related to the capitalization of expenses and the taxability of land premium.

What were the issues?

Whether expenses debited to the profit and loss account should be capitalized, and whether land premium received is taxable income of the assessee.

Which sections of the Income-tax Act were involved?

Section 145

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Income Tax Appellate Tribunal, INDORE BENCH, INDORE

Before: SHRI KUL BHARAT & SHRI MANISH BORAD

Hearing: 21.03.2018

आदेश /O R D E R PER BENCH : These are total fifteen appeals filed by the assessee and

Revenue. Appeals in I.T.A.Nos. 347/Ind/2013 to 351/Ind/2013 are

filed by the assessee Madhya Pradesh Audyogik Kendra Vikas

Nigam (Indore) Limited, Indore, ( for short – MPAKVN ) which relate

to assessment years 2003-04 & 2004-05 and 2006-07 to 2008-09

are directed against the order passed by Ld. CIT(A)-I, Indore, dated

26.02.2013 and Appeals in I.T.A.Nos. 760 & 761/Ind/2014 are also

-: 3 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

filed by MPAKVN, relating to assessment years 2009-10 & 2010-11

are directed against the order of Ld. CIT(A)-I dated 22.08.2014.

Appeals in the case of SEZ Indore Limited, Indore, are filed in

I.T.A.Nos. 571/Ind/2014, 205 & 206/Ind/2016 are directed against

the orders of Ld. CIT dated 28.03.2014 for assessment year 2006-

07 and Ld. CIT(A)-II, Indore, dated 30.11.2015 for assessment years

2009 & 2010-11. Revenue has also filed appeals in I.T.A.Nos. 530 to

534/Ind/2016 relating to assessment years 2003-04, 2004-05 and

2006-07 to 2008-09. The Ld. Representatives of the parties stated

that I.T.A.No. 347/Ind/2013 may be taken as a lead case, the

decision of which shall cover all appeals. We, therefore, reproduce

grounds in I.T.A.No. 347/Ind/2013 :-

I.T.A.No. 347/Ind/2013 : A.Y. 2003-04 : 1. The assessee has taken following grounds :-

1.

That the Ld. CIT(A) has erred in confirming the addition

of Rs. 2,18,75,469/- in respect of alleged reduction of

profit on account of debiting the expenditure in respect

of expenses incurred by the appellant with respect to

employees remuneration and benefits, administrative

and general overheads, etc. to the profit and loss

-: 4 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

account . The CIT(A) has erred in not appreciating the

fact that the transfer of expenses, which are prima-facie

revenue in nature of the profit and loss account is

according to the method of accounting consistently

followed by appellant and such expenses not

attributable to any specific project/fixed assets have

been rightly debited to profit and loss account without

being capitalized.

2.

That the Ld. CIT(A) has erred in law in confirming

the addition of Rs. 95,93,720/- in respect of land

premium received by the appellant for and on behalf of

the Governor of the State of M.P., thereby notionally

treating the said amount as income of the appellant.

3.

Further, the Ld. CIT(A) failed to see that the receipts

in respect of land premium having been receive d by

the appellant on behalf of the State Government was

in the nature of a liability to the State Government,

which by no stretch of imagination could be treated as

income of the appellant.

-: 5 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

4.

That the Ld. CIT(A) has erred in arriving at a

finding that the appellant is a lawful owner of the land

in question of treating the appellant at par with the

owner of the land and on that basis arriving at the

conclusion that the receipts in respect of the land

premium constitute income of the appellant taxable in

the hands of the appellant. The said finding arrived at

by the Ld. CIT(A) being based on pure surmises and

conjectures without any lawful basis for the same

constitute perverse finding in law and vitiates the

decision/conclusion arrived at by the Ld. CIT(A) on that

basis.

5.

That Ld. CIT(A) has also erred in law in arriving at

the findings that the appellant is engaged in the

business of development of land for industrialization

with profit motive. The said finding is contrary to the

decision of Supreme Court in the case of Gujarat

Industrial Development Corporation (227 ITR 414) and

hence vitiated in law. The Ld. CIT(A) failed to

appreciate that the functions and powers of the

-: 6 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

present appellant which acts as a wing of the State

Government in establishing and managing the

industrial areas does not carry on any business or

trade but its sole purpose of establishment is the

growth and development of industries in the area

assigned to it. The Ld. CIT(A) also failed to appreciate

that since the appellant merely acts for an on behalf of

the State of MP, the receipts in respect of land

premium etc. constitute income of the State of M.P. and

as such same cannot be brought to tax in the hand of

appellant.

6.

Without prejudice to above grounds regarding

non taxability of land premium in the hands of the

appellant, the receipts in respect of land premium

being capital receipts, cannot be brought to tax in the

hands of the appellant. The Ld. CIT(A) has also erred

in not appreciating the fact, that the treatment of

particular receipt in the books of account of the

appellant is not decisive and conclusive of the nature

of receipt and if the receipt in question is a capital

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receipt, the same cannot be brought to tax only on the

basis of the treatment by appellant in its accounts.

7.

That the Ld. CIT(A) also failed to appreciate

that since the grant of lease for a period 99 years is a

transfer of property under the provisions of the

Transfer of Properties Act, 1882, the consideration for

such transfer in the shape of premium in addition to

the yearly rent reserved clearly constitutes capital

receipt and cannot be brought to tax as a revenue

receipt or income.

8.

That the Ld. CIT(A) has also erred in law in

treating the land premium receipts as advance rents

and has also erred in law in considering the same as

revenue receipt liable to tax in hands of the appellant.

It is, therefore, prayed that the present appeal

be allowed and the order under appeal be set aside

in toto.”

-: 8 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

2.

The grounds of appeal as taken by the assessee before this

bench for adjudication in different years are summarized as under

for clarity :-

M/s M.P Audyogik Kendra Vikas Nigam (I) Ltd.,Indore 143(3) Appeal 2003-04 2004-05 2006-07 2007-08 2008-09 2009-10 2010-11 347/Ind-2013 348/Ind-2013 349/Ind-2013 350/Ind-2013 351/Ind-2013 760/Ind-2014 761/Ind-2014 Nature of S.No Grounds G G G G G G No No G Nos Addition Nos Addition Nos Addition Nos Addition s Addition s Addition Nos Addition Grounds challenged in Appeal Under Statement 21875469 1 of Profit 1 1 2 to 1 1 to 1 to 1 to 7506849 9593720 17171895 46118381 120602535 to 61737187 Land 8 to7 7 7 2 8 2 2 Premium Additional Ground of Appeals 3070564 Exclusion of 10163368 10330634 15462151 1 18979813 1 24759767 1 31905790 1 3 3 Lease Rent 1 1 1 Exclusion of Land 413878 3659868 - - - - - - - - - 4 Premium 2 2 - Exclusion of 9575465 9184362 2815235 7298375 2 11993632 2 35156830 2 103034406 2 Interest on 6 5 Deposit 3 3 2

M/s SEZ Indore Limited

143(3) Appeal

2009-10 2010-11 2006-07 205/Ind -2016 206/Ind-2016 571/Ind-2014 S.No Nature of Grounds

Ground Groun No. Addition d No. Addition Ground No. Addition

-: 9 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Grounds challenged in Appeal

1 Lease premium 1 to 2 58503365 1 to 2 13,60,81,476 8,98,42,251

Additional Ground of Appeals 2 Lease rent 1,99,95,758 1 2,64,95,713 1

3.

Since the grounds as taken in the appeal of the assessee

MPAKVN and also in the appeal of M/s SEZ Indore Limited, were

more or less similar in all the appeals except one or two other

grounds, we dispose of all these appeals by this common order for

the sake of convenience.

4.

In all these appeals additional grounds of appeal were taken.

The Ld. Counsel for the assessee filed application in each appeal for

admission of the additional grounds of appeal. The Ld. Counsel

stated that no fresh material was required for deciding the same. All

the materials were available before the AO. The Ld. Counsel for the

assessee placed reliance on the various decisions of the Hon’ble

High Court and also Hon'ble Supreme Court.

5.

The Ld. Counsel for the assessee has submitted the identical

written submissions dated 20.03.2017 in all the appeals.

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6.

Additional grounds of appeal taken in I.T.A.No. 347/Ind/2013

for the A.Y. 2003-04, read as under :-

“1] That on the facts and in the circumstances of the

case the amount of lease rent of Rs 1,01,63,368/- as

included in the figure of total income be treated as capital

receipt and requires to be excluded from the total income of

the assessee being not liable to tax.

2] That on the facts and in the circumstances of the

case the amount of land premium earned from areas of Rs

4,13,878/- as included in the figure of total income be

treated as a capital receipt and requires to be excluded

from the total income of the assessee being not liable to

tax.

3] That on the facts and in the circumstances of the

case the amount of interest on deposit of Rs 91,84,362/-

as received by the assessee in the capacity of the nodal

agencies of the state government, included in the figure of

total income, not liable to tax and therefore requires to be

excluded from the total income of the assessee.”

-: 11 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

7.

The Ld. Counsel for the assessee submitted a written

submission in I.T.A.No. 347/Ind/2013 on additional grounds of

appeal, which reads as under:-

1.

“Income Tax appeal in the case of the above assessee for

the Assessment Year 2003-04 has been fixed for hearing

on 23-03-2017. In the said appeal, the assessee has

agitated appeals on various grounds. However, few

grounds remains to be incorporated in the appeal which

are very relevant and decided on the basis of documents

as available on the file of the assessee.

2.

The assessee being a state government company formed

by the State Government for specific purpose for

development of the Industrial area on the land as provided

by the state government. That similar activities were

carried out by all the corporation in different states and

registration were also granted U/s 12AA of the Income Tax

act and the amount as received by them was also not

liable to tax.

3.

The assessee company is wholly owned by the state

government and all the policy matter decisions regarding

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allotment of land and land premium were also taken at

ministry level. The assessee company merely act on behalf

of the state government.

4.

The assessee company worked as a nodal agency of the

state government, the entire funds as available with the

assessee company was actually belonging to the state

government.

5.

That while finalization the books of account of the

assessee company, following amount was credited in the

Profit & Loss account even when the same was not liable

to tax under the Income tax Act:-

S.No Nature of receipt Remarks 1 Land Premium Cost of the land was borne by the state government and the amount as received on behalf of the state government. Hence, not liable to tax but 1/99 of the land premium amount was inadvertently offered for tax 2 Lease Rent Lease rent received in connection with the land of State government as allotted by the assessee requires to be credited as liability in the books of the assessee but inadvertently credited in the Profit & Loss account

-: 13 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

3 Interest on The amount of state government received in Fixed deposit form of grants and land premium / Lease rent as received on account of the state government was deposited with the bank during the period in which the same was not used by the assessee. The assessee being a nodal agencies not liable to pay tax on the amount of Interest on deposit

6] That as per Article 265 of the Constitution of India,

1949, which reads as under:-

265.

Taxes not to be imposed save by authority of

law no tax shall be levied or collected except by

authority of law.

7.1] That Hon’ble Delhi High Court in the case of CIT vs

Jai Parabolic Springs Ltd as reported in 306 ITR 0042 [

Delhi] has held that :-

“18. Further, revenue expenditure which is incurred

wholly and exclusively for the purpose of business

must be allowed in its entirety in the year in which it

is incurred. It cannot be spread over a number of

-: 14 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

years even if the assessee has written it off in his

books over a period of years. Reliance can be placed

on Madras Industrial Investment Corporation Ltd. vs.

CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802

(SC).”

19.

In view of the above discussion, it is very clear

that there is no prohibition on the powers of the

Tribunal to entertain an additional ground which

according to the Tribunal arises in the matter and for

the just decision of the case. Therefore, there is no

infirmity in the order of the Tribunal.

7.2] That Hon’ble Apex Court in the case of Jute

Corporation of India Ltd. vs. CIT (1990) 88 CTR (SC) 66 :

(1991) 187 ITR 688 (SC) while dealing with the powers of

the AAC, the Supreme Court observed that :

“An appellate authority has all the powers which the

original authority may have in deciding the question

before it subject to the restrictions or limitations, if

-: 15 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

any, prescribed by the statutory provisions. in the

absence of any statutory provision, the appellate

authority is vested with all the plenary powers which

the subordinate authority may have in the matter.

There is no good reason to justify curtailment of the

power of the AAC in entertaining an additional

ground raised by the assessee in seeking

modification of the order of assessment passed by

the ITO. This Court further observed that there may

be several factors justifying the raising of a new plea

in an appeal and each case has to be considered on

its own facts. The AAC must be satisfied that the

ground raised was bona fide and that the same

could not have been raised earlier for good reasons.

The AAC should exercise his discretion in permitting

or not permitting the assessee to raise an additional

ground in accordance with law and reason. The

same observations would apply to appeals before the

Tribunal also.”

-: 16 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

7.3] That Hon’ble Apex Court in the case of National

Thermal Power Co. Ltd. vs. CIT (1999) 157 CTR (SC) 249 :

(1998) 229 ITR 383 (SC), where the Hon'ble Supreme Court

observed that :-

"The power of the Tribunal in dealing with appeals is

thus expressed in the widest possible terms. The

purpose of the assessment proceedings before the

taxing authorities is to assess correctly the tax

liability of an assessee in accordance with law. We

do not see any reason to restrict the power of the

Tribunal under s. 254 only to decide the grounds

which arise from the order of the CIT(A). Both the

assessee as well as the Department have a right to

file an appeal/cross-objection before the Tribunal. We

fail to see why the Tribunal should be prevented from

considering questions of law arising in assessment

proceedings although not raised earlier."

-: 17 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

7.4] Hon’ble Bombay High Court in the case of Nirmala L.

Mehta v. A. Balasubramaniam, Commissioner of Income-

tax 269 ITR 1 (Bom) wherein it was held as under:-

“There cannot be any estoppel against the statute.

Article 265 of the Constitution of India in

unmistakable terms provides that no tax shall be

levied or collected except by authority of law.

Acquiescence cannot take away from a party the

relief that he is entitled to where the tax is levied or

collected without authority of law. _________”.

7.5] That Hon'ble Bombay High Court in the case of

Balmukund Acharya Vs DCIT as reported in 310 ITR 310

has held that :-

“31. Having said so, we must observe that the apex

Court and the various High Courts have ruled that

the authorities under the Act are under an obligation

to act in accordance with law. Tax can be collected

only as provided under the Act. If any assessee,

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under a mistake, misconception or on not being

properly instructed is over assessed, the authorities

under the Act are required to assist him and ensure

that only legitimate taxes due are collected [see S.R.

Koshti vs. CIT (2005) 193 CTR (Guj) 518 : (2005) 276

ITR 165 (Guj), C.P.A. Yoosuf vs. ITO (1970) 77 ITR

237 (Ker), CIT vs. Bharat General Reinsurance Co.

Ltd. (1971) 81 ITR 303 (Del), CIT vs. Archana R.

Dhanwatey (1981) 24 CTR (Bom) 142 : (1982) 136

ITR 355 (Bom)].

32.

If particular levy is not permitted under the Act,

tax cannot be levied applying the doctrine of estoppel

[see Dy. CST vs. Sreeni Printers (1987) 67 SCC 279].

33.

This Court in the case of Nirmala L. Mehta vs. A.

Balasubramaniam, CIT (2004) 191 CTR (Bom) 8 :

(2004) 269 ITR 1 (Bom) has held that there cannot be

any estoppel against the statute. Article 265 of the

Constitution of India in unmistakable terms provides

that no tax shall be levied or collected except by

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authority of law. Acquiescence cannot take away

from a party the relief that he is entitled to where the

tax is levied or collected without authority of law. In

the case on hand, it was obligatory on the part of the

AO to apply his mind to the facts disclosed in the

return and assess the assessee keeping in mind the

law holding the field. ”

7.6] That Hon’ble Delhi High Court in the case of DCM

Benetton India Limited vs CIT as reported in 173 Taxman

0283 has held that:-

“Assessee is entitled to raise an additional ground of

appeal before the Tribunal which was not raised

before the CIT (A); matter remanded to the AO.

8] That in view of the above, whether the amount

of lease rent, land premium and Interest on deposit

are taxable as income of the assessee or not liable to

tax is purely a question of law and as per article 265

of the constitution the tax cannot be levied until and

-: 20 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

unless the same was expressly provided under the

Act. Hence, Hon’ble Bench is hereby requested to

admit the additional ground of appeal and oblige.”

8.

Ld. Departmental Representative opposed the applications for additional grounds of appeal.

9.

We have gone through the written submissions on additional

grounds of appeal submitted in the appeals by Ld. Counsel for the

assessee. We have also gone though the case laws relied upon by

the Ld. Counsel for the assessee. The claim as lodged by the

assessee by way of additional grounds of appeal relates to exclusion

of the lease rent, Land premium and interest on funds of State

Government. The decisions of Hon’ble Apex Court in the case of

Jute Corporation of India Ltd. vs. CIT [Supra] and National Thermal

Power Co. Ltd. vs. CIT [Supra] and various other High courts are

squarely applicable on the facts of the present case. Respectfully

following ratio laid down therein, we admit the additional grounds as filed by the assessee before this Hon’ble Bench for adjudication.

I.T.A.No. 347/Ind/2013 : A.Y. 2003-04: Ground Nos. 2 to 8 : Issue regarding taxability of land premium as income:

-: 21 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

10.

The assessee through ground nos. 2 to 8 in the appeal in

I.T.A.No. 347/Ind/2013 and other appeals has challenged the taxability of the Land premium as income of the assessee company.

11.

The Assessing Officer while passing the assessment order u/s

143(3) r.w.s 254 dated 31-12-2009 added the amount of land

premium as income of the assessee company. The facts as noted by

the Assessing Officer in his assessment order are summarised as under :-

S.No Facts Para No. 1 Land premium received on allotment of 7.1 Industrial land treated as liability and spread over 99 years of lease for financial year 2001- 02 and accordingly accounted for 2 The ownership of land leased out is belonging 7.9 to the M.P State Govt and the assessee is to develop land and leased the land as per the instruction of the State Government 3 In view of the Specific Instruction of the State 7.10 Govt, it is apparent that the lease rent and the Land Premium received by the assessee especially in respect of the land belonged to the State Govt is remained with it and is not to be

-: 22 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

parted with the State Govt. However, the same needs to be utilized for the development of the Plots. 4 It cannot be disputed that the assessee had 7.12 leased out the land on behalf of the M P State Govt and shown the receipt of lease rent as its income. It was also an admitted fact that the assessee had leased out the plots for 99 years. It is also an admitted fact that on account of leasing out of the plots the assessee had received land premium.

