M/S U.P STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD.,KANPUR vs. ASTT. COMMISSIONER OF INCOME TAX-VI, KANPUR

BECAUSE in any case, the "reasons" reading as under :-

2 BECAUSE receipts shown under the head 'interest', by themselves do not bring an "assessee" within the ambit of taxation unless, the two conditions, viz,

1 BECAUSE the notice under section 10, being in the nature of juri ictional notice, was liable to be served in accordance with the provisions of law and that being not so done undisputedly in the present case, there is no valid assumption of juri iction by the learned "ACIT" to pass the impugned assessment order.

2 BECAUSE the learned CIT (Appeals) has erred in holding that-

3 BECAUSE various case laws as have been referred to and relied upon by the learned CIT (Appeals) are distinguishable on facts and in any case the preponderance of 'judicial view' (including the view expressed by the juri ictional court) being in favour of the appellant, the learned CIT (Appeals) should have held that there was no valid assumption of juri iction by the Assessing Officer, even after the assessee's participation in the proceedings, and accordingly the assessment order dated 1.3.2002 as has been passed by the ACIT- VI, Kanpur was liable to be quashed.

4 BECAUSE issuance and service of a notice, in accordance with the provisions of law is a condition precedent for assumption of juri iction to pass the assessment order (in pursuance thereof) and any infirmity therein goes to the very

BECAUSE wholly without prejudice to the contentions raised in the foregoing grounds, the appellant corporation is an "authority" as envisaged under section 10 (20A) of the Income-tax Act, 1961 by virtue of the judgement of the apex court in the case of Gujarat Industrial Development Corporation Ltd. Vs. NP CIT reported in 227 ITR page 414, and consequently it can neither be treated as a "credit Institution" nor "any other financial company" (as per the exhaustive lists as given in these two sections themselves) so as to make the provisions of the "Act" applicable in its case..

BECAUSE the learned CIT (Appeals) has erred in holding that, in principle, Interest Tax Act, 1974 is applicable in the case of the appellant, for the reasons that -

BECAUSE on a due consideration of nature of activities actually carried on by the appellant and the nature of receipts as earned by it (from such activities), the appellant could not be held to be falling within the ambit of 'any other financial company' as has been classified in clause (iii) of Section 2 (5B) of the Interest Tax Act, 1974 reading as under :-

1 BECAUSE the mere fact that the appellant corporation has been held to be eligible for relief under section 36 (1) (viii) of the IT Act, 1961, by virtue of Notification No. F.No.147(S)/73-TPL dated 30.5.1976 issued by the CBDT, will not ipso facto mean that the appellant falls in the category of 'any other financial company' so as to bring the same within the applicability of the provision of Interest Tax Act, 1974. 6.2 BECAUSE the provisions of section 2 (5A) and Section 2 (5B) of the "Act" operate in an altogether different context and direction then the provisions of section 36(1)(viii) of the Income Tax Act, 1961 and the analogy drawn by the learned CIT (A), for the purposes of upholding the applicability of Interest tax Act, 1974 in the case of the appellant, is misconceived and wholly unfounded

1 BECAUSE in any case and wholly without prejudice to the aforesaid, the learned CIT (Appeals) has grossly erred, both on facts as well as in law in holding that the Interest tax is chargeable from the appellant on the following receipts:-

2 BECAUSE none of the two sums as mentioned above can be treated as 'chargeable interest' under section 2(5) of the Act read with the definition of interest under section 2(7) of the "Act".

BECAUSE the receipts amounting to Rs. 1,90,31,586/- by way of interest on "Loan and Others including UPSEB Loans" were referable merely to the advance payments/deposits made, mainly with UPSEB, to enable them to set up power stations for the industrial estate/sites of UPSIDC and also to undertake the works of upgrading the same and the same could not be held to be referable either to the 'Loans & Advances' simplicitor or to the activities referred to in clause (iii) of Section 2 (5B) of the "Act".

1 BECAUSE the learned CIT (Appeals) has erred in law and on facts in holding that in the transactions of leasing out industrial sites/ sheds to the entrepreneurs "the lesser became a financier and the lessee becomes a debtor of the amount" which is equivalent to advancing amount" and on that basis in upholding that the receipts amounting to Rs.8,13,36,341 are covered by the charging provisions of the "Act" and in upholding the levy of interest tax on the same.

