ACIT (EXEMPTIONS), CIRCLE-1(1), HYDERABAD vs. HYDERABAD METROPOLITAN DEVELOPMENT AUTHORITY, HYDERABAD

“ The Assessing Officer is not justified in adopting the expenditure claimed by the appellant at Rs.578,49,20,346/- when the actual amount was Rs.639,25,72,346/-” 5.1 In this context the Learned Authorised Representative (“Ld. AR”) submitted that the additional ground so raised is admissible in view of judgment rendered by the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC). The prayer for admission of additional ground noted above which is not in memorandum of appeal is being admitted for adjudication in terms of Rule 11 of the ITAT Rules owing to the reason that the relevant facts related to the objections raised in additional ground are stated to be emanating from the existing records.

Accordingly, ground nos.1 & 8 of the assessee are dismissed being not pressed.

“ Reason of selection : i) Sale consideration of property in ITR is less than sale consideration report in Form 26QB. ii) Sale of high value immovable property. iii) Ratio of expenditure on Establishment and Administration, to Expenditure on objects of the trusts is high. iv) Large capital expenditure for charitable purposes. v) Large receipts reported by trust for charitable purposes. vi) Claim of large value refund. vii) Large receipts from other income. viii) Trust executing contracts, providing professional services, earning commission incomes or rent (verification as per proviso to sectin 2(15) or any other section). ix) High refund claimed by Trust. x) Large amount of income accumulated or set apart by Trust. xi) Large claim of depreciation for Trust – Whether asset itself has been claimed as application of income.”

7.1 The Ld. AR further submitted that, the Ld. AO had made certain additions on account of receipt of development charges by the assessee which was not covered under the reasons for selection of the case of the assessee.

Therefore, it was argued that the Ld. AO exceeded his jurisdiction by making addition qua receipt of development charges.

7.2 Per contra, the Learned Department Representative (“Ld. DR”) submitted that, although the case was selected for some specific reasons, it was a case of complete scrutiny. Under complete scrutiny assessment, the Ld. AO has jurisdiction to examine all the aspects of the ROI, including verification of receipts, expenditure and claim made by the assessee. The verification is not restricted under the complete scrutiny only to the specified reasons for selection. The Ld. DR prayed before the bench to reject the technical argument advanced by the assessee.

7.3 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We find merit in the submission of Ld. DR that, the present case was selected for complete scrutiny and under such scrutiny, the Ld. AO is empowered to examine all issues arising from the ROI and documents submitted. The mere fact that the selection was based on certain parameters, it does not limit the jurisdiction of Ld. AO under complete scrutiny. Hence, in our considered opinion, the argument of the assessee that the Ld. AO was not entitled to verify the receipt of development charges is devoid of merit and is liable to be rejected. Accordingly, the ground nos.2 & 4 of the assessee are dismissed.

8.1 In this regard, the Ld. AR submitted that, the assessee had received development charges and fees/levies (“development charges”) amounting to Rs.576,66,65,185/- during the year under consideration. The Ld. AR further submitted that, in accordance with para no.3 of Government Order (“G.O.”) no.439 dated 13.06.2007 issued by the state Government of Andhra Pradesh, only 15% of development charges were treated as revenue receipts in the computation of income. The Ld. AR argued that as per the said G.O., the 85% of the receipts were required to be expended strictly in accordance with the instructions given by the state government, without any discretion available to the assessee. Therefore, it was argued that, as the assessee had no liberty to expend 85% of the receipts, the same cannot be treated as revenue receipts in the hands of the assessee. In support of their claim, the assessee relied on the decision of Hon'ble Bombay High Court in the case of City and Industrial Development Corporation of Maharashtra Limited Vs. ACIT (2023) 157 taxmann.com 603 (Bombay) and the co-ordinate bench of the Tribunal in the case of DCIT Vs. Andhra Pradesh Capital Region Development Authority in to 29/Viz/2023 dated 21.04.2023. Accordingly, the Ld. AR prayed before the bench to delete the addition made by the Ld. AO on account of development charges.