12.

The Ld CIT(A) in his order dated 26-2-2013 has referred the

finding as given in his consolidated order dated 26-02-2013 as

passed for the assessment years 2004-05, 2006-07 to 2008-09 and

confirmed the addition as made to the total income of the assessee

on account of land premium. On perusal of the order of the Ld CIT(A), following facts emerged :-

S.No Facts Para No 1 I have considered the submission of the First five assessee and noted that the land is provided to lines of the assessee by Government of Madhya Para 2.5 Pradesh through DIC. It is also noted that the on inner

-: 23 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

M P Government, for development of industries Page No and infrastructure acquires land and makes 8 of payment of compensation through collector of CIT[A]’s the particular area. order 2 This land is subsequently given at the disposal Para 2.5 of audhyogikvikaskendras and other agencies on inner engaged in the process of development of Page No industries, housing and infrastructure 9 of CIT[A]’s order 3 It is observed that the land under Para 2.5 consideration has been given to the assessee on inner by Government of MP and through an Page No instruction as referred above, any land 9 of premium and lease rent received from leased CIT[A]’s out land will be kept with respective order audhyogikkendras for maintenance and further development.

13.

It was observed from the facts as noted by the assessing officer

and also by the Ld CIT[A], it was very clear that land was not

acquired by the assessee company but the same was acquired by

the State Government and the amount of compensation was also

paid by the State Government through Collector and the ownership

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of the land was also in the name of the State Government. The

assessee on the basis of guideline of the State Government allotted

the land to the eligible industries and the assessee company acted

as a nodal agencies on behalf of the State Government, allotted land

to the eligible industries and collected amount on account of Land

Premium, Lease rent, Maintenance Charges, Development charges, Transfer fee etc. 14. The Ld CIT[A] in his consolidated order passed for assessment

years 2004-05 to 2008-09 confirmed the addition as made by the

assessing officer on account of land premium as income of the

assessee company, the relevant paras of the order of the Ld CIT[A] is reproduced as under:- “2.5 I have considered the submissions of the assessee

and noted that the land is provided to the assessee by

government of Madhya Pradesh through DIC. It is also

noted that the MP government, for development of

industries and infrastructures acquire land and makes

payment of compensation through collector of the

particular area. This land is subsequently given at the

disposal of audhogikvikaskendras and other agencies

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engaged in the process of development of industries,

housing and infrastructure. It is observed that the land

under consideration has been given to the assessee by the

government of MP and through an instruction as referred

above, any land premium and lease rent received from

leased out land will be kept with respective

audhogikkendras for maintenance and further

development. The assessee is not a mere custodian. It

becomes a lawful owner of the land which has legally

been transferred through government of Madhya Pradesh.

I have also gone through the memorandum & article of

association and observed that the assessee is authorized

to purchase/ acquire land on its own also apart from the

land earmarked by the government of MP (refer para A-1 of

memorandum of association). Therefore, there is no doubt

that as far as the management and leasing of the land

under consideration is concerned, the assessee has been

adequately independent/ equivalent to the owner of the

land. This can be seen from clause C(22) of the

memorandum wherein it has been clearly brought out that

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the object of the Audhyogik Kendra shall be to sell,

improve, manage, develop, exchange, lease, mortgage,

dispose off, deal with all or any part of property and rights

of the company. Moreover there is no denial on the part of

the assessee that income has arisen. Once the income has

arisen out of any transaction, the same has to be taxed

under the income Tax Act, 1961, under the taxation

scheme unless the same is exempted by a particular

provisions of the Act. I have also noted that till the AY

2003-04, the assessee has been claiming exemptions u/s

10(20A) of the Income Tax Act. However, the same has

been omitted with effect from 01-04-2003. Therefore, in my

considered view the income arising as a land premium

which has duly been accounted for by the assessee is

necessary to be taxed under the hand of the assessee. The

Government of Madhya Pradesh shall not come into

picture for taxation purpose because the assessee is an

independent and separate identity who is filing its return

of income any paying taxes etc.

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2.6 The second limb of argument advanced by the

assessee is that the land premium is a capital receipt. This

part of argument was mainly advanced before the

assessing officer at the time of passing the assessment

order. However the same set of arguments have been put

forth before me also, the assessee has relied mainly on

two decisions of Hon’ble Supreme Court which are as

under:-

(i) Ukhara Estate Zamindaries P. Ltd Vs CIT 120 ITR

549 (SC).

(ii) Member for Board of Agricultural Income Tax,

Assam Vs. Sindhurani Chaudhurani & Other, 32 ITR

169.

2.7 It is observed that the second issue in this case is

whether the receipt under consideration is a capital receipt

or revenue receipt. In order to decide and examine this

issue, it will be appropriate to go through the

memorandum & article of association. A careful perusal of

the same makes it crystal clear that the assessee’s main

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object is to develop, promote, encourage, assist in growth

and establishment of industries etc. with ancillary/

incidental objects of carrying out of business. A reference

to objects as specified under B9 to B12 makes it clear that

the assessee is in the business with a motive to earning

the profit. The relevant paras of such objects are

reproduced as under:-

Ancillary/ incidental objects of the company shall

be:

B(9) To carry on any other trade or business whatsoever

which can, in the opinion of the company, be

advantageously or conveniently carried on by the company

by way of extension of or in connection with any such

business as aforesaid or is calculated directly or indirectly

to develop any of the company’s business or to increase

the value of or turn to account any of the company’s assets

property or rights;

(10) To undertake, manage, control or otherwise deal with

the business and undertaking of any person, firm or

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corporation when it may be necessary for the purpose of

protecting the interests of the company, or for the purpose

of protecting securities, realizing upon claims or carrying

out any transaction or obligation which the company has

entered upon;

(11) To take part in the management, supervision and

control of the business or operation of any undertakings,

shares or other securities of which are held by the

company or in which the company is otherwise interested,

any for that purpose to appoint and remunerate any

directors or accountants or other experts or agents;

(12) To sell or otherwise dispose of the undertakings of the

company or nay part thereof for such consideration as the

company may think fit and in particular (but so as not to

restrict the generality of the foregoing) for shares,

debentures, bonds or securities or obligations of any other

company having objects altogether or in part similar to

those of the company.

-: 30 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

2.8 A careful consideration of above clauses o

memorandum reveals that the assessee is in the business.

Leasing out of the land and getting rental income as well

as the premium is the business of the assessee. Therefore,

a land premium is nothing but a revenue receipt in the

form of advance rent which has loosely been named as

land premium. Since the assessee is showing annual rent

on account of leasing of the plots, there is no reason why

the advance rent received should not be taxed accordingly.

Moreover as brought out clearly in prepares, the assessee

itself has 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.

In this regard, it will be appropriate to refer the agreement

made by the assessee with the purchaser of the plots.

Clause 2 of such agreement makes it abundantly clear

that the amount of land premium is nothing, but the rent in

advance. The clause 2 reads as under:-

-: 31 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

“ 2 The lessee having, paid to the lessor for said land the

advance rent and premium of Rs……………… as security

amount before the execution of this deed.”

2.9 In view of above discussion, there remains no doubt

that the advance rent in the form of land premium is

nothing but revenue receipt to be taxed as per Income Tax

Act. During the course of appellate proceedings, the

counsel of the assessee has further submitted that the

decisions relied upon by the assessee in the case of

Member of board of agriculture and Ukhara Estate

Zamindaries P. Ltd are squarely applicable in the instant

case. Although Assessing Officer has briefly distinguished

these two cases yet in the interest of natural justice, I have

gone through the above two cases to verify the contention

of the assessee. In the case of Member of board of

agriculture Income Tax, it is seen that the salamis/ premia

were not at all dependent on the rate of the rent charged.

However, the same varied with the quality of land leased

out for the purpose of agriculture. But in the instant case,

-: 32 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

as brought out above, the land premium is nothing but

advance rent fully dependent on the rate of rent. Further in

that case, the salami was defined as lump sum non-

recurring receipt of money paid by tenant to land lord

before making a settlement of holding. Whereas in the

case under reference, where leasing of the plot is for 99

years and there is no provision for conditions in the

agreement to suggest the modality of transfers and

renewable after 99 years, in other words, after the lease

period expires, it is not the case of the assessee that they

are not going to charge further premium at the time of

renewal of lease. The salami in the referred case has been

defined as single payment made for acquisition of right of

the lessees to enjoy the benefit granted to them by the

lease. In that case it was held as capital asset for the

reasons that the right for cultivation of the and being the

capital in nature was transferred to the lessee for a

consideration called salami. Therefore, the same was

treated as capital assets. Hence, in view of the clear-cut

difference in the facts and findings of the cases, to that

-: 33 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

extent, the case law cited by the assessee is not applicable

in the instant case where land premium charged is nothing

but the advances rent.

2.10 The another case law, i.e., Ukhara Estate

Zamindaries P. Ltd. relied upon by the assessee was also

gone through and it was seen that the facts and findings

in the said case law are also clearly distinguishable from

the facts of the instant case. In that case, the assessee

was himself a lessee who took over he zamindari

properties of a family for 999 years. The lease items

comprised of coal bearing lands/ mines, government

promissory notes, jewellery, arrears of rent etc. The

assessee granted several sub lease for 900 years to

various companies and received salami as well as

compensation for compulsory acquisitions. This was single

lease by the assessee and receipt of salami by granting of

sub lease for management of real property as an owner of

lease hold interest was constructed and treated as capital

receipt. Whereas in the instant case as brought out above,

-: 34 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

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. In the case relied upon by the

assessee, Hon’ble Supreme Court reversed the decision of

High Court saying that the assessee had dealt with its

lease hold interest in the zamindari property as a land

owner and the receipt of salami, premia and compensation

were receipts of capital nature. Therefore, the facts are

altogether different. In view of the foregoing discussion, I

am of the considered opinion that the AO has correctly

assessed the income as revenue receipt. The additions

made under this head In the instant assessment year as

well as in the AY 2006-07, 2007-08 & 2008-09 are hereby

confirmed.”

15.

The assessee company against the order of the Ld CIT(A)

preferred an appeal before this Hon’ble Bench argued its case at

length.

-: 35 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

16.

The Ld. Counsel for the assessee company argued its case

mainly on following issues, which are as under:-

1 The assessee company acts as a nodal agencies of the State Government and therefore entire receipt for and on behalf of the State Government is not an income of the assessee company 2 Cost of land was not claimed by the assessee in its books of account as expenses but the same was borne by the State Government. The amount of development expenses were also not charged to the Profit & Loss Account. Hence, following the principle of Matching concept the gross receipt on account of Land Premium and Lease rent is not taxable as income. 3 The different clauses of Memorandum of Association is not a conclusive until the same act actually done by the assessee company. In the present appeal it was claimed that land was not purchased by the assessee in its name and therefore not liable to taxed as income in its own name 4 In any case if it was accepted that the amount of land premium pertains to the assessee company, in that case the said amount of land premium was a capital receipts and not liable to tax as a revenue receipts.

-: 36 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

17.

The Ld. Counsel for the assessee during the course of hearing

argued at length and also filed written synopsis. The written synopsis as filed by the assessee is reproduced as under:-

“Issue:

Whether one time lease premium in addition to lease rent

collected by the assessee (engaged in development of

industrial area on the land owned by State Government)

on behalf of the State Government before commencement

of lease is Capital Receipt or Revenue Receipt?

Brief facts

The assessee Madhya Pradesh Audhyogik Kendra Vikas

Nigam (Indore) Limited (MPAKVN) was incorporated in the

year 1981 by the State Government as wholly owned

government company with the main object to develop

industrial area for industrial growth in the State of

Madhya Pradesh. The State Government had acquired the

land from the private landowners and contributed its own

land for development of industrial area. The raw land

-: 37 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

were handed over to the assessee for development and

further management and maintenance of the same. The

land remained in the ownership of the State and the

assessee was allowed to act as a nodal agency.

The development of industrial area which was commenced

in the year 1981 came to at halt around 2000 when most

of the land available have been utilized for development.

It is further submitted that in the year 2005 the State

Government decided to develop fist Special Economic Zone

and therefore established a new entity in the name of SEZ

Indore Limited and diverted the development work in that

company. Therefore, no major projects remained with the

assessee and all the resources and land available with it

had been transferred to M/s. SEZ Indore Limited which

has developed the first SEZ of the country in India.

The second assessee SEZ Indore Limited(SEZ) is a wholly

owned subsidiary of MPAKVN Ltd. and it is a Government

Company engaged in the development of Special

Economic Zone in the region in terms of provisions of

Special Economic Zone Act, 2005. The main object of the

-: 38 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

assessee Company is to develop, promote, encourage or

to assist in formation of Special Economic Zones and other

allied infrastructure development work.

The development of infrastructure is the primarily

responsibility of the State Government. However, the

State Government may delegate such responsibilities

upon its instrumentalities. MPAKVN and the assessee

Company are such instrumentalities, which are

discharging the responsibility of industrial infrastructure

development on behalf of the State Government for

promotion of the industrial development in the State.

The assessee allots the developed industrial land to the

prospective industrialist to setup industry in the area

developed by the assessee in consideration of payment of

(i) Land Premium, (ii) advance rent, (iii) security deposit

equivalent to one year rent, (iv) other annual charges for

maintenance.

The amount of land premium collected by the assessee

are credited in the account of State Government as capital

receipt and the same are appropriated as per the

-: 39 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

standing orders of the State Government for further

development.

The Income Tax Authorities have treated the land

premium as revenue receipt in the hands of the assessee,

which has been agitated by the assessee on the following

grounds:

(i) the assessee is not the owner of the land and has

acted merely as a nodal agency and instrumentality of

the Government hence not liable to tax.

(ii) the amount of land premium (Salami) is capital

receipt, hence not taxable under any circumstances.

Ownership: State Govt. v/s. assessee

The State Government had acquired the land under the

provisions of the Land Acquisition Act, 1894 for the

purpose of development of industrial area in the

backward areas or no industry district as per the policy of

Government of India to attract industrialization in the

State. Thus, the assessee has been entrusted with the

responsibilities of the State.

-: 40 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

The State Government had acquired the lands in Dhar

district from the private landowners, farmers in addition

to Govt. land available with the State Government.

That, after acquisition of the land and payment of

compensation to the landowners/farmers in terms of the

award passed by Land Acquisition Officer and as may be

modified by the competent authority or the Courts as the

case may be, the land so acquired have been entered in

the revenue record in the name of Industries Department,

Government of Madhya Pradesh. Therefore the State

Government through industries department became the

owner of entire land acquired to develop an industrial

area/SEZ.

It is made clear that the State Government paid the

compensation for acquisition of land from its exchequer.

Therefore, the State Government had acquired the land on

payment of due consideration/compensation. Thus, the

State Government is the owner of the land on which

industrial area/SEZ has been developed by the assessee.

-: 41 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

The extract of the provisions of MP Land Revenue Code,

1959 which deals the issue of ownership of land are

reproduced hereinunder:

Sec. 57. State ownership in all lands: (1) All

lands belongs to the State Government and it

is hereby declared that all such lands,

including standing and flowing water, mines,

quarries, minerals and forests reserved or not,

and all rights in the sub-soil of any land are

the property of the State Government.

Provides that nothing in this section

shall, save as otherwise provided in

this Code, be deemed to affect any

rights of any person subsisting at the

time of coming into force of this Code in

any such property.

Section 108. Records of rights: (1) A

record of rights shall in accordance

with rules made in this behalf be

-: 42 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

prepared and maintained for every

village and such record shall include

the following particulars:

(a) the names of all

Bhumiswamis together with

survey numbers or plot numbers

held by them and their area,

irrigated or un-irrigated;

(b) the names of all occupancy

tenants and Government lessees

together with survey numbers or

plot numbers held by them and

their area, irrigated or un-

irrigated;

(c) the nature and extent of the

respective interest of such

persons and the conditions or

liabilities, if any, attaching

thereto;

-: 43 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

(d) the rent or land revenue, if

any, payable by such persons;

and

(e) such other particulars as

may be prescribed.

(2) The record of rights mentioned in sub-

section (1) shall be prepared during a

revenue survey or whenever the State

Government my by notification so direct.

Sec. 109. Acquisition of rights to be

reported: (1) Any person lawfully

acquiring any right or interest in land

shall report orally or in writing his

acquisition of such right to the patwari

within six months from the date of

such acquisition, and partwari shall at

once give a written acknowledgement

-: 44 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

for such report to the person making it

in the prescribed form.

Sec. 110. Mutation of acquisition

of right in Field Book and other

relevant land records: (1) The

Patwari shall enter into a register

prescribed for the purpose every

acquisition of right reported to him

under section 109 or which comes to

his notice from intimation from Gram Panchayat or any other sources.

That, after acquisition of lands for the purpose of

development of industrial area from private land owners

the entire such lands have been recorded in the land

records under section 108 of the Code in the name of

Industries Department, Government of Madhya Pradesh.

Copy of survey reports (land records) is available in paper

book.

The State Government instead of undertaking the

industrial infrastructure development work on its own

-: 45 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

delegated the responsibility up on its instrumentalities in

the name of MPAKVN/SEZ and entrusted the task of

development of infrastructure on the land owned by the

State.

That, the assessee/MPAKVN incurred all cost and

expenses for development on behalf of the State

Government, however the State Government instead of

reimbursement of the same allowed the assessee to

adjust the amount of Lease Premium collected/to be

collected to meet the cost of development of infrastructure

by order dated 14.12.1981 and explanation dated

31.03.2017. Thus, the MPAKVN/Appellant are the nodal

agency of State Government engaged in development of

infrastructure of industrial area. Copies of order dated

14.12.1981 and explanation dated 31.03.2017 are

annexed herewith for ready reference.

That, the lease premium represents the recovery of cost of

acquisition of land and since the cost of acquisition has

been incurred by the State, therefore the State has right

over the lease premium. It is also the duty of the State to

-: 46 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

incur the development cost on its land, therefore State has

allowed the assessee to adjust such expenses and cost

from the amount of lease premium payable to the State by

the lessor.