2 BECAUSE the receipts amounting to Rs.8,13,36,341 as had been realized from the allottees/entrenurs of Industrial Sites/ Sheds on delayed payments of lease premia on allotment of industrial sites/sheds (as payable by them) can not be said to be attributable to any "loan or advances" given to entrepreneurs and the same can not be held to be covered by the definition of 'chargeable interest' as given in Section 2 (5) read with Section 2 (7) of the Act.

BECAUSE in any case the issue with regard to the applicability of charging provisions (as distinct from the applicability of Interest Tax Act, 1974 itself) has been decided on a wholly wrong premise and the sums aggregating Rs. 10,03,67,927/- can not be said to be representing "chargeable interest" under the "Act".

BECAUSE the impugned order as passed by the learned first appellate authority stands wholly vitiated as the same has been passed without appreciating/giving due consideration to the material and information that had been placed on record and various pleas as had been raised before him.

BECAUSE the order appealed against is contrary to the facts, law and principles of natural justice.

BECAUSE the notice under section 10 of the "Act" has not been validly issued, as the same is based on the view expressed by the Audit Party, without there being any independent satisfaction/approval of the "Authorities concerned".

BECAUSE in any case, the "reasons" reading as under :-

2 BECAUSE receipts shown under the head 'interest', by themselves do not bring an "assessee" within the ambit of taxation unless, the two conditions, viz,

1 BECAUSE the notice under section 10, being in the nature of juri ictional notice, was liable to be served in accordance with the provisions of law and that being not so done undisputedly in the present case, there is no valid assumption of juri iction by the learned "ACIT" to pass the impugned assessment order.

2 BECAUSE the learned CIT (Appeals) has erred in holding that-

3 BECAUSE various case laws as have been referred to and relied upon by the learned CIT (Appeals) are distinguishable on facts and in any case the preponderance of 'judicial view' (including the view expressed by the juri ictional court) being in favour of the appellant, the learned CIT (Appeals)

4 BECAUSE Issuance and service of a notice, in accordance with the provisions of law is a condition precedent for assumption of juri iction to pass the assessment order (in pursuance thereof) and any infirmity therein goes to the very root of the assessment, and is not even curable so as to validate the assessment order itself.

BECAUSE wholly without prejudice to the contentions raised in the foregoing grounds, the appellant corporation is an "authority" as envisaged under section 10 (20A) of the Income-tax Act, 1961 by virtue of the judgement of the apex court in the case of Gujarat Industrial Development Corporation Ltd. Vs. CIT reported in 227 ITR page 414, and consequently it can neither be treated as a "credit Institution" nor "any other financial company" (as per the exhaustive lists as given in these two sections themselves) so as to make the provisions of the "Act" applicable in its case..

BECAUSE the learned CIT (Appeals) has erred in holding that, in principle, Interest Tax Act, 1974 is applicable in the case of the appellant, for the reasons that -

BECAUSE on a due consideration of nature of activities actually carried on by the appellant and the nature of receipts as earned by it (from such activities), the appellant could not be held to be falling within the ambit of 'any other financial company' as has been classified in clause (iii) of Section 2 (5B) of the Interest Tax Act, 1974 reading as under :-

1 BECAUSE the mere fact that the appellant corporation has been held to be eligible for relief under section 36 (1) (viii) of the IT Act, 1961, by virtue of Notification No. F.No.147(S)/73-TPL dated 30.5.1976 issued by the CBDT, will not ipso facto mean that the appellant falls in the category of 'any other financial company' so as to bring the same within the applicability of the provision of Interest Tax Act, 1974. ITA Nos.3 & 4/LKW/2004

2 BECAUSE the provisions of section 2 (5A) and Section 2 (58) of the "Act" operate in an altogether different context and direction then the provisions of section 36(1)(viii) of the Income Tax Act, 1961 and the analogy drawn by the learned CIT (A), for the purposes of upholding the applicability of Interest tax Act, 1974 in the case of the appellant, is misconceived and wholly unfounded

1 BECAUSE in any case and wholly without prejudice to the aforesaid, the learned CIT (Appeals) has grossly erred, both on facts as well as in law in holding that the Interest tax is chargeable from the appellant on the following receipts:-

2 BECAUSE none of the two sums as mentioned above can be treated as 'chargeable interest' under section 2(5) of the Act read with the definition of interest under section 2(7) of the "Act".