8.2 Per contra, the Ld. DR invited our attention to para no.3 of G.O. no.439 (supra) and submitted that, there was no restriction from the state government that the assessee cannot use the 85% of the collection on account of development charges. The only restriction imposed by the said G.O. no.439 (supra) was that, the assessee shall utilise 85% of the receipts to implement the provisions of master plan viz. a) traffic improvement (b) construction of bridges (c) development of green belts and parks, etc. (“specified objects”) . Therefore, there was only restriction towards certain specific object where the assessee can utilise 85% of the development charges. The contention of the assessee that, the assessee has no liberty to utilise 85% of the development charges is not correct. The Ld. DR also invited our attention to computation of income of the assessee placed at page no.23 of the paper book and submitted that, in the computation of income, the assessee has claimed certain expenditure which fall under the specified objects, which demonstrate that, the assessee was not prevented to utilise its receipts towards the specified objects. The Ld. DR further submitted that, during the year, the assessee has claimed deficit of Rs.460,63,90,170/-. The deficit itself is evident that, the assessee has utilised the amount specified for 85% of the development charges. Hence, the assessee was not restricted altogether to utilise the 85% of the development charges.

The Ld. DR reiterated that the restriction on account of 85% of the development charges was only towards utilisation for specified objects only. Finally, the Ld. DR submitted that, the entire amount collected by the assessee towards development charges is liable to be treated as revenue receipts and hence, there is no error in the order of the Ld. AO or the decision of the Ld. CIT(A) on this aspect.

8.3 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have gone through para no.3 of G.O.(supra) placed at page no.54 of the paper book which is to the following effect :

“ The amount so collected by Urban Development Authorities shall be kept in a separate account by Vice-Chairman of Urban Development Authorities. The Urban Development Authorities shall utilise 85% of the income to implement the provisions of Master Plans viz., (a) traffic improvement; (b) construction of bridges; (c) development of green belts and parks, etc. and remaining 15% can be utilised for administration and other maintenance.”

8.4 On perusal of the above, it is evident that only the mode of utilisation has been prescribed by the government. In the said G.O., it has been specified that the assessee shall utilise 85% of the income to implement the provisions of Master Plans viz., (a) traffic improvement; (b) construction of bridges; (c) development of green belts and parks, etc. and remaining 15% can be utilised for administration and other maintenance. In the said G.O., there is no restriction that the assessee cannot utilise 85% of the development charges or the assessee has no liberty over 85% of development charges. The restriction has been made for utilisation of 85% for some specified objects i.e. a) traffic improvement (b) construction of projects. (c) development of green belt and parks, etc. We have also gone through page no.23 of the paper book which is to the following effect :

8.5 On perusal of above, we found that the assessee has incurred certain expenditure i.e. lake and road development work of Rs.144,16,73,805/-, and development of sites and services of Rs.33,32,52,572/-, which are in the nature of expenditure covered under specified objects. The incurrence of these expenses also establishes that the assessee was not prevented from undertaking specified object.

8.6 Further, we have also gone through the decision of Hon'ble Bombay High Court in the case of City and Industrial Development Corporation of Maharashtra Ltd. Vs. ACIT (supra), wherein at para no.10 of its order, the Court has held as under :

“ 10. The ITAT in its order dated 8th August 2012 for A.Y. 2006-2007 while considering the issue whether petitioner should be held to be “an agent” of the State or an “arm” of the State, working solely under the authority and guidelines issued through various notifications by the State, i.e. the Government of Maharashtra has come to a finding that the resolutions taking back to 1970 make it clear that petitioner is an agent and functions as an arm of the State Government because petitioner can only work under the control and supervision of the State Government meaning thereby petitioner cannot make / take any decisions suo motu.”

8.7 On perusal of above, we found that the decision of Hon'ble Court has been given under different set of facts, where the assessee is an agent and functions as an arm of the state government. However, the facts in the present case are different. Hence, the decision of Hon'ble Court(supra) is not applicable to the issue before us.

8.8 We have also gone through the decision of co-ordinate bench of Tribunal in the case of DCIT Vs. Andhra Pradesh Capital Region Development Authority (supra), wherein at para no.8 of its order the Tribunal has held as under :

“ 8. We have heard both the parties and perused the material available on record. It is undisputed fact that the assessee is a non-profit organisation, established for the development of urban areas by implementing the provisions of the Master Plan as per the directions of the Government of Andhra Pradesh. The assessee debited 85% of the Development Charges received to the sinking fund to meet the future formation charges as per the directions given in GO Ms.No.530 dated 28.09.1998. Coordinate Bench of the Tribunal in the assessee’s own case for the A.Y.2009-10 to 2013-14 on similar issue in 396, 397, 398 & 399/Viz/2017 dated 30.09.2022 allowed the appeal of the assessee holding that since the assessee could not expend 85% of the development charges during the relevant assessment year does not warrant disallowance of the same, as the expenditure shall be incurred in future years for the purpose of general public utilities. For the sake of clarity and convenience, we extract relevant part of the order of the Tribunal as under :