In view of above following facts emerges:

(i) The State Government had acquired the land from the

landowners for industrial infrastructure development of area

and had paid the compensation from exchequer.

(ii) The name of State Government through industries department

has been recorded in the revenue records as owner of land.

Thus, State Government is the owner of the land on which

industrial area/SEZ has been developed by MPAKVN/the

assessee.

(iii) The assessee/MPAKVN were involved in the industrial

infrastructure development as an instrumentalities to

discharge the responsibility of State Government towards

infrastructure development as nodal agency.

(iv) The lease deeds have been executed on behalf of State

Government in the name of Governor of Madhya Pradesh. The

assessee has no power or right to dispose of any of the

-: 47 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

assets without prior consent of the State Government.

Therefore, the assessee is under obligation to follow the

directions of the State Government in respect of the land.

(v) The lands have not been recorded in the books of A/c of the

assessee/MPAKVN as Assets as the assessee is not the

owner and have no right over the title of the land.

(vi) Lease Premium collected by the assessee/MPAKVN from the

industrial unit have been shown in the books of A/c as

liability towards the State Government under the head

“Current Liabilities & Provisions” in the Balance Sheet.

(vii) The assessee/MPAKVN are regularly incurring cost and

expenses towards infrastructure development of the

industrial area and its maintenance on behalf of State

Government. Therefore owns such monies from the State

Government.

(viii) The State Government instead of reimbursing the cost

and expenses of infrastructure development incurred by

assessee/MPAKVN allowed the assessee to adjust such cost

and expenses from the amount payable to the State

-: 48 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Government towards lease premium as per order dated

14.12.1981 and explanation dated 31.03.2107.

(ix) The object clause of the Memorandum of Association clearly

states the main object to develop industrial area and rest of

the objects are incidental to main object. The assessee is not

in the business of real estate or sale and purchase of land

and real estate. The land is not stock in trade in the books of

the assessee nor revenue has ever claimed that the land is

stock in trade of the assessee.

(x) In case of renting or leasing business only rental income and

other recurring charges and fees are revenue receipt but not

the lease premium which is received for parting away the

rights in capital assets.

The aforesaid facts clearly establish that assessee has no

right of ownership on the land and has acted merely as an

agent or nodal agency for and on behalf of the State

Government to achieve the object of industrialization in the

State. Since, the assessee is not the owner of the land,

therefore the CIT(A) has erred in confirming the additions

-: 49 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

made by the ld. AO by treating the land premium as revenue

receipt of the assessee.

Thus, the lease premium received/collected by the assessee is

capital receipt for and on behalf of the State Government,

hence not taxable in the hands of the assessee.

Response to observation in Appellate Order in ITA No. 402/2009-10 and 882, 883, 884/2011-12 which is relied upon by the CIT(A) in impugned order:

Sr. No. Observation of CIT Response 1. Para 2.5. First of all it is submitted I have considered that the land was not ……………it is observed given by the State to the that the land under Assessee under consideration has been ownership. The assessee given to the assessee was allowed by the State by Government of M.P. to discharge the and through an responsibility of the State instruction referred towards infrastructure above, any land development on the land premium and lease rent belonging to State received from leased Government as an its out land will be kept instrumentality and in with respective the capacity as nodal Audhyogik Kendras for agency or executing maintenance and agency of Govt. further developments. The lease premium so collected by the Assessee has been shown in the books of A/c of assessee

-: 50 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

as liability payable towards the State Government.

The lease deed have been executed by the State in the name of the Governor through Managing Director of the assessee company who is a Gazetted Officer of the State Government.

The State Government instead of reimbursing cost and expenses incurred on development of land to assessee allowed the assessee to adjust the same from the amount payable to State Government towards lease premium collected and shown in liability. 2. Para 2.5 continued …. It is denied that the assessee is the lawful The assessee is not a owner. It appears that mere custodian it Ld. AO/CIT(A) did not becomes a lawful verify the facts properly. owner of land which The lands of the has legally been industrial area have transferred through never been transferred or Government of M.P. vested by the State Government in the

-: 51 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

assessee in any manner. There is no order or conveyance deed to give effect transfer or vesting of the land to the assessee. It is submitted that the land still belongs to and owned by the State Government, which is evident from the fact that revenue record contains the name of the State Government as an owner and also the lease deeds are executed in the name of Governor in compliance of Article 154 of the Constitution of India. Thus this observation of Learned CIT is without any substance and evidence. 3. Para 2.5 continued …. There is no dispute about the power and I have also gone authority of Assessee to through the purchase and acquire Memorandum of any land. However, it is Association and submitted that the lands Article of Association on which industrial and observed that the area/SEZ has been assessee is authorized developed are not to purchase/acquire acquired or purchased the eland on its own by the assessee. The apart from the land right to purchase given

-: 52 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

earmarked by the in memorandum does Government of M.P. not mean that the land which has been developed by the assessee on behalf of the State has been purchased. 4 Para 2.5 continued …. This observation of CIT(A) is misconceived Therefore, there is no and without substance. doubt that as far as The Ld. CIT has failed to the management and appreciate that how and leasing of land under under what the consideration is circumstances the concerned the assessee has become assessee has been the owner of land. This adequately observation shows the independent/equivale whims and fancies of nt to owner of land. the Ld. CIT to somehow treat the land under the ownership of assessee. Though there is no evidence or document, however only to bring the collection of lease premium on behalf of State Government by the assessee within the ambit of taxable income an attempt has been made in this regard. 5. Para 2.5 continued …. It is submitted that such observation are based This can be seen from on the whims as the Ld.

-: 53 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

the clause C(22) of the CIT(A) has drawn it Memorandum wherein merely on the basis of it has been clearly the object incidental to brought out that the main object given in object of the Memorandum of the Audhyogik Kendra company without shall be to sell, appreciating the legal improve, manage, rights of ownership over develop, exchange, the land. lease, mortgage, dispose off deal with all or any part of property and rights of the company. 6. Para 2.5 continued …. This observation is baseless and contrary to Moreover there is no the facts available on denial on the part of the record. The Ld. AO the assessee that and CIT has observed income has arisen. that the assessee has Once the income has credited the land arisen out of any premium collected to the transaction the same State Government has to be taxed. account as liability. Therefore it is clear that the assessee had never accepted the collection of lease premium on behalf of State Government as its income. Thus this observation of Ld. CIT is incorrect. 7. Para 2.5 continued …. At the outset it is denied

-: 54 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

that the assessee has Therefore in my ever considered, the considered view the lease premium as its income arising as a income. The observation land premium which of CIT is contrary to the has duly been facts recorded by Ld. AO accounted for by the and himself that the assessee is lease premium has been necessarily to be credited to the account taxed in the hand of of State Government as the assessee. liability. Therefore, the order is not sustainable in the eyes of law. 8. Para 2.6 It is settled legal The second limb of position that the lease argument advanced premium in addition to by the assessee is lease rent received for that the land premium parting away the rights is a capital receipt.. and possession in the party before commencement of the lease is Capital Receipt. The lease rent is payment is for enjoyment of the right uninterruptedly. Various case laws in this regard have been discussed later on.

9.

Para 2.7 It is observed that the There is no dispute that second issue in this the main object of the case is whether the assessee is to develop receipt under industrial areas as an consideration is a instrumentality of the capital receipt or State Government on the

-: 55 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

revenue receipt. In land owned by the order to decide and State. It is only a nodal examine this issue, it agency. The nature of will be appropriate to business of the go through the assessee nowhere affect memorandum & the nature of receipt. It articles of association. may be capital or A careful perusal of revenue in any the same makes it business. The capital crystal clear that the and revenue receipt assessee’s main depends upon the business is to nature of transaction. In develop, promote the present case the encourage, assist in lease premium has been growth and received for parting establishment of away the right and industries etc. with possession over the ancillary/ incidental capital assets and the objects of carrying out same is received before of business. parting away, therefore it has cloth of capital receipt as held by Supreme Court and other High Courts as per case law cited below. 10. Para 2.8 The Learned CIT has come to the conclusion A careful that since as per consideration of above Memorandum the clauses of assessee is in the Memorandum reveals business of leasing of that the assessee is in land. Therefore land the business of premium is nothing but leasing out of land revenue receipt in the and getting rental form of advance rent. income as well as This observation is premium is the totally misconceived and

-: 56 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

business of the under any stretch of assessee. Therefore imagination it cannot be land premium is assumed that lease nothing but a revenue premium is advance receipt is in form of rent. The entire advance rent which premises of Appellate has loosely been order considering the named as land lease premium as premium. Since the advance rent is without assessee is showing any substance and the annual rent on basis. The main object account of such of the assessee is to leasing of plots there develop industrial area is no reason why on the land of the State advance rent received Govt. and to collect should not be taxed lease premium on its accordingly behalf. Thus, it is incorrect to say that the leasing is the business of the assessee. It can be business only if the assessee owns any land. In the present case, the assessee owns no land. The Supreme Court has in following cases clarified the Lease Premium and Advance Rent. In the present case the assessee is collecting one time lease premium for parting away the right and

-: 57 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

possession, advance rent for one year, security deposit in the form of one year advance rent and annual rent for continuation lease. Therefore, lease premium cannot be treated as advance rent in given case.

11.

Para 2. 9 In view of above The contentions of the discussion, there CIT(A) are misconceived remains no doubt that one, on one hand he the advance rent in has stated that “the the form of land land premium is nothing premium is nothing but advance rent fully but revenue receipt to dependent on the rate of be taxed as per rent. Further in that Income Tax Act. ……. case the salami was defined as lump sum The land premium is not recurring receipt of nothing but advance money paid by the rent fully dependent tenant to landlord before on the rate of rent. making a settlement of Further in that case holding”. Whereas all the salami was the same ingredients defined as lump sum are present in the case not recurring receipt of under reference as the money paid by the assessee has received tenant to landlord the premium as before making a i. non-recurring, one settlement of holding. time receipt. Whereas in the case ii. it has been paid under reference, before entering into

-: 58 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

where leasing of plot lease agreement is for 99 years and iii. it has been received there is no provision for parting away the for conditions in capital assets (rights agreement to suggest and possession in the the modality of land) transfer and iv. lease rent are renewables after 99 separately receivable years. alongwith annual maintenance charges for allowing the lessee to continue to enjoy the benefits of the lease.

The CIT(A) has erred in distinguishing the case law cited before him by the assessee.

Land/lease Premium or Salami – Whether Capital Receipt or Revenue Receipt. Irrespective of the ownership of the land the major issue is

whether the one time lease premium collected by the

assessee is capital receipt or revenue receipt:

The assessee collects the lease premium (Salami) for

parting of its right and possession over the land, whereas

the lease rent is received for continuation of enjoyment of

the right of possession.

-: 59 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

The Premium is one time non-recurring receipt and

is received at the beginning of the lease for transfer

of lessors right in the capital assets.

The assessee has not charged the development cost to the

profit and loss account as the same has been transferred

to the State Government and net balance payable to State

Government has been shown under the heard “Current

Liabilities & Provisions” in the Balance Sheet.

Therefore, the Revenue has accepted and admitted the

infrastructure development cost incurred by the assessee

as Capital Expenditure. Therefore, the lease premium shall

also be capital revenue extending the same analogy.

CASE LAWS RELIED UPON BY THE assessee IN SUPPORT OF ABOVE CONTENTIONS:

(i) In case of Dy. Commn. of Income Tax vs. Sudarshan

Chemicals Ltd. (22.07.2004 - ITAT Pune) :[2005] 95 ITD

131 (Pune), the Revenue Authorities have supported the

case of the assessee herein and had argued that the one

time lease premium is capital receipt. The relevant

paragraph of the aforesaid order is as under:

-: 60 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

4.

The ld. DR has assailed the order of the CIT(A)

by contending that the payment made by the

assessee was for acquiring the leasehold rights

which is an asset and therefore, the payment is in

the nature of capital expenditure. It was also

pointed out by him that the CIT(A) in AY 1992-93

has taken a different view by referring to the

judgment of Madhya Pradesh High Court in the

case of Project Automobiles 167 ITR 781 wherein it

was held that premium payable by the

assessee to secure a permanent lease cannot

be considered as advance rent and the same

as to be held as capital expenditure. Further

reliance was placed on the judgment of AP High

Court in the case of Aditya Minerals Pvt Ltd. 167

ITR 774 which was relied upon by the ld. CIT(A) in

AY 92-93. The reliance was also placed on the

Supreme Court judgment in the case of Panbari Tea

Co Ltd. 57 ITR 422.

-: 61 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

The ITAT Pune bench after considering the arguments of the

revenue and various judgment of the Supreme Court and

other High Courts has held:

In our opinion, it is the settled legal proposition that

where lump-sum money is paid before acquiring

leasehold rights then such payment has to be

considered as capital expenditure.

It is clear beyond doubt that if any consideration is

paid for acquiring leasehold rights then such

payment would be in the nature of capital

expenditure. So, if the interest of the lessor is

parted with for a price then the price paid as to be

considered as premium/salami which is neither

assessable as income in the hands of the recipient

nor allowable as deduction in the hands of the

payer

(ii) The issue has been discussed by the Supreme Court in

case of CIT Assam Versus The Panbari tea Company

Limited (1965) 57 ITR 422 SC wherein the Apex Court

while dealing with the nature of receipt of premium on the

-: 62 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

land leased to lessee has held that it is a payment made

for the acquisition of the right of lessor to enjoy benefits

granted by the lease the general right may properly be

regarded as a capital asset and the money paid to

purchase to it may properly be held to payment on capital

account. The para 4 to 8 are reproduced herein below:

4.

The distinction between premium and rent

was brought out by the Judicial Committee in

Raja Bahadur Kamakshya Narain Singh of

Ramgarh v. Commissioner of Income-tax,

Bihar & Orissa[1943] 11 ITR 513 thus :

"It (salami) is a single payment made for

the acquisition of the right of the lessee

to enjoy the benefits granted to them by

the lease. That general right may

properly be regarded as a capital asset,

and the money paid to purchase it may

properly be held to be a payment on

capital account. But the royalties are on

a different footing".

-: 63 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

5.

It is true that in that case the leases were

granted for 999 years; but, though it was one

of the circumstances, it was not a decisive

factor in the Judicial Committee coming to the

conclusion that the salami paid under the

leases was a capital asset. This Court in

Member for the Board of Agriculture Income-

tax, Assam v. Sindhurani Chaudhurani [1957]

32 ITR169(SC) defined "salami" as follows :-

"The indicia of salami are (1) its single

non-recurring character and (2) payment

prior to the creation of the tenancy. It is

the consideration paid by the tenant for

being let into possession and can be

neither rent nor revenue but is a capital

receipt in the hands of the landlord."

6.

It is true that in that case the payments was

paid in a single lump sum, but that was not a

conclusive test, for salami can be paid in a

single payment or by installments. The real

-: 64 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

test is whether the said amount paid in a

lump sum or in installments is the

consideration paid by the tenant for being let

into possession. This Court again in

Chintamani Saran Nath Sah Deo v.

Commissioner of Income-tax, Bihar & Orissa

[1943] 11 ITR 513 considered all the relevant

decisions on the subject in the context of

licenses granted to the assessee to prospect

for bauxite in some cases for 6 months and in

others for a year or two and observed :

"The definition of salami was a general

one, in that it was a consideration paid

by a tenant for being let into possession

for the purpose of creating a new

tenancy."

7.

Applying that test this Court held in that case

that under the said licenses there was a grant

of a right to a portion of the capital of the

-: 65 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

licensor in the shape of a general right to the

capital asset.

(iii) The Jurisdictional High Court of Madhya Pradesh in case

of CIT Versus Project Automobiles (1987) 167 ITR 781

M.P. has held that the payment of lease premium even in

installment does not change the character and it cannot be

treated as advance rent. The Court has in unequivocal

words has held that the lease premium or Salami in order

to obtain the right of an endeavoring nature in the plot in

question is capital expenditure for the lessee. Therefore the

same would be capital receipt for the lessor. Para 23 of the

order reads as under:

23.

In view of the foregoing discussion, we

are of the opinion that the principles laid down

in the cases relied on by learned counsel for

the Department are applicable to the facts and

circumstances of the instant case. From a

perusal of the various terms, subject to which

the permanent lease was granted by M/s.

-: 66 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Hindustan Steel Company Limited in favour of

the assessee, it is apparent that the assessee

obtained a right of an enduring nature in the

plot in question and in order to obtain this

right it had to pay a sum of Rs. 62,500 as

premium. On the terms of the contract, it is

again apparent that ground rent in the sum of

Rs. 3,125 per annum was payable by the

assessee in addition to the premium of Rs.

62,500. The amount of premium, in our

opinion, could not, on the facts of the instant

case, be treated as advance rent. The fact that

facility of paying the amount of premium in

instalments was provided to the assessee

will, in our opinion, in no way derogate from

the nature of the amount payable as premium.

The payment of the sum of Rs. 62,500 was

apparently in the nature of a salami payment

in order to obtain the right of an enduring

nature in the plot in question. In our opinion,

-: 67 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

the clause contemplating resumption of

possession by the lessor if the premises were

required by it for its own use for a public

purpose on the conditions stated in the said

clause would also not make much of a

difference. Firstly, that is a clause which

normally finds place in such leases and,

secondly, the contingency contemplated was

such which may or may not happen. In the

instant case, it is not the case of the assessee

that the said contingency has happened and

the lessor has resumed possession over the

plot in question. In this view of the matter, the

amount of premium paid by the assessee was

obviously in the nature of capital expenditure

and the Tribunal was not right in holding it to

be revenue expenditure.

(iv) The Supreme Court in case of A.R. Krishnamurthy and

Anr. vs. Commissioner of Income Tax, Madras

(10.02.1989 - SC) :[1989]176 ITR 417 (SC) has held

-: 68 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

that the lease premium is consideration for parting away

the right in capital assets, therefore it is capital receipt and

cannot be taxed. The head-note reads as under:

What is parted with under the terms of the

lease deed is the right to exploit the land by

extracting clay which right directly flows from

the owenership of the land. The said right

evaluated in terms of money forms part of the

cost of acquiring the land. If transfer of capital

asset in s. 45 includes grant of mining lease

for any period then obviously the cost of

acquisition' of the land would include the 'cost

of acquisition' of the mining right under the

lease. There is a live nexus between the 'cost

of acquisition' of the land and the rights

granted under the lease. The amount paid by

the assessee was not only the cost of

acquiring the land but also of acquiring bundle

of rights in the said land including the right to

grant lease. There is thus 'cost of acquisition'

-: 69 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

which is attributable to the right of limited

enjoyment transferred by the grant of the

lease. So far as the apportionment of the cost

of acquisition is concerned, it is a question of

fact to be determined by the ITO in each case

on the basis of evidence.