BECAUSE the receipts amounting to Rs.2,09,28,657/- by way of interest on "Loan and Others including UPSEB Loans" were referable merely to the advance payments/deposits made, mainly with UPSEB, to enable them to set up power stations for the industrial estate/sites of UPSIDC and also to undertake the works of upgrading the same and the same could not be held to be referable either to the 'Loans & Advances' simplictor or to the activities referred to in clause (iii) of Section 2 (5B) of the "Act".

1 BECAUSE the learned CIT (Appeals) has erred in law and on facts in holding that in the transactions of leasing out industrial sites/ sheds to the entreprenurs "the lesser became a financier and the lessee becomes a debtor of the amount" which is equivalent to advancing amount" and on that basis in upholding that the receipts amounting to Rs.9,66,47,048 are covered by the charging provisions of the "Act" and in upholding the levy of interest tax on the same.

2 BECAUSE the receipts amounting to Rs.9,66,47,048 as had been realized from the allottees/entrenurs of Industrial Sites/ Sheds on delayed payments of lease premia on allotment of industrial sites/sheds (as payable by them) can not be said to be attributable to any "loan or advances" given to entreprenurs and the same can not be held to be covered by the definition of 'chargeable interest' as given in Section 2 (5) read with Section 2 (7) of the Act.

BECAUSE in any case the issue with regard to the applicability of charging provisions (as distinct from the applicability of Interest Tax Act, 1974 itself) has been decided on a wholly wrong premise and the sums aggregating Rs. 11,75,75,706/- can not be said to be representing "chargeable interest" under the "Act".

BECAUSE the impugned order as passed by the learned first appellate authority stands wholly vitiated as the same has been passed without

BECAUSE the order appealed against is contrary to the facts, law and principles of natural justice.

Subsequently, the assessee also filed an additional ground of appeal as under:-

However, it was submitted that the said ground had already been set-forth in the memo of appeal itself under the heading, “Additional Ground”. Therefore, in view of Rule 11 of the Income Tax (Appellate) Tribunal Rules, 1963, the aforesaid ground did not represent an additional ground. The assessee had only filed the said petition as a matter of abundant precaution seeking admission of the said ground. It was further submitted that in case the same was held to be, “Additional Ground”, the assessee case was fully covered by a catena of case laws which have been elaborately dealt with by the Hon’ble Gauhati High Court in the case of Assam Co. (India) Limited vs. CIT 256 ITR 423 (Gau) and therefore, it was prayed that the said additional ground may be admitted.

The facts of the case are that on 1.03.2002, the ld. Assessing Officer passed an order under section 8(2) of the Interest Tax Act, 1974 disallowing the exemption

In the assessment year 1996-97, the ld. AO held the following to be chargeable interest under section 5 and 6 of the Income Tax Act; i. Interest received on deposits Rs. 3,12,74,486/- ii. Interest received on loans and others Rs. 2,09,28,657/- iii. Interest received on advances Rs. 9,61,756/- iv. Interest received on premium Rs. 9,66,47,049/-

While making these additions, the ld. Assessing Officer held that M/s UPSIDC Limited was a financial corporation fully owned by the U.P. State Government, which was engaged in the acquisition and development of land for the purposes of promoting industrialization in the State of Uttar Pradesh. Industrial plots of land were given to entrepreneurs on long term finance basis and installments were recovered from the entrepreneurs alongwith interest. Interest was also recovered in cases of delayed payments of instalments (besides regular interest). In view of the above, the assessee corporation was liable for interest tax under the Interest Tax Act, 1974 and was fully covered within the ambit of sections 2(5A) (iv) as well as section 2(5B) of the Interest Tax Act, 1974. The ld. Assessing Officer also pointed out that for purposes of claiming deduction under section 36(1)(viii) of the Income Tax Act, 1961, the company had claimed to be a financial corporation and for these reasons, the ld. Assessing Officer had held that the ITA Nos.3 & 4/LKW/2004