“19. We have heard both the parties and perused the material available on record and the orders of the Ld. Revenue Authorities. Admittedly, the assessee is a Non-Profit Organization established for the development of Urban Areas by implementing the provisions of the Master Plan. As the assessee has been formed under section 3 of the Andhra Pradesh Urban Areas (Development) Act, 1975, it is bound by the Circular issued by the Government of Andhra Pradesh. In the instant case, even though the assessee has not spent the entire amount but debited 85% of the Development Charges received to the Sinking Fund to meet the future formation charges expenditure as per the directions given in G.O.Ms. No.530, dated 28/9/1998. The assessee being a Local Authority which acts as per the directions of the Government of Andhra Pradesh by implementing the Master Plan approved by them. It is also seen from the submission of the Ld. AR that the Institution was exempted from the Income Tax U/s. 10(20A) of the Act upto AY 2002-03. Reliance placed by the Ld. AR on the decision of the ITAT, Hyderabad in the case of HUDA in is distinguishable on the fact that HUDA in the relevant assessment year actually incurred the expenditure which was more than the Sinking Fund created during the year. It is normal accounting practice under the Accrual System of Accounting any future expenditure needs to be provided in the books of accounts in the relevant assessment year. It is not necessary that deduction shall be permissible only in case of amounts actually expended or paid. Further, it is also noticed that the assessee is supposed to expend 85% of the amount to developmental activities as approved by the Government of Andhra Pradesh in accordance with the Master Plan revised. It can be concluded that the assessee as formed under the Andhra Pradesh Urban Areas (Development) Act is bound by the directions of the Government in the collection and execution of development charges. It is also found that the assessee after getting necessary approvals and permissions from the Government of Andhra Pradesh has to expend 85% of the Development Charges collected by them to implement the provisions of the Master Plan. In view of the above discussions, we are of the considered view that the assessee being a non-profit oriented organization established for the purpose of implementing the provisions of the Master Plan is not carrying on any business activity and is only an organ of Government of Andhra Pradesh. Since the assessee could not expend 85% of the development charges during the relevant assessment year it does not warrant disallowance of the same as the expenditure shall be incurred in future years for the purpose of general public utilities. Accordingly, we allow the 7 29/Viz/2023 & CO No.04-07/Viz/2023, A.Y.2014-15, 2016-17 to 2018- 19 Andhra Pradesh Capital Region Development Authority, Vijayawada ground raised by the assessee and hereby set aside the order of the Ld. Revenue Authorities. Respectfully following the order of the Tribunal in assessee’ own case for the A.Y.2009-10 to 2013-14, we hold that the Ld.CIT(A) has rightly deleted the disallowance made by the AO. We are therefore, inclined to uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue.”

8.9 On perusal of above, we found that in the aforesaid case, the assessee has debited 85% of the development charges received to the sinking fund to meet the future formation charges as per the directions given in G.O.Ms.No.530 dated 28.09.1998. However, in the present issue before us, no such direction has been given by the state government as per para no.3 of G.O. no.439 placed at page no.54 of the paper book. Therefore, the decision of the co-ordinate bench of the Tribunal(supra) is not applicable to the present case before us.

8.10 Therefore, under the facts and circumstances of the case, we are of the opinion that there was no restriction on the assessee for utilisation of 85% of the development charges. Accordingly, we hold that the entire amount collected by the assessee towards development charges is liable to be treated as revenue receipts. Therefore, we find no irregularity in the order of revenue authorities. Accordingly, the ground no.3 of the assessee is dismissed.

9.1 In this regard, the Ld. AR submitted that, the assessee had claimed the amount of TDS as application of income on the ground that the said amount was not available with the assessee for utilisation, as the same was deducted at source by the payer. The Ld. AR also submitted that, both the income tax authorities have rejected the claim of the assessee primarily on the ground that the income against which TDS was deducted i.e. the sale of land, was not offered as income by the assessee. It was also held by the revenue authorities that, when the corresponding receipts are not recognised as income in the hands of the assessee, the claim of TDS as application of income cannot be allowed. The Ld. AR contended that, in such cases the amount not available with the assessee should be considered as applied for the purpose of section 11 of the Act. Accordingly, the Ld. AR prayed before the bench to allow the amount of TDS as application of income.