(v) The Supreme Court in case of Maharaja Chintamani

Saran Nath Sah Deo Versus CIT Bihar and Orissa

(1971) 82 ITR 464 Hon'ble Supreme Court has held that

the principle on which the Courts have acted whether a

payment described as Salami or Premium is capital or

revenue receipt are well settled. Salami or Premium is a

single payment made for the acquisition of right of the

lessor by the lessee to enjoy the benefits granted by the

lease. That general right may properly be regarded as a

capital asset and the money paid to purchase it may

properly be held to be a payment on capital account. Para

4 and 6 (relevant portion) are reproduced herein below:

4.

The principles on which the courts have acted

whenever a question has arisen whether a

-: 70 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

payment described as a salami is capital or

revenue receipt are well settled. Salami is a

single payment made for the acquisition of the

right of the lessor by the lessee to enjoy the

benefits granted to him by the lease. That

general right may properly be regarded as a

capital asset and the money paid to purchase

it may properly be held to be a payment on

capital account. But merely because a certain

amount paid to the lessor is termed as salami

it does not follow that no inquiry can be made

to determine whether it has or has not an

element of revenue receipt in the shape of

advance payment of royalty or rent. The onus,

however, is upon the income tax authorities to

show that there exist facts and circumstances

which would make payment of what has been

called salami, income. The position may be

summed up in this way. When the interest of

the lessor is parted for a price the price paid is

-: 71 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

premium or salami but the periodical

payments made for the continuous enjoyment

of the benefits under the lease are in the

nature of rent; the former is a capital receipt

and the latter a revenue receipt. Parties may

camouflage the real nature of the transaction

by using clever phraseology and, therefore, it

is not the form but the circumstances of the

transaction that matter. The nomenclature

used may not be decisive or conclusive but it

helps the courts, having regard to the other

circumstances, to ascertain the intention of the

parties.

6.

The Tribunal proceeded to say:

Here in the present case what we find is

that the assessee had chosen to take a large

amount by way of premium but a lesser

amount by way of royalty. The patent

reason for the assessee to take a lesser,

amount by way of royalty was that the

-: 72 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

amount received by him as salami was not

taxable. There is, therefore, no doubt in this

case that the sum received by the assessee

by way of salami or premium was in

substance an advance payment of royalty.

We are, therefore, in entire agreement with

the Income-tax Officer's order.

We are unable to appreciate how a

comparison of the terms of the lease of 1941

which was only for one year and which was

for a different purpose, namely, prospecting

could afford a reasonable basis for

determining whether the terms of the 1944

lease were fixed in such manner that part of

the proceeds of royalty were included in the

figure of the salami. The object of a

prospecting lease is entirely different and

since the period was only one year it is quite

reasonable to assume that the royalty was

fixed at a higher rate because it was not

-: 73 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

known how much quantity of mineral would

be extracted during that period. The lease of

1944 was for a much longer period i.e. 30

years. When a lessor creates a lease for that

period it is legitimate for him to charge more

amount by way of salami or premium as he is

transferring possession of the demised land

for a considerably long period. A lessor may

also think that the rate of royalty need not be

the same as it was in the case of the

prospecting lease and taking an over all

business view royalty at a slightly less rate

may be charged. The Tribunal's decision

based as it was only on a comparison of the

terms of the leases of 1941 and 1944 does not

appear to take into consideration all these

relevant matters. It must not be forgotten that

the mere fact that the amount taken on

account of salami was substantial and on the

face it looked considerably large would not

-: 74 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

justify the view that that amount represented

capitalized royalty. In the Panbari Tea [1965]

57 ITR 422(SC) case certain tea estates had

been leased put for a period of 10 year. The

lease was executed on a consideration of a

sum of Rs. 2,25,000 as and by way of

premium or salami and an annual rent of Rs.

54,000 to be paid by the lessee to the lessor.

The payments were to be made by

installments. This Court declined to assume

that the parties had camouflaged their real

intention and fixed a part of the rent in the

shape of premium and it was observed that no

material had been placed either direct or

circumstantial to disbelieve the description

given in the lease deed to the amount as

premium and to hold that it was not in fact

premium but only rent. The position does not

seem to be different in the present case.

-: 75 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

(vi) The Supreme Court in case of Durga Prasad Khanna

Versus CIT (1969) 72 ITR 796 (SC) has also held that in

para 5 that the departmental authorities as well the High

Court were in error in treating the amount of premium of

Rs. 55,200/- as advance payment of rent. The Apex Court

in para 4 has stated that the payment of Salami (Premium)

could not be treated as revenue receipt. The payment of

being non-recurring nature.

4.

On behalf of the assessee-assessee it has

been urged that the sum of Rs. 55,200/- was

paid to the lessor in lump for completing the

cinema house without which the lessee could

not have used the building for the purpose of

exhibiting cinematograph films. According to

the recitals in the deed which must be given

due effect the lessees agreed to give this

amount towards the cost of erection of the

cinema house according to their suggestion

and for defraying other charges and

expenses. The payment of rent was expressly

-: 76 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

stipulated at the rate of Rs. 2,100/- per month

and there was no indication whatsoever that

any different or higher rate of rent was agreed

to. It is further submitted that there was no

material or evidence on which it could be

found that the cinema would have fetched any

higher rent, the admitted cost of construction

being about Rs. 1,00,000/-. Alternatively the

sum of Rs. 55,200/- could be regarded only

as payment of salami (premium) and could not

be treated as revenue receipt, the payment

being of a non-recurring nature.

(vii) A similar question has also been answered by the Calcutta

High Court in case of Pramode Chandra Roy

Choudhary Versus CIT West Bengal 1962 (46) ITR

1064 that the premium of salami is capital receipt.

The Court after considering various judgments of Supreme

Court in this regard laid the following principles:

-: 77 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

(1) Prima facie premium is no income; it is for the taxing

authorities to prove that the facts exist which would make

the same an income, if they seek to tax it.

(2) Where the premium represents payment of rent in

advance it is income. But if it represents the whole or

part of the price of the land or the sale price of the

leasehold interest, it is not income but capital.

(3) Salami to be income, should be a periodical monetary

return coming in with some of sort of regularity or expected

regularity from definite sources.

(4) Salami or premium paid at the beginning of a

mining lease for a long period ordinarily represents

the purchase price of an out and out sale of the

property and the sum received is capital and not

income, but rent or royalty paid periodically is income. The

principle is the same, whether the premium is for a simple

lease of mineral rights. But royalty payable under the mining

lease stands on a different footing from premium or salami.

(5) When a premium is received merely as an incident in the

possession of property (even if leasehold) and there is no

-: 78 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

finding that the letting out of the property is the business of

the assessee, the premium receipt is capital.

(6) Salami or premium paid in advance of rent once for all at

the outset, the period of tenancy being uncertain and the

chances of the resettlement of the same land to some tenant

being remote, is capital.

(7) Premium (salami) is a single payment made for the

acquisition by the lessee of the right to enjoy the

benefits granted to him by the lease. Money paid to

purchase the said general right is a payment on

capital account.

(8) Salami is the amount of money which a landlord

insists on receiving as a condition precedent for

parting with the land in favour of the lessee and that

it was received by the landlord, not because of the use

of the land, but before the land was put into use by the

assessee.

(9) The question of salami should not be decided on the

length of the period of the lease, but on the nature of the right

-: 79 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

conveyed. The characteristics of the payment should be

decided without reference of the nature of the lease including

the wasting nature of the assets under the lease.

(10) The smaller the salami the higher the rent and vis-a-vis

(Birendra Kishore Manikya v. Secretary of State) is no longer

a good law.

Of course it is true, as to whether salami was income or not

the same had to be decided on the facts of each case, but on

the construction of the terms of the lease in the instant case,

we hold that the payment has a close analogy to the

payments as in Sindhurani's and Chintamani's cases. We

also find that the sum of Rs. 20,000 in the present case is a

consideration paid by the tenant at the beginning for being

let into possession with the object of obtaining a new

tenancy and the covenants of the lease show that there was

a transfer or parting with of the landlords right under the

instant building lease. The sum of Rs. 20,000 was also paid

prior to the creation of the tenancy and not after the

relationship of landlord and tenant had come into existence.

The payment is also of a single non-recurring character in the

-: 80 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

nature of the premium for granting the lease. In view of the

absence of any evidence on behalf of the department to show

that the rental of Rs. 800 is low and the period of the lease is

short and there being no other attending circumstance and in

view of assessees proof of another building lease of a

contiguous area showing the same state of affairs, we find

that the receipt of the said sum of Rs. 20,000 is a capital

receipt and not an advance rent.

(viii) The Supreme Court in case of Member for the Board of

Agriculture Income Versus Sindhu Rani Choudhrani

(1957) 32 ITR 0169 has defined the Salami (Premium) as

follows:

Salami was described by Lord Wright in Kamakshya

Narain Singh v. Commissioner of Income-tax, a case of a

grant of a mining lease for a period of 999 years in the

following word :

"The salami has been, rightly in their Lordships

opinion, treated as a capital receipt. It is a single

payment made for the acquisition of the right of

the lessees to enjoy the benefits granted to them

-: 81 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

by the lease. That general right may properly be

regarded as a capital asset, and the money paid

to purchase it may properly be held to be a

payment on capital account."

The Supreme Court in the said case defined "salami"

as follows :

"The characteristics and incidence of salami

disclosed from the 'statements of the cases' are

that it is a lump sum non-recurring receipt of

money by a landlord from a tenant before

making a settlement of the holding, waging C.A.

No. 162 of 1955 varied from Rs. 7 to Rs. 10 per

bigha and was less in other cases. He is also

entitled to charge a fixed periodical amount of

11 thousand per bigha per annum. Salami is

charged whenever a fresh settlement is made

whether it is of a piece of virgin land or of an

auction-purchase holding. Thus, salami is

payment by a tenant to the landlord antecedent

to the constitution of the relationship of landlord

-: 82 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

and tenant. It is really a payment by the tenant

to the landlord for being allowed to take

possession of the land for cultivation under the

lease.......salami is not a recurring or periodical

payment or a fee or fine levied at fixed intervals

from the tenant for the same holding."

(ix) The Bombay High Court in case of Commissioner of

Income Tax, Bombay City-III vs. Ratilal Tarachand Mehta

(12.11.1976 – BOM HC) [1977] 110 ITR 71(Bom) has also

held the lease premium, salami or pagadi as Capital

Receipt and rejected the contention of the Income Tax Authorities to consider it as revenue receipt.

7.

It is true that in the instant case there were at

least more than 12 tenants in respect of which the

assessee must have received these amounts by

way of premiums from the respective tenants before

granting the monthly tenancies to them. But here

again, no material has been brought on record to

show that the construction of the present building,

-: 83 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

from the tenants of which he received premium,

was a part of his business as a builder or promoter.

Moreover, even the department did not seek to

include this item of Rs. 54,000 in the assessee's

total income under section 10 of the Indian Income

Tax Act, 1922, but the only attempt was to show

that it was his income from other sources under

section 12 of the Act. As we have said above,

considering the case under section 12 of the Act it is

difficult to come to the conclusion that the amount of

Rs. 54,000 that was received by the assessee from

his tenants by way of premium for the grant of

monthly tenancies to the tenants would be receipt

in the nature of income or revenue.

(x) ITAT Mumbai in case of Joint Commissioner of Income Tax

vs. Mukund Ltd. (15.02.2007 - ITAT Mumbai) [2007] 106

ITD 231(Mum) has considered the same issue in favour of

the assessee. The headnote reads as under:

-: 84 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Capital or revenue expenditure--Premium or

salami paid for acquisition of land in Industrial area

for 99 years Not refundable on termination of

agreement before 99 years.--Assessee entered into

an agreement with Maharashtra Industrial

Development Corporation (MIDC) by writ it was

given on land lease for 99 years for its purpose as

factory/plant. The assessee paid a huge amount as

"premium or salary" and rent was fixed at Rs. 1 per

annum. The amount paid as premium or salami

was non-refundable on termination of lease before

99 years. The AO treated the amount paid as

"premium or salami" as capital expenditure. The

assessee contended that it was an advance rent

and, therefore, deductible as revenue expenditure.

Held: The contention of the assessee was not

acceptable. The amount paid as premium or salami

was not an advance rent and enduring benefit was

to be obtained by the assessee for 99 years and as

-: 85 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

such it was a "premium or salami" and thus to be

treated as capital expenditure.

In view of above submission, the appeal may kindly

be allowed and the impugned orders of Ld. AO and CIT(A)

may kindly be set aside.”

18.

During the course of hearing it was asked from the Ld.

counsel of the assessee to explain the treatment in respect of these

receipts prior to the Asst Year 2003-04 where the assessee company

eligible to claim exemption U/s 10[20A] of the Act. The Ld. Counsel

for the assessee submitted the written submission, which is placed

on record. The Ld. Counsel for the assessee reiterated his

arguments as per written submission, which is reproduced as under, :-

“2.1] During the course of hearing an argument was

put forth by the Ld. DR stating that in the years prior

to 2003-04 the assessee was showing lease

premium, lease rent and other revenue as its income

and since exemption under section 10(20-A) has been

withdrawn, therefore the assessee has changed the

-: 86 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

accounting of the income of lease premium and lease

rent. This argument was countered by AR stating

that since beginning the assessee has credited the

Lease Premium, Lease Rent and other revenues

belonging to State Government in the accounts of

State Government pursuant to order dated

14.12.1981 by the Industries Department,

Government of Madhya Pradesh. In view of above,

the Hon’ble Tribunal directed the assessee to produce

the audited Balance Sheet and Profit & Loss

Accounts of the years prior to 2003-04 to

substantiate the arguments. In response to the same

the assessee submits the Annual Accounts of

following years for kind perusal of the Hon’ble

Tribunal:

S. Particulars No 1 Balance as on 31-03-1986 2 Balance as on 31-03-1991 3 Balance as on 31-03-1999

-: 87 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

2.2] That on perusal of the above Balance sheet,

following facts emerge :-

[A] ASST YEAR 1986-87 [ FOR THE YEAR ENDED ON

31-03-1986 ]

(i) On page 3 of the Balance Sheet the State Government

Account has been shown in the liabilities side and details

have been provided in “Schedule – D” at page (7) where

State Government Account has been shown and under

point no. (2) Direct Collection of Land Premium, Security

Deposit, Lease Rent on its behalf for Industrial Area has

been shown. Similarly the cost of construction and

development has been deducted from the account of State

Government under Expenditure on behalf of State

Government. Similarly all the deposits in the banks have

been shown in “Schedule – G” at page (11) on behalf of

State Government and Interest received have been shown

under point no. (3) of Schedule “D”.

(ii) Profit & Loss Account at page (4) shows Income and

details of which has been provided in “Schedule – K” at

page (14) where except amount of lease premium, lease

-: 88 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

rent which was collected on behalf of State Government,

all other revenues have been shown. Similarly in expenses

only Personnel Expenditure (Schedule – L) and

Administrative Expenditure (Schedule – M) clearly shows

that no expenses of development or construction of

industrial area has been charged to Profit & Loss Account

and the same have been first shown under the head

“Capital Work in Progress” and upon completion of the

work the same has been debited to the account of State

Government in Schedule – D.

Thus, evidently, the entire lease premium, lease rent and

security deposit collected on behalf of the State

Government have been shown in Schedule – D as liability

and the expenses incurred on development has been

deducted therefrom. Thus, the assessee was acting as

“Nodal Agency” of the State Government.

[B] ASST YEAR 1991-92 [ FOR THE YEAR ENDED ON

31-03-1991]

(i) On page 1 of the Balance Sheet the State Government

Account has been shown in the liabilities side and details

-: 89 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

have been provided in “Schedule – 4” at page (5) where

State Government Account has been shown and under

point no. (2) Direct Collection of Land Premium, Security

Deposit, Lease Rent on its behalf for Industrial Area has

been shown. Similarly the cost of construction and

development has been deducted from the account of State

Government under Expenditure on behalf of State

Government. Similarly all the deposits in the banks have

been shown in “Schedule – 7” at page (7) on behalf of

State Government and Interest received have been shown

under point no. (3) of Schedule “4”.

(ii) Profit & Loss Account at page (3) shows Income and

details of which has been provided in “Schedule – 11” at

page (9) where except amount of lease premium, lease rent

which was collected on behalf of State Government, all

other revenues have been shown. Similarly in expenses

only Personnel Expenditure (Schedule – 12) and

Administrative Expenditure (Schedule – 13) clearly shows

that no expenses of development or construction of

industrial area has been charged to Profit & Loss Account

-: 90 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

and the same have been first shown under the head

“Capital Work in Progress” and upon completion of the

work the same has been debited to the account of State

Government in Schedule – 4.

Thus, evidently, the entire lease premium, lease rent and

security deposit collected on behalf of the State

Government have been shown in Schedule – 4 as liability

and the expenses incurred on development has been

deducted therefrom. Thus, the assessee was acting as

“Nodal Agency” of the State Government.

[C] ASST YEAR 1999-00 [ FOR THE YEAR ENDED ON

31-03-1999]

(i) On page 11 under the hear Current Liabilities of the

Balance Sheet the State Government Account has been

shown in the liabilities side in “Schedule – 6” The State

Government Account shows the balance payable to the

State by the assessee due to collection of Lease Premium,

Lease Rent and Security Deposit as shown in previous

years as per details given in Annexure – 1 on page no. 18

where under point no. (2) Direct Collection of Land

-: 91 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Premium, Security Deposit, Lease Rent on its behalf for

Industrial Area has been shown. Similarly the cost of

construction and development has been deducted from the

account of State Government under Expenditure on behalf

of State Government.