Aggrieved by the said assessment orders, the assessee went in appeal before the ld. CIT(A)-2, Kanpur. At the very outset, the assessee took the plea that the notices under section 10 were not served on the principal officer of the company. However, the ld. CIT(A) turned down this ground of appeal by relying upon the decision of the Hon’ble Gujarat High Court in the case of CIT-1, Ahmedabad vs. Bhanji Kanji Shop 68 ITR 416 (Gujarat). Thereafter, it was argued that the assessee was not a credit institution as defined in section 2(5A) nor a finance company as defined in section 2(5B) of the Interest Tax Act and thus the Act did not apply to the assessee. It also argued that since it was a State Government Company, it should be treated like the State Government and no tax liabilities should be fastened on it under any taxing statute. However, the ld. CIT(A) did not accept these contentions of the assessee. He held that a public sector undertaking owned by the State cannot be equated with the State itself and immunity from taxation that was available to the sovereign would not be available to such an entity. Furthermore, he held, that one of the purposes of the creation of the UPSIDC was to provide credit to the entrepreneurs in the State of U.P. The functions and powers of the corporation were discussed in Chapter 3 of the U.P. Industrial Development Act, 1962. In section 13(h) and 13(k), it was clearly provided that the corporation would be financing industrial projects and would also be giving loans and advances. Therefore, in the opinion of the ld. CIT(A), one of the important objectives of the company was to provide finance and therefore, it would fall in the ambit of any other finance company as envisaged under section 2(5A) (iv). He further pointed out that one of the businesses of the assessee was to finance the acquisition and development of land in connection therewith and he held, that therefore it was covered under section 2(5B)(iii). The ld. CIT(A) held that another fact which was indicative that the assessee was covered under the Interest Tax Act, was that the assessee had been claiming deduction under section 36(1)(viii) of the Income Tax

05.1975, he held that the transaction entered into by the assessee was an amalgam of two transactions. The first was the leasing out the land for a premium and the second was to receive interest on payment by instalment. He held that by virtue of this second limb, in cases where it received instalment payments, the assessee (which was the lessor) also became a financer and the lessee became a debtor of the assessee of the value of the land. Therefore, he held that the interest received on instalments of premium should be included in the definition of chargeable interest and he based his decisions on the stand taken by the assessee while seeking recognition from CBDT for deduction under section 36(1)(viii).

Aggrieved by these orders of the ld. CIT(A), the assessee filed an appeal before the ITAT Lucknow Bench. Before the said Bench, it was argued that the UPSIDC was not a credit institution or a finance company and nor did it come under the definition of “any other financial company”. The ITAT held, that even though the assessee had represented itself before the CBDT as a financial institution, while applying for approval under section 36(1)(viii) of the Income Tax Act, there was merit in the submission of the assessee, that the treatment of the corporation as a financial institution under section 36(1)(viii) of the Income Tax Act, 1961 was different from its treatment as a financial company under section 2(5A) (iv) r.w.s. 2(5B) of the Interest Tax Act. The ITAT pointed out that the institution which was to be treated as a credit institution and or financial company, was specifically defined under the above sections on which the Interest Tax Act was applicable and on perusal of the clauses 2(5B) of the Act, the Tribunal observed that the activities of the assessee company did not fall in any of the clauses of section 2(5B) of the Act. Furthermore, it held that there was no dispute that the principal business of the assessee was not of financing loans to the entrepreneurs, but to promote and establish industrial sites in the State of U.P. and provide them to prospective entrepreneurs, to enable them to set up industry in the State. The interest income received by the assessee from the allottees was not on loans / advances given to them, but on account of delayed payments of instalments of lease rent / payment of ITA Nos.3 & 4/LKW/2004

Aggrieved by these orders, the Department carried the matter to the Hon’ble Allahabad High Court in Interest Tax Appeal No. 191 & 192 of 2006. The Hon’ble High Court required the counsel appearing on behalf of the UPSIDC to show how and in what manner it was constituted and what its memorandum of association and articles of association were. It noticed that such material had neither been placed before the Tribunal nor before it. It noticed that in paragraph 7 of the petition filed before it, it was mentioned that UPSIDC had been formed under the U.P. Industrial Development Act, 1962 but paragraph 11 showed that UPSIDC was already incorporated on 29th March, 1961. Thus, it held that UPSIDC could not have been constituted under UPID Act, 1962. Ongoing through the UPID Act, 1962, it observed that what was contemplated in that Act was a corporation named as the, “U.P. Industrial Development Corporation” while the assessee in question was incorporated as the, “U.P. State Industrial Development Corporation Limited”. It also observed that the U.P. Industrial Development Corporation as envisaged under the UPID Act, 1962 was to take over and employ all the existing staff of the UPSIDC and takeover and manage the industrial areas hitherto owned

Sh. Pankaj Shukla, Advocate and Sh. Shubham Singh, C.A. (hereinafter referred to as the ld. ARs) took us through the facts of the case and submitted copies of the un-authenticated memorandum of association and articles of association. It was submitted before us that authenticated copies of memorandum of association and articles of association were not available with the assessee, mainly because there had been large scale retirement of the personnel looking after tax matters. Furthermore, there had been no response from the