9.2 Per contra, the Ld. DR submitted that the TDS was primarily deducted on the sale of land. The assessee is only an agent of state government as far as the receipt of sale proceeds of land is concerned, and as such the assessee has not offered the same as its income. Therefore, no deduction of TDS should be allowed as application of income on such amount.

9.3 In rejoinder, the Ld. AR invited our attention to the details of TDS placed at page nos.24 & 25 of the paper book and submitted that the TDS in question is not entirely related to sale of land. He argued that TDS has also been deducted on other revenue receipts which have been offered as income of the assessee.

Accordingly, the Ld. AR submitted that, the entire amount of TDS could not be disallowed on the ground that it relates only to sale of land.

9.4 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. There is no dispute that, in so far as the sale of land is concerned, the assessee had acted as an agent of the state government and the corresponding receipts has not been offered as income. Hence, the TDS corresponding to such receipts cannot be treated as application of income. We have gone through the details of TDS placed at page nos.24 & 25 of the paper book which is to the following effect :

---Space left intentionally--- 9.5 On perusal of above, we found that in addition to TDS on sale of land, TDS has been deducted on other receipts as well, which the Ld. AR contended to have been offered as income by the assessee. In view of the above, we are of the considered opinion that, the matter requires verification. Therefore, the Ld.

AO is directed to verify the nature of receipt on which TDS has been deducted.

In respect of receipts which had been treated as income in the hands of the assessee, the corresponding TDS amounts may be treated as application of income. However, no such benefits shall be extended in respect of receipts which have not been treated as income in the hands of the assessee, including the sale proceeds of land where the assessee has merely acted as a collecting agent of the state government. Accordingly, ground no.5 of the assessee is treated as partly allowed for statistical purposes.

10.1 In this regard, the Ld. AR submitted that, the assessee had availed loan from HUDCO for construction of express highway, which were utilized in F.Y.

2010-11 and 2012-13 towards object of the assessee. It was specifically contended that in the years of utilization of loan amount, the assessee had not claimed the same as application of income. Accordingly, the assessee has claimed the repayment of the said loan amount as application of income in the year under consideration. However, the Ld. AO rejected the claim of the assessee by observing that the amount has already been utilized for the object in earlier year and hence could not be treated as application of income in the year of repayment. During the appellate proceedings before the Ld. CIT(A), the Ld. CIT(A) affirmed the action of the Ld. AO on the ground that the application of loan amount would have already been claimed in the year of actual utilization. The Ld. AR contended that, in fact, the assessee had not claimed the same as application of income in the year of utilization. Accordingly, the Ld. AR prayed before the bench to allow their claim.

10.2 Per contra, the Ld. DR relied upon the orders of revenue authorities and submitted that, the claim of the assessee is liable to be rejected.

10.3 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. It has been submitted by the Ld. AR that, the assessee had availed loan from HUDCO for construction of express highway, the proceeds of which were utilized towards the object of the assessee. It has been specifically contended by the Ld. AR that in the year of utilization of loan amount, the assessee had not claimed the same as application of income. However, we found that the Ld. AO has rejected the claim of the assessee contending that the amount had already been utilized for the object in earlier year and hence could not be treated as application of income in the year of repayment. Further, the Ld. CIT(A) dismissed the appeal of the assessee on the ground that application of loan amount has already been claimed by the assessee in the year of actual utilization. We are of the considered view that, where a charitable institution utilises borrowed fund towards its object, and such utilization is not claimed as application of income in the year of utilization, then the repayment of such loan can be treated as application of income in the year of repayment. Therefore, in the present case, the factual verification is required whether the utilization of loan amount was already treated as application of income in earlier year or not. If the assessee had not claimed the utilization of loan as application at the time of utilization, the repayment thereof must be allowed as application of income in the year of repayment. Accordingly, we direct the Ld. AO to verify whether the assessee had claimed application of loan amount in the year of utilization or not. If it is found that the assessee had not claimed the utilization of loan amount, in the year of application, the Ld. AO shall allow the claim of the assessee for the repayment of loan as application of income in the year under consideration. Accordingly, the ground no.6 of the assessee is allowed for statistical purposes.