(ii) Profit & Loss Account at page (8) shows Income and

details of which has been provided in “Schedule – 8” at

page (12) where except amount of lease premium, lease

rent which was collected on behalf of State Government,

all other revenues have been shown. Similarly in expenses

only Personnel Expenditure (Schedule – 9) and

Administrative Expenditure (Schedule – 10) clearly shows

that no expenses of development or construction of

industrial area has been charged to Profit & Loss Account

and the same have been first shown under the head

“Capital Work in Progress” and upon completion of the

work the same has been debited to the account of State

Government in Schedule – 6 as per Annexure – 1 on page

18.

-: 92 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Thus, evidently, the entire lease premium, lease rent and

security deposit collected on behalf of the State

Government have been shown in Schedule – 4 as liability

and the expenses incurred on development has been

deducted therefrom. Thus, the assessee was acting as

“Nodal Agency” of the State Government.

3.1] That from the analysis of the Balance sheet as

enclosed for the period prior to 2003-04 it is proved

beyond doubt that the assessee company act as a nodal

agency for and on behalf of the State Government.

3.2] That it is admitted facts by the assessing officer and

also by the Ld CIT[A] that land was acquired by the State

Government through collector and handed over the same

for development and allotment for installation of the new

industries as per order dated 14.12.1981 and clarification

dated 31.03.2017.

3.3] The land was allotted by the assessee for and on

behalf of the Governor of State Government under Article

299 of the Constitution of India in accordance to the M.P.

-: 93 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Industries (Allotment Shed, Plot & Land) Rule, 1974 and

2008.

3.4] The amount of land premium and Lease rent and

other charges have been collected by the assessee

company at the rate as prescribed by the State

Government in the Rules.

3.5] That as per State Government Order dt 14-12-1981 ,

land was acquired by the State Government and handed

over the same for development to the assessee company,

major expenses in excess of Rs 5,00,000/- were also

incurred from the Grants as received from the State

Government. Thus, development was done by the

assessee company for and on behalf of the State

Government. Hence, entire amount as received in

connection with the allotment of the land pertains to the

State Government. The State Government vide his order dt

31-03-2017 further clarified the nature of receipt as

received by all the AKVN in the State of Madhya Pradesh.

Hence, after clarification from the State Government there

was no doubt about the nature of different receipt in

-: 94 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

connection with the land. It is also settled position of law

that any explanation which has clarificatory in nature

having retrospective effect, for this preposition we rely on

the following decisions:-

1 CIT Vs Gold Coins Foods 304 ITR 308[SC] (P )Limited 2 Allied Motors (P) Ltd etc Vs 224 ITR 0677 CIT [SC] Viva Highways Ltd. V AIR2017MP103 MPRDC Ltd.

3.6] The assessee company act as a nodal agency of the

State Government , there is no business activity of the

assessee on its own, assessee does not hold any assets in

its own name, all expenses were incurred by the Appellant

whether capital or revenue are on behalf of the State

Government and therefore the amount as received by the

assessee company for and on behalf of the State

Government not liable to taxed as income of the assessee

but belonging to the State Government. For this preposition

we rely on the following direct decisions:-

1 City and Industrial Development Appeal Nos ITA No Corporation of Maharashtra Ltd 2985/ Mum/2012 dt Vs ACIT 08-08-2012 2 CIT and Anr Vs Karnataka 284 ITR 0582 [

-: 95 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Urban Infrastructure Karnataka ] Development and Finance Corporation 3 Karnataka State Agricultural ITA No 1078/ Bang/ Produce Processing & Export 2012 dt 20-12-2013 Corporation Ltd for the Asst Year 2008-09 4 CIT Vs Delhi State Industrial 295 ITR 0406 [ Delhi Development ]

MATCHING CONCEPT OF ACCOUNTING :

3.7] The assessing officer was also grossly erred in taxing

the entire amount as received by the assessee company on

account of land premium, lease rent, Transfer Fee and

Interest on funds of the State Government as income of the

assessee company without following the basic accounting

principle of matching concept. Since, cost of land and

development expenses have never been charged by the

assessee in its books of account as expenses but all such

cost have been deducted from the outstanding due of the

State Government. Therefore, the Ld. AO has grossly erred

in considering the Lease Premium, Lease Rent and other

income pursuant to allotment of land to the industries as

Income but failed to appreciate that without expenditure

how these assets were created.

-: 96 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

3.8] The Ld. AO and CIT(A) has heavily relied upon Other

Object and Incidental Objects of the Memorandum &

Articles of Association of the assessee Company ignoring

in totality the MAIN OBJECTS which clearly spell out that

the assessee company shall develop the land obtain from

the State Government as its instrumentality. The assessee

company has not undertaken any of the OTHER OBJECTS

as provided under clause (C), however the Ld. AO and

CIT(A) merely mention of business activity in the OTHER

OBJECT has consider that the assessee company is the

OWNER OF THE LAND and is in business of leasing of the

land as real estate business. The Ld. AO and CIT(A) failed

to appreciate that the LAND OWNER is always the State

Government and in all REVENUE RECORS the Industry

Department, Government of Madhya Pradesh has been

shown as OWNER of the land. The Ld. AO & CIT(A) has

also failed to appreciate that the land and cost of

development have not been shown in the balance sheet of

the assessee company as assets of the assessee

company. The land was never transferred and registered

-: 97 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

in the name of the assessee. Therefore, the Ld. AO &

CIT(A) merely on the basis of collection of lease premium,

lease rent by the assessee and its utilization as per the

order of State Government, has erred in considering the

assessee as OWNER of the land and development.

3.9] The Ld. AO & CIT(A) has also erred in not considering

the provisions of section 13 and 149(2-A) of the Companies

Act, 1956 which provides that no company can undertake

any activity mentioned in clause (C) OTHER OBJECTS of

the Company without complying the formalities as

provided under section 149(2-A) of the Companies Act and

if the company undertakes any such business the same

shall be ultra vires to the company.

3.10] LAND PREMIUM IS A CAPITAL RECIEPT

3.10.1] During the course of hearing it was also argued

that the amount of land premium for transfer of right to

use the land was also capital receipt and not the revenue

receipt as taxed by the assessing officer.

3.10.2] In the case of the assessee company, the land

as acquired by the State Government was handed over to

-: 98 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

the assessee company for development and as per

prescribed guideline of the State Government, the

assessee company allotted Industrial plot to the eligible

industries on the land premium and lease rent as

prescribed by the State Government. The right of use was

transferred from the land owner to the Industries for 99

years and 30 years as the case may be and the lease rent

was payable on annual basis. It is settled position of law

that right in land was transferred for longer lease is to be

considered as transfer of ownership to the lessee and

therefore the amount of land premium as paid for the

transfer of right is to be considered as capital receipt in the

hand of the assessee company. For this preposition we

placed reliance on the following direct decisions: -

1 Member for the Board of Agricultural 32 ITR 0169 Income Tax Vs Sindhurani [SC] Chaudharani and Ors 2 Ukhara Estate Zamindaries (P) Ltd 120 ITR 0549 vs CIT [SC] The assessee also rely upon all other 11 judgments on this subject which have provided in the Synopsis of Judgments during the course of Arguments.

-: 99 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

3.10.3] The Lease Deed provided in paper book clearly

prove the contentions of the assessee as under:

(i) Lease Premium is one time upfront amount received

by the assessee on behalf of the State Government for

parting away the interest in the property and right to enter

in the land, therefore it is capital receipt.

(ii) Lease Rent is periodical payment of continuous

enjoyment of the property and in case of failure to pay the

lease rent the lessee cannot continue to enjoy the property,

therefore it is revenue receipt.

(iii) The Lease Premium is refundable in case of

surrender and forfeiture of lease as per the terms of the

lease deed. Therefore, it is payment for right in the

property but for payment for enjoyment of the property,

therefore it is capital receipt.

(iv) The Ld. AO & CIT (A) have erred in considering the

lease premium as “Advance Rent” without any reason just

on whims and fancies. The assessee is collecting the lease

Premium, Lease Rent, Transfer fees, Development Charges

etc as per the Rules framed by the State Government. The

-: 100 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

assessee is separately collecting 3 years advance rent as

“Security Deposit” and one year lease rent in advance in

addition to lease premium which is received upfront before

entering into an agreement for lease. ”

19.

The assessee during the course of hearing also placed reliance

on the decision of the Hon’ble Mumbai Bench of ITAT in the case of

City and Industrial Development Corporation of Maharashtra

Limited Vs Assistant Commissioner of Income Tax [ Appeal Nos ITA

No 2985/ Mum/2012 dt 08-08-2012 ]has held that [ refer paras 37 to

46] :-

“37. We have heard the arguments advanced from either

side at length and have also perused the material brought

and placed before us for consideration.

38.

Coming to the arguments of the Senior Counsel that

the assessee must be treated as Government or surrogate

or an agent, has to be considered and adjudicated at first.

To consider the taxation point of view, we have to refer to

Article 289 of the Constitution, wherein Article 289(1) says,

"The property and income of a State shall be exempt from

-: 101 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Union Taxation". Article 289(2) reads, "Nothing in clause

(1) shall prevent the Union from imposing or authorizing

the imposition of, any tax to such extent, if any, as

Parliament by Law provide in respect of a trade or

business of any kind carried on by, or on behalf of the

Government or State, or any operation connected

therewith, or any property used or occupied for the

purpose of such trade or business, or any income accruing

or arising in connection there with" and Article 289(3)

reads, "Nothing in clause (2) shall apply to any trade or

business, or to any class of trade or business, which

Parliament may by Law declare to be incidental the

ordinary functions of Government".

39.

To our mind, the entire case of the assessee in the

instant case, hinges on clause (2) or clause (3) of Article

289 of the Constitution of India. The basic purport of

Article 289(2) is to neutralize clause (1), but with a rider

that, if there is any "trade or business", done on behalf of

the Government or any operations connected therewith or

any property issued or occupied for the purposes of such

-: 102 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

trade or business, or any income accruing or arising in

connection therewith. To make this clause effective, even

for Government / State, conduct of "trade or business" is

necessary, which simply means involvement of commercial

and profit motive for the vendor. This is in line with the

decision of Hon'ble Supreme Court of India in the case of

APSRTC (supra), relied upon by the DR, wherein the

Hon'ble Supreme Court had observed, "....the facts that the

trading activity carried on by the assessee may be covered

by article 289 (2) of the Constitution does not really assist

the assessee's case. Even if a trading activity falls under

clause (2) of article 289 of the Constitution, it can sustain a

claim for exemption from Union taxation only if it is shown

that the income derived from the said trading activity is

the income of the State" Therefore, whenever, there is an

activity in the nature of trade or business, clause (2) shall

come to life, which according to clause, shall be applicable

towards the State i.e. if an activity which is in the nature

of trade or business, conducted by the State itself, the

liability for tax shall emerge, a typical example is that of

-: 103 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

service tax collected by the State on events being

conducted by the vendors, have to be deposited by the

State, in the Government exchequer, making the State an

assessee under service tax as held by the Hon'ble

Supreme Court in the case of RashtriyaIspat Nigam Ltd. vs

Dewan Chand Ram Saran (CA No. 3905 of 2012). This is

only possible where there is an activity of "trade or

business", but, if, confined towards development, either of

a new township or betterment of the functions of the local

authority, 289(2) shall remain in the oblivion and shall not

come into play. In this context when in the case of APRTC,

reported in 52 ITR 524 (SC), the Advocate General sought

to include activities in clause (2) in clause (1), the Hon'ble

Apex Court negated the same by saying "no exception can

be taken". Therefore, the functions and / or activity has to

be seen primarily. The Hon'ble Supreme Court, thus

observes, "Reading the three clauses together, one

consideration emerges beyond all doubt and that is that

the property as well as the income in respect of which

exemption is claimed under clause (1) must be the property

-: 104 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

and income of the State, and so, the same question faces

us again: is the income derived by the assessee from its

transport activities the income of the State? If a trade or

business is carried on by the State departmentally and

income is derived from it, there would be no difficulty in

holding that the said income is the income of the State. It

may be that the statute under which a notification has

been issued constituting the assessee corporation may

provide expressly or by necessary implication that the

income derived by the corporation from its trading activity

would be the income of the State". This observation read

together with section 113(3A) of MR&TP Act, 1966, shall

emerge that the activity so performed by the assessee is

nothing but an act of State without any profit or

commercial motive attached with it. The only clause left for

our consideration then would be clause (3), which shall

come into play once clause (2) is disbanded and as soon

as it become disbanded, clause (3) come to life, which

operates only if, "Parliament may by Law declare to be

incidental to the ordinary functions of Government". Here,

-: 105 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

in the instant case, we have to read "Parliament" as "State

Government" because in the instant case, it is the State

Government which has authorized the assessee to perform

the development projects at Navi Mumbai, Vasai- Virar,

Waluj and such other places.

40.

We cannot agree with the argument of the DR that

there is no document which has drawn out the Agent-

Principal relationship, because the very first Resolution

dated 18th March, 1970 mention in para no. 2 that "....

which would act as an "agent" of Government for the

development of the areas with a view to secure the above

objective", and in para no. 3 of this Resolution clearly say,

"The subsidiary company will work under the control and

supervision of the State Government in the General

Administrative Department". In our opinion, the first

Resolution itself makes it clear that the assessee is to be

an agent, but functions as an arm of the State

Government, because, if the assessee can only work under

the control and supervision of the State Government,

meaning thereby that the assessee cannot make / take

-: 106 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

any decisions suo motu, then, in such a case authority for

performance of all activities lie somewhere else. In any

case, as per this Resolution, it clearly makes the assessee

an "agent" of the State.

41.XX XX XX

42.

We find that according to MR&TP Act, 1966, the

machinery sections, i.e. sections 113 & 113A talk of

appointment of Development Authority and Local Authority

and accordingly, through various Resolutions, in

compliance of these sections, MR&TP Act has appointed

the assessee as the Development Authority for

development to new townships and Local Authorities for

streamlining the functions of already existing towns like

Aurangabad, Nashik, Nagpur etc. This, itself shows that

the assessee is acting totally on behalf of the Government.

Another distinguishing feature that can be seen in that as

soon as the "Project" is complete, the project gets handed

back to the State, i.e. when there is a development project,

as per phases, and in the case of local authority, as and

when the authorizing committee is satisfied, the reins are

-: 107 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

transferred to the municipal boards, from whom, the

project was taken over, as we have seen from Resolution

no. 10375 dated 06/08/2010.

43.

In tune with these observations, read with sections

113 & 113A of MR&TP Act along with Articles 289(1) &

289(3) and holding that the assessee corporation is not

doing any trade activity on its own accord, we hold,

relying on the decision of the Hon'ble Bombay High Court

in the assessee's own case, in the Writ Petition, following

the decision Percival case (supra), wherein it has been

held, that CIDCO, the assessee herein, is an agent of the

State Government of Maharashtra. We, therefore,

respectfully follow the Hon'ble jurisdictional High Court of

Bombay, as held in the case of Percival (supra), and hold,

the assessee to be the "agent" of the State Government of

Maharashtra, read with the entire overwhelming

documents, suggesting that there is no income to the

assessee as such, and whatever is, generated, it gets

deposited in the Consolidated Fund of the State. We also

cannot ignore the fact that the department has been

-: 108 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

assessing the assessee as a State Government

undertaking for the last three years, therefore, even this

cannot be called as an afterthought and applying the 'rule

of consistency' we hold that the department cannot be

allowed to take a distinctive approach in the current year.

44.

The revenue authorities were thus, clearly in error, in

assessing the business income in the hands of the

assessee at Rs. 63,786.58 lacs. We delete this income, as

not belonging to the assessee.

45.

Ground no. X to XXIV.

We have held that there is no business activity of the

assessee on its own and the assessee does not hold any

assets in its own name, as is evident from the Balance

Sheet filed with the revenue authorities, the question of

treatment of the same does not arise, besides that all

expenses incurred by the assessee whether capital or

revenue are on behalf of the State Government of

Maharashtra and which are reimbursed to the assessee.

In these circumstances, there cannot be any capital

expenditure incurred by the assessee on physical and

-: 109 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

social infrastructure. In that case, all the impugned

grounds become infructuous, hence these are dismissed.

46.

Ground no. XXV

The ground is taken on contingency that in case grounds

no. 3 to 9 were not allowed. Since we have seen from the

records and also held that the assessee did not own any

assets, pertaining to the development projects, the ground

is rendered infructuous.

20.

The Ld. Counsel for the assessee also placed reliance on the

decision of the Hon’ble Karnataka High Court in the case of CIT &

Anr vs Karnataka Urban Infrastructure Development & finance

Corporation as reported in 284 ITR 0582 has held that:-

“4. The material on record shows that the very purpose of

constitution of the assessee was to act as a nodal agency for

implementation of mega-city scheme worked out by the

Planning Commission. Both the Central and the State

Governments are expected to provide requisite finances for

implementation of the said project. The funds from the

Central and State Governments will flow directly to the

specialised institutions/nodal agencies as grant and the

-: 110 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

nodal agency will constitute a revolving fund with the help of

Central and State shares out of which finance could be

provided to various agencies such as water, sewerage

boards, municipal corporations, etc. The objective is to create

and maintain a fund for the development of infrastructural

assets on a continuing basis and, therefore, the assessee is

a nodal agency formed/created by the Government of

Karnataka as per the guidelines; there is no profit motive as

the entire fund entrusted and the interest accrued therefrom

on deposits in bank though in the name of the assessee has

to be applied only for the purpose of welfare of the

nation/States as provided in the guidelines; the whole of the

fund belongs to the State Exchequer and the assessee has to

channelise them to the objects of centrally sponsored scheme

of infrastructural development for mega-city of Bangalore.

Funds of one wing of the Government is distributed to the

other wing of the Government for public purpose as per the

guidelines issued. The monies so received, till it is utilised, is

parked in a bank. The finding recorded by the Tribunal

clearly shows that the entire money in question is received

-: 111 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

for implementation of the scheme which is for a public

purpose and the said scheme is implemented as per the

guidelines of the Central Government and, therefore, the

assessee is only acting as a nodal agency of Central

Government for implementation of these projects. It is not the

case of the Revenue that the assessee was carrying on any

business or activities of its own while implementing the

scheme in question. The unutilised money, during which the

project could not be fully implemented, is deposited in a

bank to earn interest. That interest earned is also again

utilised for the implementation of the mega-city scheme

which is also permitted under the scheme. Therefore, in

computing the total income of the assessee for any previous

year the interest accrued on bank deposits cannot be treated

as an income of the assessee as the interest is earned out of

the money given by the Government of India for the purpose

of implementation of mega-city scheme.

5.

Therefore, we do not find any error in the conclusion

reached by the Tribunal that there was no income earned by

way of interest by the assessee and setting aside the order

-: 112 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

of AO which is affirmed by the first appellate authority. The

finding given by the Tribunal is purely a question of fact. We

do not find any substantial question of law involved in this

appeal and therefore, this appeal is liable to be dismissed at

the stage of admission itself.”

21.

The Ld. Departmental Representative has reiterated the submissions before us as made in the written submission, which is reproduced as under :-

“Written submission in the case of M/s Madhya Pradesh Audhyogik Kendra Vikas Nigam Ltd., Indore, ITA No. 347 to 351/Ind/2013, A.Y. 2003-04 to 2008-09-reg.

The above mentioned appeals are fixed for hearing

today on 06.03.2018. In this connection we are filing our

written submission along with the paper book attached

herewith.

1.

The original assessment u/s 143(3) read with section

147 in this case was completed on 29.12.2006. The

section 147 of Income Tax Act, 1961 was invoked in this

case because the appellant was claiming the exemption

-: 113 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

u/s 10(20A) of Income Tax Act, 1961 till the financial year

2002-03 which was omitted w.e.f. 01.04.2003. Since the

appellant had come under the ambit of taxation from A.Y.

2003-04, necessary action under the Income Tax Act was

taken in this case for the A.Y. 2003-04 and A.Y.2004-05.

The order of CIT(A) against the order of A.O. dated

29.12.2006 was passed on 15.01.2008 whereby the

finding of AO given in the assessment order dated

29.12.2006 were upheld. However, Hon’ble ITAT vide their

consolidated order dated 03.02.2009 for the A.Y. 2003-04

& 2004-05 have restored the issue to the file of AO for

reconsideration and re-adjudication. The CIT(A) has

passed a consolidated order for the A.Y. 2004-05 to 2008-

09 and separate order for the A.Y. 2003-04 against the

assessment orders passed by the assessing officer in

compliance to the direction of Hon’ble ITAT and also the

orders on subsequent pending assessments. The CIT(A) in

his consolidated order dated 26.02.2013 has dismissed

the various grounds of appeal on the issue of Land

Premium.

-: 114 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

2.

The most relevant part of the order of CIT(A) is

required to be reproduced hereunder – 2.4 to 2.10.

From careful consideration of written submissions of

the assessee, it becomes evident that the arguments of

the assessee are basically based on two limbs. Firstly it

has been tried to bring out that the land belongs to the

government of Madhya Pradesh and the assessee is

just an agent engaged in development and distribution

of the same. In order to justify this position, the

assessee has adduced many arguments for example,

(a) the assessee is a subsidiary of MPAVN Ltd., (b)

Directors of appellant company are appointed by MPAVN

Ltd. and chairman and directors are appointed by

governor of MP, (c) the appellant company has not

purchased any land on its own for

establishment/promotion of industries, (d) Government

allocates and disburses the funds for acquisition of land

under consideration which reaches to the assessee

through DIG, (e) As per instruction 6/3/81/ 11-B, dated

-: 115 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

14.12.1981 issued by Commerce and Industry

department of MP government, the government is

supposed to make available the land to the assessee.

Further during the course of appellate proceedings, the

assessee has brought to my notice the instance when

the MP government has instructed the assessee to

spare an amount of Rs. 10 Crores to be given to MP

Trade and facilitation corporation to participate in equity of

MPAKVN, Ujjain. Through the above mentioned

arguments, the assessee has tried to establish that

the land belongs to Madhya Pradesh government and

the amount of land premium needs to be considered

as liability of the appellant towards the government of

Madhya Pradesh.

I have considered the submissions of the assessee

and noted that the land is provided to the assessee by

government of Madhya Pradesh through DIG. It is also

noted that the MP government, for development of

industries and infrastructure acquires land and

-: 116 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

makes payment of compensation through collector of the particular area. This land is subsequently given at the disposal of audhyogik vikas kendras and other agencies engaged in the process of development of industries, housing and infrastructure. It is observed that the land under consideration has been given to the appellant by government of MP and through an instruction as referred above, any land premium and lease rent received from leased out land will be kept with respective audhyogik kendras for maintenance and further development. The assessee is not a mere custodian. It becomes a lawful owner of the land which has legally been transferred through government of Madhya Pradesh. I have also gone through the memorandum & article of association and observed that the assessee is authorized to purchase/acquire land on its own also apart from the land earmarked by the government of MP. (refer para A-l of memorandum of association).

-: 117 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Therefore, there is no doubt that as far as the management and leasing of the land under the consideration is concerned, the assessee has been adequately independent/ equivalent to the owner of the land. This can be seen from clause C(22) of the memorandum wherein it has been clearly brought out that the object of the audhoygik kendra shall be to sell, improve, manage, develop, exchange, lease, mortgage, dispose off, deal with all or any part of property and rights of the company. Moreover there is no denial on the part of the appellant that income has arisen. Once the income has arisen out of any transaction, the same has to be taxed under the Income Tax Act, 1961 under the taxation scheme unless the same is exempted by a particular provisions of the Act. I have also noted that till the AY 2003-04, the assessee had been claiming exemption u/s 10(20A) of the Income Tax Act. However, the same has been omitted with effect from 01.04.2003.

-: 118 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Therefore, in my considered view, the income arising as a land premium which has duly been accounted, for by the appellant is necessarily to be taxed in the hand of assessee. The government of Madhya Pradesh shall not come into picture for taxation purpose because the assessee is an independent and separate identity who is filing its return, of income and paying taxes etc.

The second limb of argument advanced by the assesse is that the land premium is a capital receipt. This part of argument was mainly advanced before the Assessing Officer at the time of passing the assessment order. However the same set of arguments have been put forth before me also. The assessee has relied mainly on decisions of Hon'ble Supreme Court which are as under:- (i) Ukhara Estate Zamindaries P. Ltd. Vs. CIT 120 1TR 549 (SC)

-: 119 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

(ii) Member for the Board of Agricultural Income Tax, Assam Vs. Sindhurani Chaudhurani & Others 32 ITR 169. It is observed that the second in this case is whether the receipt under consideration is a capital receipt or revenue receipt. In order to decide and examine this issue, it will be appropriate to go through the memorandum & article of the association. A careful perusal of the same makes it crystal clear that the assessee's main object is to develop, promote, encourage, assist in growth and establishment of industries etc. with ancillary/incidental objects of carrying out of businesses, A reference to objects as specified under B9 to B12 makes it clear that the assessee is in the business with a motive of earning the profit. The relevant paras of such objects are reproduced as under :-

-: 120 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

“Ancillary/incidental objects of the company shall be:

B (9) To carry on any other trade or business

whatsoever which can, in the opinion of the company, be advantageously or conveniently

carried on by the company by way of extension of

or in connection with any such business as

aforesaid or is calculated directly or indirectly to

develop any of the company's business or to

increase the value of or turn to account any of the

company's assets property or rights;

(10) To undertake, manage, control or otherwise

deal with the business and undertakings of any

person, firm or corporation when it may be

necessary for the purpose of protecting the

interests of the company, or for the purpose of protecting securities, realizing upon claims or

carrying out any transaction or obligation which the

company has entered upon;

-: 121 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

(11) To take part in the management, supervision

and control of the business or operation of any

undertakings, shares or other securities of which

are held by the company or in which the company

is otherwise interested, and for that purpose to

appoint and remunerate any directors or

accountants or other experts or agents;

(12)To sell or otherwise dispose of the undertaking

of the company or any part thereof for such

consideration as the company may think fit and in particular (but so as not to restrict the generality

of the foregoing) for shares, debentures, bonds or

securities or obligations of any other company

having objects altogether or in part similar to those of the company.”

A careful consideration of above clauses of memorandum reveals that the .assessee is in the business. Leasing out of the land and getting rental income as well as the premium, is the

-: 122 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

business of the assessee. Therefore, a land premium is nothing but a revenue receipt in the form of advance rent which has loosely been named as land premium. Since the assessee is showing annual rent on account of such leasing of the plots, there is no reason why the advance rent received should not be taxed accordingly. Moreover as brought out clearly in prepares, the assessee itself has offered I/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. In this regard, it will be appropriate to refer the agreement made by the assessee with the purchaser of the plots. Clause 2 of such agreement makes it abundantly clear that the amount of land premium is nothing but the rent in advance. The clause 2 reads as under :-

-: 123 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

"2. The lessee having, paid to the lessor for said land the advance rent and premium of Rs….. ........... as security amount before the execution of this deed."

In view of above discussion, there remains no doubt that the advance rent in the form of land premium is nothing but revenue receipt to be taxed as per Income Tax Act. During the course of appellate proceedings, the counsel of the assessee has further submitted that the decisions relied upon by the assessee in the cases of Member for the Board of agriculture income and Ukhara Estate Zamindaries P. Ltd. are squarely applicable in the instant case. Although Assessing Officer has briefly distinguished these two cases yet in the interest of natural justice, I have gone through the above case laws to verify the contention of the assessee. In the case of Member of the Board of Agriculture Income Tax, it is seen that the salamis/premia were not at

-: 124 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

all dependent on the rate of the rent charged. However, the same varied with the quality of land leased out for the purpose of agriculture. But in the instant case, as brought out above, the land premium is nothing but advance rent fully dependent on the rate of rent. Further in that case, the salami was defined as lump sum non recurring receipt of money paid by tenant to land lord before making a settlement of holding. Whereas in the case under reference, where leasing of the plot is for 99 years and there is no provision for conditions in the agreement to suggest the modality of transfers and renewable after 99 years. In other words, after the lease period expires, it is not the case of the assessee that they are not going to charge further premium at the time of renewal of lease. The salami in the referred case has been defined as single payment made for acquisition of right of the lessees to enjoy the benefit granted to them by the lease. In that case it was held

-: 125 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

as capital asset for the reasons that the right for the cultivation of the land being the capital in nature -was transferred to the lessee for a consideration called salami. Therefore the same was treated as capital asset. Hence, in view of the clear cut difference in the facts and findings of the cases, to that extent, the case law cited by the assessee is not applicable in the instant case where land premium charged is nothing but the advanced rent.

The another case law, i.e., Ukhara Estate Zarnindaries P. Ltd. relied upon by the appellant was also gone through and it was seen that the facts and findings in the said case law are also clearly 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 999 years. The lease items comprised of coal bearing lands/mines, government

-: 126 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

promissory note, jewelry, arrears of rent etc. The appellant granted several sub leases for 900 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 as brought out above, 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. In the case relied upon by the assessee, Hon'ble Supreme Court reversed the decision of High Court saying that the appellant had dealt with its lease hold interest in the zamindari property as a. land owner and the receipt of salami, premia and compensation were receipts of capital nature. Therefore, the facts

-: 127 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

are altogether different. In view of the foregoing discussion, I am of the considered opinion that the AO has correctly assessed the income as revenue receipt. The additions made under this head in the instant assessment year as well as in the AY 2006-07, 2007-08 & 2008-09 are hereby confirmed.

3.

Special Audit u/s 142(2) of Income Tax Act 1961on land premium-

During the subsequent assessment years i.e.2011-

12,2012-13,2013-14 & 2014-15, the assessing officer had

got the special audit conducted section under 142(2A) of

Income Tax Act 1961. The copies of special audit reports

are placed at page no.79 to 137 of paper book. The special

auditor has clearly reported that the Land Premium is the

revenue income of the appellant. The said conclusion was

drawn by the auditor keeping in account various

documents like memorandum of association, lease deeds

and various facts and circumstances of the case. The

-: 128 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

relevant part of notes given by the special auditor in the

above mentioned assessment years is reproduced here

under-

“Land Premium:-

During our audit we have found that land premium

collected by the company amounts to Rs. Xyz. which has

been credited to State Government Account and is shown

as liability in balance sheet, As explained to us the

management of SEZ INDORE Ltd is of the view that the

land belongs to state government and land premium so

received also belongs to the state government therefore, it

is to be credited to State Government account. However,

the company retains the whole amount received with it

and deploys the said premium amount for industrial and

infrastructure development which the main object of the

company. The main object of company as per

memorandum of association is as reproduced below:-

"To develop, promote encourage or the assist in the

formation of Special Economic Zone(s), information

-: 129 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Technology park, software park of any other such zone/

park, in accordance with the policies of the Government of

India, Government of Madhya Pradesh or any other

Government, or its department(s) of any agency of any

regulatory body formed in this regard and to obtain

and/or acquire land from Government or private sources

and/or arrange, co-ordinate the availability of all essential

infrastructural inputs such as water, power,

telecommunication facilities and to construct roads,

culverts, bridges, industrial sheds, dwelling units,

administrative units or any other buildings, multiplex or

any other unit which may be considered necessary in this

regard, to acquire and provide the telecommunication

facilities; and to provide such other infrastructural facilities

as may be considered necessary for the establishment of

a special economic zone; and to sell, lease or otherwise

transfer such properties on such terms and conditions as

may be decided from time to time, obtain necessary

permission from all concerned Government Departments,

Central of State, regulatory bodies such as Reserve Bank

-: 130 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

of India or any other competent authorities, and to

establish such a special economic zone either on its own or

in association/collaboration with any other Government

Department or company or institution or individual."

The above object clearly state that the company is to

develop or assist in development of industrial area and for

the same, take suitable steps to obtain or acquire land

from government or private. The company work on model

of leasing out land to industries for industrial purpose. On

this, they collect upfront land premium and other lease

charges.

As stated above company is engaged in the business

of industrial and infrastructure development, thus, land

premium and other lease charges so received is a part and

parcel of its business receipt. Therefore, land premium and

lease rent so received is not a liability in the hand of the

company.

As in the estate business a builder debit all expenses

incurred on construction and credit sale proceeds to profit

-: 131 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

and loss account considering them as revenue in nature.

The company also debit all expenses incurred on

development of plot in profit and loss account. Therefore,

the land premium being the consideration of leasing out of

plot needs to be given the same treatment i.e. treated as

revenue in nature.

Also no capital gain is offered when the lease is

cancelled due to surrender of plot or due to any other

reason and the said plot is allotted to other lessee on

higher premium which shows that the difference of

premium received is not a capital receipt, thus, the same

stands revenue in nature.

Further in the recent judgment in the case of New

Mangalore Port Trust vs Assistant Commissioner of Income

Tax, Circle -1(1), Mangalore decided by ITAT Bangalore, it

appeal no. 1299(Bang) of 2013 where the upfront premium

is treated as income and is charged to tax in the year of

the receipt.

-: 132 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Looking to all these facts, land premium is the

revenue income of the company and the amount of Rs Xyz-

is to be included in the total income”

It becomes evident from the detailed discussion in the

order of the CIT(A) as reproduced above and also the

finding of the special auditor that the Lumpsum Land

Premium charged and collected by the appellant was

nothing but revenue receipt earned in the process of

business in development and sale of plots. Which has also

been found supported by the memorandum of association

and the copies of lease deeds wherein nature of receipt

has been specified.

4.

Memorandum and Articles of association

I may request this Hon’ble Bench to kindly take note

of the main objects of the company listed at serial no. 3, 4

& 5 (PARA A) at page no. 1 of the memorandum of

association. Similarly we may draw the kind attention of

Hon’ble members to incidental/ancillary objects of the

company listed at 1,8,9,10,11,12,13,15,17,19,20 (PARA

-: 133 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

B), page no. 2 to 4 of the MOA. Further there is a list of

other object in the MOA which is listed under (PARA C).

Kind attention is invited to serial no. 1,2,3,5,7,21,22 & 23

of other unspecified objects. The above referred objects of

the company proves beyond doubt that the company is

very much in business of acquiring land, developing plots

and selling and leasing out of the same to various

industrial houses for a consideration in the form of rent,

advance rent and land premium and also for various terms

and conditions specified in the lease deeds. Therefore, the

learned CIT(A) has rightly reached to the conclusion that

land premium is nothing but revenue receipt in the hands

of the appellant which view has also been supported by

MOA, Sample lease deed and the report of Special auditor

filed for various assessment years which are placed on

record.

5.

Sample lease deed

May I request this Hon’ble bench to take note of a

sample lease deed placed in the paper book at page no. 53

-: 134 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

to 78. Special attention is drawn to para 1, 2, 3, 4, 5, 6

,27,28,30 and 33 of sample lease deed wherein various

terms and conditions of lease have been specified and the

nature and name of consideration in lieu of the lease of the

land has been properly specified. It has clearly been

brought out that land has been leased out for rent or

advance rent or land premium. The appellant has also

been reflecting the part of land premium in the return of

income for the A.Y. 2003-04 to 2008-09 and subsequent.

Therefore, there is no question of considering the land

premium as capital receipt. Accordingly it is requested that

the action of CIT(A) in confirming the order of AO may

kindly be upheld on the issue of taxability of land

premium.

6.

High Court orders in writ petition

It is not out of place to mention here that the

appellant, in the subsequent year i.e. A.Y. 2014-15, soon

after the completion of assessment order and raising the

demand on the same issue of land premium had preferred

-: 135 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

a writ petition in Hon’ble M.P. High Court for stay of the

demand. Hon’ble High Court vide it’s order dated

13.11.2017 had declined to interfere with the action of

assessing officer in perusing the recovery of demand.

Rather Hon’ble High Court had opined that the department

was justified in issuing demand notice and was also

justified in issuing letter dated 04.10.2017 for recovery of

20% of demand in accordance with the circular of CBDT

dated 31.07.2017 read with circular dated 29.02.2016.

7.

In view of the detailed discussion as above and

various relevant documents filed through the paper book,

we request this Hon’ble bench to confirm the action of AO

and CIT(A) in considering the land premium belonging

exclusively to the appellant and treating the same as

revenue receipt for the purpose of taxation. ”

22.