11.1 Per contra, the Ld. DR relied on the order of revenue authorities and prayed before the bench to uphold the same.

11.2 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have gone through Explanation 5 to section 11(1) of the Act, which has been inserted by Finance Act, 2021 w.e.f. A.Y. 2022-23 wherein the statute has restricted the set off of b/f deficit against the income of current year. We are of the considered opinion that, the restriction imposed by Explanation 5 to section 11(1) of the Act is prospective and applicable only from A.Y. 2022-23 onwards. We are also of the opinion that, the law prior to insertion of Explanation 5 to section 11(1) clearly permitted the charitable institution to set off b/f deficit of earlier year against the income of current year. Therefore, for the year under consideration, we hold that the Ld. AO has erred in denying the claim of the assessee on account of set off of b/f deficit against the income of the current year. However, we are of the considered view that, the set off of b/f deficit claimed by the assessee needs to be verified with the record of the assessee to ensure correctness and arithmetical accuracy. Accordingly, we direct the Ld. AO to verify the correctness of the amount of b/f deficit claimed by the assessee from the record and if found correct, to allow the set off of the same against the income of current year while completing the assessment.

Accordingly, the ground no.7 is allowed for statistical purposes.

(Revenue’s Appeal) 14. The revenue has raised the following grounds of appeal :- “

1. The Ld CIT(A) erred in law and in facts of the case in allowing the appeal of the assessee on the ground related to service tax by stating that the AO has not given any reason to reject the claim of service tax paid except stating that the details were not produced, though in the Assessment order, the AO has clearly mentioned that the assessee has not offered the income to tax in the ITR on which the service tax was paid by the assessee.

2. The Ld CIT(A) erred in law and ignored the fact that the AO in the Assessment order has clearly mentioned that the assessee has not offered the income to tax in the ITR on which the service tax was paid by the assessee.The Ld.CIT(A),NFAC erred in not considering the facts that the assessee has failed to file revised return of income for correct claim of exemption u/s.10(23C) (vi) of the I.T Act, 1961 before completion of assessment.

3. The Ld CIT(A) erred in law and in facts of the case in allowing the appeal of the assessee on the ground related to GST and has held that the AO has assumed that the GST claimed as application is on account of sale of land which is not offered to tax.

4. The Ld CIT(A) erred in law and ignored the fact that the AO has clearly mentioned in the Assessment Order that the assessee has not offered the income to tax in the ITR on which the GST was paid by the assessee.

5. Any other ground that may be urged at the time of hearing.”

15. The solitary issue raised by revenue against the order of Ld. CIT(A) is, deleting the disallowance made by the Ld. AO on account of GST & Service Tax (“GST/ST”) claimed as deduction by the assessee.

15.1 In this regard, the Ld. DR submitted that the assessee has paid GST/ST in respect of receipts arising from sale of land and collection of development charges. However, the assessee has not offered the corresponding receipts as income in its books of account. Therefore, it was contended that if the underline revenue has not been offered to tax, then the GST/ST paid in relation to such receipts cannot be allowed as an application for deduction.

15.2 Per contra, the Ld. AR invited our attention to Schedule III of GST Act placed at page no.128 of the paper book and submitted that, as per item no.5 of Schedule III, no GST is leviable on the sale of land. Further, it was contended that the assessee has not offered the sale proceeds of land as income, as the assessee has acted merely as an agent of the state government, with regard to collection of sale proceeds of land. However, the GST/ST paid by the assessee pertains to other service components, which have been duly offered as revenue by the assessee in its books of account. Accordingly, there is no infirmity in the order of Ld. CIT(A).

15.3 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have gone through entry no.5 of Schedule III of GST Act placed at page no.128 of the paper book, which is to the following effect :

15.4 On perusal of above, we found that sale of land is not a taxable supply under the GST Act and hence no GST is leviable thereon. Further, it is not disputed that the assessee has not offered the sale proceeds of land as income as the assessee has acted only as an agent on behalf of the state government. However, the issue that requires verification is whether the GST/ST claimed by the assessee as deduction pertains to revenue receipts, which has been offered as income in the ROI. In our opinion, if the GST/ST has been paid on such receipt that has been shown as income, then the corresponding GST/ST must be allowed as application of income. In the interest of justice and fair play, we deem it appropriate to remand this issue to the file of Ld. AO. The Ld. AO shall verify from the record, the nature of receipt on which the GST/ST has been paid by the assessee. In respect of receipt which has been duly offered as income, the corresponding GST/ST paid shall be allowed as application of income. However, no deduction shall be allowed in respect of GST/ST paid on the receipt which has not been offered as income.

Accordingly, the appeal of the revenue is partly allowed for statistical purposes.

Order pronounced in the open Court on 23rd May, 2025.