We have carefully considered the rival submissions and have

perused the material placed before us and also gone through the

case laws cited by the respective Learned Representatives of the

parties. The issue requires to be adjudicated is whether the land

-: 136 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

premium received by the assessee company is liable to be taxed as

an income for the year under consideration. The main thrust of the

arguments of the Ld. Counsel for the assessee remain three folds,

firstly, the assessee being a Government Company and acting as a

nodal agency for the State Government is not liable for the income

tax, in terms of Article 289 of the Constitution of India; secondly,

the receipt of premium is being accepted and collected by the

assessee company on behalf of the State Government, and, thirdly,

even if it is assumed that the premium receipt is of the assessee

company, even in that event it is not taxable being capital in

nature. We have given our careful consideration to the arguments

addressed at length by the Ld. Counsel for the assessee that the

assessee being a Government Company cannot be taxed under

Article 289. Article 289(1), 289(2) and 289(3) read as under :-

Article 289(1) says,-

"The property and income of a State shall be exempt from

Union Taxation".

Article 289(2) says -

"Nothing in clause (1) shall prevent the Union from

imposing or authorizing the imposition of, any tax to such

-: 137 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

extent, if any, as Parliament by Law provide in respect of a

trade or business of any kind carried on by, or on behalf of

the Government or State, or any operation connected

therewith, or any property used or occupied for the

purpose of such trade or business, or any income accruing

or arising in connection there with".

Article 289(3) says -

"Nothing in clause (2) shall apply to any trade or

business, or to any class of trade or business, which

Parliament may by Law declare to be incidental the

ordinary functions of Government".

As per Article 289(2) of the Constitution of India, the Union

Government is authorized to impose any tax to such extent, being

as Parliament by law provides in respect of trade or business of any

kind carried on by us on behalf of the Government for State, for any

operation connected therewith or any property used or occupied for

the purpose of its trade or business or any income accruing or

arising in connection therewith. However, as per Article 289(3)

nothing in clause (2) shall apply to any trade or business, or to any

class of trade or business, which Parliament may by Law declare to

-: 138 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

be incidental to the ordinary functions of Government. We have

perused the objects of the assessee company. A bare perusal of the

same, demonstrates that what the assessee company is doing, is

purely a work of businessman/contractor. Therefore, the assessee

company cannot take shelter under Article 289(1) or 289(3) of the

Constitution of India. Hence, this plea of the assessee company is

rejected.

Now coming to another plea of the assessee company that whatever

is being done is done on behalf of the Government of Madhya

Pradesh. In support of this, the Ld. Counsel for the assessee has

taken us to various instructions by the Government of Madhya

Pradesh. There is no doubt that there has to be a clear distinction

between sovereign function and a function carried out as a trader or

a businessman. If the function falls under the ambit of sovereign

function, certainly any receipt arising therefrom cannot be subject

to tax, but where the function is being carried out as a contractor,

in that event, in our considered view, such receipt will be taxable.

Moreover, as per the directives of the State of M.P., the entire

receipt remains with the assessee company.

-: 139 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Now coming to the third arguments of the assessee that even if it is

assumed that the receipt is to be taxed as a business receipt, under

the facts of the present case, that being a capital receipt cannot be

taxed. This plea of the assessee company is contrary to the facts on

record. Admittedly, in earlier years, the assessee itself has shown

1/99th of the land premium as a taxable receipt. Thus, such

treatment reflects the intention of the assessee company that it was

nothing but a business activity. The assessee has relied upon the

judgement of the Hon'ble Supreme Court to buttress the arguments

if the income is wrongly declared that cannot be taxed. It is not the

case where the assessee has wrongly offered the premium for tax. In

fact, it was a conscious decision keeping in view the objects of the

assessee company and lease deed executed by it.

23.

The Ld. Counsel for the assessee strongly urged that the issue

may be decided in the light of the various case laws as relied in the

written synopsis.

24.

We have gone through the decisions relied upon by the Ld.

Authorized Representative of the assessee of the Hon’ble Mumbai

Bench in the case of M/s City and Industrial Development

-: 140 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Corporation of Maharashtra Limited Vs Assistant Commissioner of

Income Tax [ Supra] and Hon’ble Karnataka High Court in the case

of CIT & Anr vs Karnataka Urban Infrastructure Development

& Finance Corporation [ supra]. We have also considered the case

laws cited by the Ld. Counsel for the assessee, but the judgments

of Hon'ble Supreme Court in the case of CIT Assam Versus The

Panbari Tea Company Limited (1965) 57 ITR 422 (S.C.), wherein

the Apex Court while dealing with the nature of receipt of premium

on the land leased to lessee has held that it is a payment made for

the acquisition of the right of lessor to enjoy benefits granted by the

lease the general right may properly be regarded as a capital asset

and the money paid to purchase to it may properly be held to

payment on capital account. and Hon'ble Madhya Pradesh High

Court in the case of Project Automobiles, 167 ITR 781, wherein it

was held that premium payable by the assessee to secure a

permanent lease cannot be considered as advance rent and the

same has to be held as capital expenditure. Both the above cases

are distinguishable on facts. In the present case, the assessee is

also empowered to acquire land and deal with the same in the

manner it likes. Another distinguishing facts in the present case is

-: 141 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

that the assessee itself has treated as taxable in earlier years and in

the present case, there was special audit, wherein the auditors have

given a finding on facts by observing as under :-

“As stated above company is engaged in the business of

industrial and infrastructure development, thus, land

premium and other lease charges so received is a part and

parcel of its business receipt. Therefore, land premium and

lease rent so received is not a liability in the hand of the

company.

As in the estate business a builder debit all expenses

incurred on construction and credit sale proceeds to profit

and loss account considering them as revenue in nature.

The company also debit all expenses incurred on

development of plot in profit and loss account. Therefore,

the land premium being the consideration of leasing out of

plot needs to be given the same treatment i.e. treated as

revenue in nature.

Also no capital gain is offered when the lease is

cancelled due to surrender of plot or due to any other

-: 142 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

reason and the said plot is allotted to other lessee on

higher premium which shows that the difference of

premium received is not a capital receipt, thus, the same

stands revenue in nature.”

The case laws as relied upon by the Ld. Counsel for the assessee,

Salami or the premium as may be called was not refundable. In our

considered view, the fundamental aspect for the treatment of any

receipt would certainly depend upon the intention of the assessee.

In the case in hand from the Memorandum of Association as well as

the Lease Deed as executed, the relevant clauses for the same are

reproduced as under :-

Clauses of Memorandum and Articles of Association of MPAKVN:

“Ancillary/ incidental objects of the company shall

be:

-: 143 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

B(9) To carry on any other trade or business whatsoever

which can, in the opinion of the company, be

advantageously or conveniently carried on by the company

by way of extension of or in connection with any such

business as aforesaid or is calculated directly or indirectly

to develop any of the company’s business or to increase

the value of or turn to account any of the company’s assets

property or rights;

(10) To undertake, manage, control or otherwise deal with

the business and undertaking of any person, firm or

corporation when it may be necessary for the purpose of

protecting the interests of the company, or for the purpose

of protecting securities, realizing upon claims or carrying

out any transaction or obligation which the company has

entered upon;

(11) To take part in the management, supervision and

control of the business or operation of any undertakings,

shares or other securities of which are held by the

company or in which the company is otherwise interested,

-: 144 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

any for that purpose to appoint and remunerate any

directors or accountants or other experts or agents;

(12) To sell or otherwise dispose of the undertakings of the

company or nay part thereof for such consideration as the

company may think fit and in particular (but so as not to

restrict the generality of the foregoing) for shares,

debentures, bonds or securities or obligations of any other

company having objects altogether or in part similar to

those of the company.”

Clause 2 of the agreement of Lease Deed :

“2. The lessee having, paid to the lessor for said land the

advance rent and premium of Rs. ………as security

amount before the execution of this deed.”

Moreover, it is contended by the assessee that matching principle is

to be applied to give set off of the expenditure incurred in respect of

the lease premium. It demonstrates that the assessee is not clear

whether this receipt is revenue or capital in nature.

-: 145 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

From the above, it is clear that one time premium received by the

assessee would be income of the year of the receipt. It can be safely

inferred that the land premium is nothing but a kind of rent, which

is certainly taxable. Under the identical facts, Coordinate Bench of

this Tribunal in I.T.A.No. 1299/Bang/2013, in the case of M/s. New

Mangalore Port Trust, Mangalore vs. ACIT, has held as under :-

“9.5 Thus it is clear that the Special bench has analyzed

the respective obligations of the parties and found that in

the said case, the assessee contributed to the accruing or

arising of the income by rendering services or otherwise. It

was also noted that in case of failure of the assessee to

provide the allotted accommodation or the alternative

accommodation, the assessee is liable to pay liquid

damage to the members. On those peculiar facts of the

said case, the Special Bench conducted that there was a

continuing liability on the part of the assessee not only to

provide the accommodation but also to provide other

incidental services attached with the accommodation.

Thus, in the said case, when the assessee was under

-: 146 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

obligation to provide accommodation as well as other

services incidental to the accommodation to its members,

then the amount received in advance was held to be

recognized as income over the period during which the

assessee remained under obligation to provide the

accommodation and other services to the members. By

considering the peculiar facts, Special bench held that the

entire fee received by the assessee cannot be said to be

accrued as income in the year of receipt. In the case in

hand, after receiving upfront premium, assessee was no

longer required to provide any service or to perform any

other act/obligation under the agreement for 30 years.

Therefore, we are of the considered ,opinion that the

judgment of the Special bench in the case of Mahendra

Holidays (supra) cannot be applied in the facts of the

present case. In view of the above facts and circumstances

of the case, we do, not find any error or illegality in the

orders of the authorities below in treating the entire

upfront premium received by the assessee as income for

the year under consideration.”

-: 147 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

We, therefore, do not see any reason to take a different view as

taken by the Ld. CIT(A). Hence, we hold under the facts of the

present case, the Ld. CIT(A) was justified in taxing the land

premium. Ground nos. 2 to 8 of the assessee’s appeal are

dismissed.

Issue regarding exclusion of lease rent, land premium and interest income :

25.

The assessee company through the additional grounds of appeal claimed to exclude the amount of lease rent, Land premium and Interest

on deposit from its total income in all the appeals. The amount of lease

rent as received by the assessee company from different industries to

whom land was leased out by it for and on behalf of the State

Government. In the ground of Land premium, it was held that the same

was received by the assessee company for and on behalf of the State

Government. Similarly, 1/99th share of land premium as offered

inadvertently also claims to exclude, since the same was also relates to

the land leased out by the assessee company to different industries.

Similarly, the amount of interest as credited in the books of the assessee

on the amount of State Government as received in the form of Land

Premium, Lease rent, Transfer fee and development funds which

actually pertained to the State Government and as per order of the State

-: 148 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Government dated 31-03-2017 also it was clarified that the amount of

lease rent, Interest on State Government, Transfer fee and development

funds as received by the assessee actually pertained to the State

Government. The assessee before the assessing officer himself vide his

letter dated 17-12-2009 has submitted its detailed reply which was also

considered in Para 7.6 of the assessment order the same is reproduced

as under: -

“Further to our earlier submissions on the subject, we may

submit that the land premium is being received by the

assessee Company for and behalf of the government of M.P.

according to the policies as decided by the M.P.Government in

this respect. We may invite your honors kind attention on the

instructions letter dated 14.12.1981,copy of which is enclosed

herewith. On perusal of the said letter your honor will please

appreciate that the assessee company, which is fully owned by

the government of M.P. and is being functioning under the

instructions and polices made and decided by them, was

provided with the land by the government and the company is

to develop and manage the same for the said purpose. It is

very important to note that the assessee company is only an

extended and of government of M.P for the leasing out such

-: 149 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

land, that too on the terms and conditions, for and on behalf of

government only, which are being laid down by the

Government in that respect from time to time.(pl. refer sub

clause (c) of clause No. 1 of the said letter.)

It is further submitted that the assessee company is only an

agency to collect Land premium and other revenues in respect

of such land for and behalf of the government and further that

the assessee company is only allowed to retain the land

premium and other revenues collected by them in respect of

such land and are supposed to utilize the same for the

development and maintenance, as per the instructions of the

government. Under the circumstance, we are sure that you

honor will please agree with us that the land premium is being

collected by the assessee Company only for and behalf of the

government and as such the same is being rightly shown as

liability in balance sheet and accordingly being not offered for

taxation.

Without prejudice to whatever is being submitted herein above,

even if the land premium so collected, by any stretch of

imagination be considered as receipt by the assessee company

-: 150 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

, the same cannot be taxed as the same is in the nature of

capital receipt. We rely on following”

a. (1957) 32 ITR 169 (SC) Member of the board of agricultural

Income-Tax v Sindhurani Chaudhurani.

b.(1979) 120 ITR 549 (SC) Ukhara Estate Zamindaries (P)

Ltd v CIT.

We are sure that in the light of whatever is being submitted

herein above, your honor will please agree with us that the

land premium so collected is not an income.”

26.

That from the above, it is clear that the assessee before the

Assessing officer himself has stated that Land premium and other

receipts were received by it for and on behalf of the State Government

and, therefore, entire amount so received was not liable to be taxed in

its hand. Thus, entire material and claims was before the assessing

officer himself at the time of passing of the assessment order.

27.

The Ld. Counsel for the assessee during the course of hearing

relied on various decisions and claimed that merely the amount of lease

rent, land premium and Interest on State Government Funds

inadvertently offered for tax does not deprive the assessee company to

lodge its claim before the Hon’ble Bench.

-: 151 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

28.

The Hon'ble Bombay High Court in the case of Balmukund Acharya

Vs DCIT as reported in 310 ITR 310 has held that :-

“ 31. Having said so, we must observe that the apex

Court and the various High Courts have ruled that the

authorities under the Act are under an obligation to act

in accordance with law. Tax can be collected only as

provided under the Act. If any assessee, under a

mistake, misconception or on not being properly

instructed is over assessed, the authorities under the

Act are required to assist him and ensure that only

legitimate taxes due are collected [see S.R. Koshti vs.

CIT (2005) 193 CTR (Guj) 518 : (2005) 276 ITR 165

(Guj), C.P.A. Yoosuf vs. ITO (1970) 77 ITR 237 (Ker), CIT

vs. Bharat General Reinsurance Co. Ltd. (1971) 81 ITR

303 (Del), CIT vs. Archana R. Dhanwatey (1981) 24

CTR (Bom) 142 : (1982) 136 ITR 355 (Bom)].

32.

If particular levy is not permitted under the Act, tax

cannot be levied applying the doctrine of estoppel [see

Dy. CST vs. Sreeni Printers (1987) 67 SCC 279].

33.

This Court in the case of Nirmala L. Mehta vs. A.

Balasubramaniam, CIT (2004) 191 CTR (Bom) 8 :

-: 152 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

(2004) 269 ITR 1 (Bom) has held that there cannot be

any estoppel against the statute. Article 265 of the

Constitution of India in unmistakable terms provides

that no tax shall be levied or collected except by

authority of law. Acquiescence cannot take away from

a party the relief that he is entitled to where the tax is

levied or collected without authority of law. In the case

on hand, it was obligatory on the part of the AO to

apply his mind to the facts disclosed in the return and

assess the assessee keeping in mind the law holding

the field.

29.

That Hon’ble Calcutta High Court in the case of Mayan Poddar

(HUF) vs. Wealth Tax Officer as reported in 262 ITR 0633 has held [refer

Para 10]:-

“ 10. ………. Even if the assessee had included the

same in his return, that would not preclude the

assessee from claiming the benefit of law. There cannot

be any estoppel against statute. A property , which is

not otherwise taxable , cannot become taxable because

of misunderstanding. If in law an item is not taxable,

no amount of admission or misapprehension can make

-: 153 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

it taxable. The taxability or the authority to impose tax

is independent of admission. Neither there can be any

waiver of the right by the assessee. The department

cannot rely upon any such admission or

misapprehension if it is not otherwise taxable.”

30.

That it is settled position of law that nothing can be taxable merely if the same was offered by the assessee inadvertently when the same was not taxable as per provision of law. For this proposition the reliance was placed by the Ld. Authorized Representative of the assessee on the following direct decisions:- 1 National Thermal Power Co. ltd. vs. CIT (1998) 229 ITR 383 (SC) 2 Jute Corporation of India Ltd. vs. CIT (1991) 187 ITR 688 (SC) 3 Nirmala L. Mehta v. A. Balasubramaniam, 269 ITR 1 (Bom) Commissioner of Income-tax 4 CIT v/s. Mayur Foundation (2005) 274 ITR 562 (Guj) 5 CIT v/s. Kerala State Co-Operative (1992) 193 ITR 624 (Ker) Marketing Federation Ltd. 6 Balmukund Acharya Vs DCIT 310 ITR 310 [ Bombay ] 7 Mayank Poddar [HUF] vs Wealth Tax Officer 262 ITR 0633[ Calcutta]

31.

The Ld. Departmental Representative vehemently argued supporting the order of both the lower authorities and further added that the assessee has itself offered the income for tax on account of lease premium in the return of income. 31.1 We have heard the rival contentions and perused the records placed before us and gone through the judgments referred and relied by both the parties. We observe that in the preceding para no.22, we have given a categorical finding that the lease premium income offered by the assessee was a conscious decision and further Article 289(1) of Constitution of India is not applicable on the facts of the present case.

-: 154 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Therefore, the grounds raised relating to this issue regarding exclusion of lease rent, land premium and interest income are devoid of merits and therefore, they are rejected. Issue regarding Under estimation of profit : 32 In the appeal as filed for the Asst Year 2003-04 [ Appeal No

347/Ind/2013 ], the assessee had challenged the addition as made

by the assessing officer and as maintained by the Ld CIT[A] in

respect of understatement of profit to the tune of Rs.2,18,75,469/-.

33 The assessing officer in the assessment order disallowed the

expenses as incurred to the tune of Rs 2,18,75,469/- and added

the same to the total income of the assessee. The assessing officer

while making the above disallowance stated as under:-

“6.8 In the above proposition of law on examination of Note

appended to the Schedule (4) of the Balance Sheet it is

noticed that the assessee had shown the Capital WIP as

on 01.04.2002 at Rs. 23,97,10,477/- after due

capitalization of the expenses. Examination of the

particulars furnished in the Note further revealed that the

assessee had shown the carrying out of the WIP during

the previous year under consideration for Rs

6,46,99,371/- From this it follows that the assessee did

-: 155 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

not carry out the capital work during the previous year

under consideration, as it was in the earlier previous year.

As no other details were furnished by the assessee to

establish that the particular expenditure was not incurred

for the aforesaid work it is imperative that the method

followed by the assessee earlier is invariably required to

be adopted in the Previous year under consideration also.

Therefore it would rather be incorrect on the part of the

assessee to assert that AO had not brought any material

evidence to establish that the certain expenditure were

required to be capitalized not mentioned in the Guidelines

of Chartered Accountant of India. I therefore do not find

any merit in assessee’s this contention.

6.9 In view of the above it is apparent that by change of

method if not capitalization of various expenses to the

extent of 75% has resulted in to suppression of profit by Rs

2,18,75,469/-. I therefore make the addition of Rs

2,18,75,469/- to the total income of the assessee. I am

satisfied that the assessee had concealed the correct

-: 156 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

particular of its income, penalty proceeding u/s 271(1)© of

the Act are being initiated separately.”

34 The assessee preferred an appeal before the Ld CIT[A] and

disputed the additions as made by the assessing officer. The Ld

CIT[A] vide his order dated 26-02-2014 has dealt with the said

issue in detail but confirmed the action of the Assessing officer.

The finding of the Ld CIT[A] is reproduced as under:-

“2.7 After careful perusal of the submissions of the

assessee, the main contentions are summarized as under:-

(i) The AO has simply relied on the comments of the

Auditor whereas the assessee has accounted for the same

as per guidelines of Chartered Accountant.

(ii) The AO has mechanically relied upon the Audiotrs

comments without taking into account the notes on

accounts from which it emanates that the assessee was

considering employee remuneration, administrative and

general overheads as capital expenditure only when such

expenditures were specifically attributable to the

construction of a project. This means such expenditure

-: 157 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

were capitalized only till such time, the capital work was

in progress and once the capital work has been completed

these expenditure have not been capitalized and treated

as revenue expenditure, Surprisingly, the facts in the case

do not support the statement of the assessee. The

assessee’s contention that the projects were complete,

therefore, the expenses were taken to profit and loss

account is absolutely a contradictory statement because

records for the year under consideration and subsequent

year indicate evidently that the projects/ creation of fixed

assets is a continuous process in which the assessee is

fully engaged. Even if it is believed that the projects were

no more in existence, in that case there is no question of

existence of such expenditure under the relevant heads

under consideration. Similarly the assessee’s objections

for referring the Audiotrs comment is not going to help

because they are the assessee’s auditor not of the Income

Tax Department. The assessee has not been in a position

to prove anything contrary to the facts brought out by the

auditors which in fact is the moral and lawful duty of

-: 158 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

Audiotrs. Therefore I do not find an infirmity in the order of

AO in referring the comments of the Auditors and taking

cognizance of the same.

2.8 Without prejudice to the inference drawn above, during

the course of appellate proceedings, in the interest of

natural justice, the assessee was requested to file

complete details along with supporting documentary

evidence relevant to expense of Rs 2,18,75,168/- which

are under consideration. The assessee has not filed any

such details, further the assessee was required to prove

that said expenditure are revenue expenses and not

attributable to any work/ project in the nature of capital

creation. In other words, the assessee was afforded

reasonable opportunity to distinguish the nature of said

expenditure from those which were capitalized in earlier

assessment years. But the assessee has not been able to

avail this opportunity saying that at this stage it shall be

cumbersome process. Since the relevant details and

explanations have not come forth, the AO is found to be

-: 159 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

within his rights to treat the expenditure relying upon the

Auditor report being consistent and regular method of

accounting followed by the assessee in relation to said

expenditure. Therefore, the action of the AO is confirmed.

Accordingly, the ground no.2 of the appeal is dismissed.”

35 The assessee preferred an appeal before this bench and

challenged the assessment order as passed by the assessing officer

and order of the Ld CIT[A], the assessee in addition to his verbal

arguments filed detailed written synopsis, the same is reproduced

as under: -

“ The assessee Madhya Pradesh Audhyogik Kendra Vikas

Nigam (Indore) Limited was incorporated in the year 1981

by the State Government as wholly owned government

company with the main object to develop industrial area

for industrial growth in the State of Madhya Pradesh. The

State Government had acquired the land from the private

landowners and contributed its own land for development

of industrial area. The raw land were handed over to the

assessee for development and further management and

-: 160 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

maintenance of the same. The land remained in the

ownership of the State and the assessee was allowed to

act as a nodal agency.

The development of industrial area which was commenced

in the year 1981 came to at halt around 2000 when most

of the land available have been utilized for development.

It is further submitted that in the year 2005 the State

Government decided to develop first Special Economic

Zone and therefore established a new entity in the name of

SEZ Indore Limited and diverted the development work in

that company. Therefore, no major projects remained with

the assessee and all the resources and land available

with it had been transferred to M/s. SEZ Indore Limited

which has developed the first SEZ of the country in India.

In the above background, there were need for the assessee

to revisit its accounting policy which was continued for

many years and as a policy the assessee was allocating

75% of its employees cost and administrative cost to the

pending projects. However, since no major projects were in

the hands of the assessee, therefore it was imperative for

-: 161 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

the assessee to reconsider its policy and charge entire

expenditure to Profit and Loss Account.

Ironically, the auditors of the assessee have mechanically

given a qualification in their report without appreciating

the current status and nature. The Auditor did not apply

their mind to the rationality of 75% of expenses to be

allocated to the projects when no major projects were in

the hands of the assessee. It is further submitted that

even in past, the Auditors must have raised an issue on

the rationality of allocation of 75% amount of employees

cost and other expense to any project without considering

the size and work under the project. The Auditors failed to

appreciate that the assessee had started development

work in the year 1981 and till 2000 it had utilized all the

lands available with it and remaining land was

earmarked for M/s. SEZ Indore Limited leaving no land for

development by the assessee, under such circumstance no

amount is required to be allocated to any project.

It is further submitted that, after completion of initial

development, the assessee is required to maintain these

-: 162 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

infrastructures and facilities and now these employee’s

cost and other expenses are pertaining to these recurring

expenditures.

That, the Ld. AO in the assessment order dated 29th

December 2006 has observed referring para 11(c) of Form

3-CD that attribution of expenses incurred on Employees

Remuneration and Benefits and Administrative & General

Overheads on construction of projects/fixed assets from

75% capitalization to nil percent understatement of profit

by Rs. 2,18,75,469/- made the addition.

That, the Ld. AO has relied upon the above note made by

the Auditor in their report without ascertaining whether the

attribution of expenses to the extent of 75% is required or

not under the generally accepted accounting principles and

various Accounting Standards & Guidelines issued by The

Institute of Chartered Accountants of India from time to

time. The ld. AO while relying upon a mechanical note

given by the Auditor conveniently ignored the statement of

the company on significant Accounting Policies given under

-: 163 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

notes to account in Schedule 17 under the head Fixed

Asset which reads:

“Previously Expenditure incurred on employees

remuneration and benefits and the administrative

and general overheads which are specifically

attributable to the construction of a project fixed

assets are treated as part of the cost of the

project/fixed assets. Likewise 75% of employee

remuneration, administrative expenses and

financial expenses have been charged to capital

works in progress. Now this year management

has changed their policy and it has been

decided that major expenditure has been

incurred on maintenance activities instead of

infrastructure activities hence there is no

need to allocate 75% of expenditure to work

in progress”

36 Thus, it is clear that the assessee was considering employees’

remuneration, administrative & general overheads as capital

expenditure only when such expenditures were specifically

-: 164 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

attributable to the construction of a project. This means such

expenditures were capitalized only till such time, the capital work

was in progress and once the capital work has been completed

these expenditures have not been capitalized and treated as

revenue expenditure.

37 Regarding the Accounting Standards-AS 10, the AO stated as

under :-

“The Accounting Standards-AS 10 Para 93 of Accounting Standard 10, Accounting for Fixed

Assets issued by the Institute of Chartered Accountants

of India deal with the subject matter as under:

“Administration and other general overhead

expenses are usually excluded from the cost

of fixed assets because they do not relate t a

specific fixed asset. However, in some

circumstances, such expenses as are

specifically attributable to construction of a

project or to the acquisition of a fixed asset or

bringing it to its working condition, may be

included as part of the cost of the construction

-: 165 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

project or as a part of the cost of the fixed

asset.”

Thus, the assessee was following the Accounting standard

AS 10 while capitalizing 75% of expenses specifically

attributable to the construction of the project and when no

such expenses were specifically attributable to the

construction of project/fixed assets, the assessee rightly

debited the same to the profit & loss account.

Copy of Accounting Standard 10 on Accounting for Fixed

Assets is annexed as Annexure-C.

Is there change in accounting policy: Though nothing has been stated by the Ld. AO in regard to

the above expenses and has only stated “in view of these

circumstances books of accounts are not acceptable as

consistency has not been maintained by the assessee.”

The ld. AO during the appellate proceeding before

CIT(A) in his Remand Report dated 10th September

2007 has stated, “the contention of AR is misplaced

because of the reason that auditor of company is

-: 166 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

responsible professional man who audits the Books

of Accounts on the basis of certain parameters and

it is legal requirement under Section 44AB of the IT

Act. Moreover, each assessment year is a separate

year for tax purposes. Therefore the change of

method of accounting has a bearing in the taxability

of the therefore to nullify the effect of change the

assessee has to pay taxes on income element of Rs.

2,18,75,469/-(sic).”

That the ld. AO even in his Remand Report could not

brought any justification for not accepting the employee

remuneration benefits, administrative and general

overheads as revenue expenditure particularly in light of

the Notes to Accounts which says that these expenses,

when specifically attributable to the construction of a

project/ fixed assets then, 75% of the same were

transferred to the capital assets. It is submitted that

during the year under consideration, the major project was

under progress and the industrial area was fully

developed, therefore only routine maintenance expenses

-: 167 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

were incurred, which have been correctly charged to profit

and loss account.

The Ld. CIT(A) in his appellate order has

accepted the contentions of the Ld. AO without

going in to the merit and submissions made

by the assessee. The Ld. CIT(A) failed to

appreciate the notes to the accounts , which

categorically mentioned that the assessee

was capitalising the revenue expenses only in

case these expenses have been specifically

attributable to any project or fixed assets,

which is as per the accounting standard and

GAAP. The Ld. CIT(A) has also erred in

considering the above treatment of revenue

expenses by the assessee as change in

accounting method/policy where there was no

change in the accounting method/policies and

the assessee continued to follow the same

-: 168 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

accounting methods and policies which were

regularly employed by the assessee.

When the aforesaid expenses are not directly

related to any project nor specifically

attributable to construction of a project/fixed

assets, the Ld. AO can not impose his decision

to transfer 75% of these expenses to a capital

assets contrary to the accounting standard AS

10 and GAAP.

It is the brain child of Ld. AO that the

assessee by considering the aforesaid

expenses as revenue expenses tried to

avoid the payment of tax. Before reaching

to any such conclusion it is necessary to

ascertain whether the aforesaid expenses

are capital expenses or revenue expenses

in accordance with GAAP.

Employee’s cost and Other Expenses are whether revenue or capital

-: 169 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

It is undisputed that the expenses disallowed are

pure revenue in nature and by stretch of imagination

cannot be considered as capital expenses. When it is

established that expenses disallowed are pure revenue

expenditure then under what circumstances same can be

considered as capital expenditure:

(i) When expenses are directly related to the creation of capital assets prior to commencement of business.

(ii) When expenses are incurred on the capital assets after commencement of business.

In the above case, the expenses which are specifically

attributable to the construction of project/fixed assets such

as project engineer remuneration, interest on loan

borrowed for the project, which does not include working

capital interest are only to be capitalized and rest of the

expenses pertaining to pre-commencement of the business

are separately capitalized/deferred under the head pre-

operative expenses.

-: 170 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

In case when the enterprise has already commenced the

business any expenditure, which cannot be attributable to

any particular fixed asset, or any revenue expenditure

incurred in relation to any long term benefit or capital loss

the same is required to be treated as deferred revenue

expenditure.

Thus any revenue expenditure which does not fall in any

of the above two categories cannot be treated as capital

expenditure. Therefore the observation made by the Ld.

AO and Ld. CIT(A) are misplaced and wholly influenced by

the comments of the Auditor without appreciating the

nature and merit.

Comment by Auditor The Auditor has made the mechanical comment

without commenting upon true nature of expenses.

The Auditor’s comment should not be read in

isolation, the same should be read along with the

significant accounting policies mentioned in Schedule

17 under the head Notes to Accounts. Secondly, the

-: 171 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

assessee should not suffer due to any comment of

the Auditor, which is inconsistent to the Accounting

Standard and GAAP. The Auditor’s comment on

change of accounting policy was unwarranted as in

fact, there was no change in accounting policy. The

assessee still maintains its accounting policy

regarding capitalization of revenue expenditure when

the same are specifically attributable and when

these revenue expenses are not specifically

attributable, the assessee is treating the same as

revenue expenditure following accounting standards

& GAAP.

The assessee rely upon following Judgment in

support of his argument:

(i) CIT Vs. Punjab State Industrial

Development Corporation Limited

(2002) 255 ITR 351 (P&H) it is

undoubtedly correct that the statue

stipulates that the income shall be

computed on the system of accounting

-: 172 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

“regularly” followed by the assessee. It

should mean during the period under

consideration. However, the provision

cannot be interpreted to mean that once

a system of accounting is adopted, it

can never be changed. ”Regular” cannot

in the present context mean permanent.

It has not been pointed out with

reference to any provision that a change

is impermissible or barred even when it

is warranted by the existing situation.

Where, the assessee a Government

Company switched over from mercantile

system to hybrid system in respect of

its liability on account of interest

because “it was not realizing interest in

time” and the finding of the Tribunal

was that the change over adopted “was

a legitimate and bona fide need of

accounting” and there was no mala fide

-: 173 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

intention”. It was held that the

procedure adopted by the assessee

could not be said to violate Section 145

of Income Tax Act.

The observation of the Ld. AO in para 6.5 to 6.9 of the order has tried to justify the disallowance merely on the ground of change in accounting policy without appreciating the rationality for capitalization of 75% of the employees cost and other expenses whether 75% is commensurate to the pending projects or not. Why only 75% and why not 90% or 100% amount should be capitalized. No justification has been given.

The Ld. AO has also observed that in the year work in progress was Rs. 23.97 crores in 2001-02 which has been reduced to Rs. 6.46 crores in the year 2002-03. Thus, there was substantial reduction (say 75% in the work in progress) whereas the employees cost and other expenses during the same period were Rs. 2.89 crores and Rs. 2.92 crores. Therefore under such circumstances there cannot be straightjacket formula to allocate 75% of the total employee’s cost and other expenses irrespective of cost of projects.

-: 174 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

The Ld. CIT (A) has failed to appreciate aforesaid submissions of the assessee which were before the Ld. AO as well as before Ld. CIT(A) and have mechanically confirmed the order of Ld. AO.

In view of above submission, the appeal may kindly be allowed and the impugned orders of Ld. AO and CIT(A) may kindly be set aside.” 38 On perusal of the order as passed by the assessing officer and

by the Ld CIT[A] , written synopsis as filed by the assessee and on

perusal of the Balance sheet of the assessee company, we find that

major development work has already been completed till the Asst

Year 2002-03. The amount of opening Capital WIP and expenses as

incurred in this year capitalized in the books of the assessee

company and also in the book of M/s SEZ Indore Limited. The

assessee further claimed that expenses directly related to the fixed

assets have already been capitalized to the cost of assets. On

perusal of the Profit & Loss account it seems that against the credit

of receipt of Rs 7,02,82,708/- expenses of Rs 5,52,86,310/- only

was incurred by the assessee. The expenses as claimed in the Profit

& Loss account also having direct nexus of receipt/ income as

shown in the Profit & Loss account. Since the expenses as incurred

-: 175 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

was not for the purpose of addition to the fixed assets, hence, there

was no justification for making the addition merely on the basis of

remarks in the clause 11[c] of the Tax audit report. The remarks of

the Tax auditor which is important piece of evidence but the same

is not considered as conclusive piece of evidence. Considering the

written synopsis of the assessee and on perusal of the Profit & Loss

account, we are of the view that expenses as claimed by the

assessee were incurred for day to day maintenance and also

incurred for day to day administrative work which was not in the

capital nature. We hereby direct the assessing officer to delete the

addition of Rs 2,18,75,469/- as made on account of

understatement of profit.

39 In the result, the appeals filed by the assessee company –

MPAKVN, Indore, in I.T.A.Nos. 347 to 351/Ind/2013 & 760 &

761/Ind/2014 are partly allowed. Our decision given in I.T.A.Nos.

347 to 351/Ind/2013 & 760 & 761/Ind/2014 in the case of

MPAKVN would apply mutatis mutandis to the appeals filed in

I.T.A.Nos. 571/Ind/2014, 205 & 206/Ind/2016 in the case of SEZ

Indore Limited, Indore.

-: 176 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

I.T.A.Nos. 530 to 534/Ind/2016 – Departmental Appeals : A.Ys.

2003-04 & 2004-05 and 2006-07 to 2008-09:

40 The Department through above appeals have come in appeals

for the penalty imposed by the AO in all the years and cancelled by

the Ld. CIT(A). Admittedly, the assessment proceedings and

penalty proceedings are two different and distinct proceedings. The

Ld. Departmental Representative supported the order of the CIT(A).

In quantum, the appeals of the assessee have been partly allowed

except the addition related to land premium. Since the issue

relating to land premium is debatable and to be decided on the

facts of these cases, we are of the considered view that on this

issue as a whole, no interference is called for in the view adopted

by the Ld. CIT(A). The same is hereby affirmed. The grounds raised

in the Revenue’s appeals are dismissed.

-: 177 :- MPAKVN AND SEZ (Indore ) & SEZ Ltd.,Indore

41 In the result, all the appeals of the assessees are partly allowed and Departmental appeals are dismissed. The order pronounced in the open court on 21.03.2018.

Sd/- Sd/- (मनीष बोरड) (कुल भारत) लेखा सद�य �या�यक सद�य (MANISH BORAD) (KUL BHARAT) ACCOUNTANT MEMBER JUDICIAL MEMBER

Indore; �दनांक Dated : 21/03/2018 CPU/SPS Copy to: Assessee/AO/Pr. CIT/ CIT (A)/ITAT (DR)/Guard file. By order Private Secretary/DDO, Indore

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