M/S. PIMPRI- CHINCHWAD NEW TOWN DEVELOPMENT AUTHORITY,PUNE vs. JT.. CIT RG-10 PUNE, PUNE

PER R.S.SYAL, VP :

These two appeals by the assessee arise out of the separate orders, both dated 07-03-2011, passed by the CIT-V, Pune, u/s. 263 of the Income Tax Act, 1961 (hereinafter called as ‘the Act’) in relation to the assessment years 2003-04 and 2004-05. Since both the appeals are based on similar facts and identical grounds, we are, therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.

ITA No.613/PUN/2011 - A.Y. 2003-04

served on the assessee, pursuant to which, the assessee filed the return

declaring NIL income claiming that its income should be treated as exempt

u/s.11 r.w.s. 13 of the Act. The AO held that the assessee was not eligible for

exemption u/s 11 as it was not registered u/s.12A of the Act. He further

noticed that the Commissioner passed the order u/s.12AA r.w.s. 12A on

30.05.2007 rejecting the application of the assessee. He proceeded to frame

the assessment at a total income of Rs.7.42 crore and odd by adding back the

amount of depreciation amounting to Rs.1.68 crore and odd to the excess of

Income over expenditure to the tune of Rs.5.74 crore and odd. The Ld. CIT,

invoking the provisions of section 263 of the Act, held that the assessment

order passed by the AO on 12-12-2008 was both erroneous and prejudicial to

the interest of the Revenue inasmuch as the assessee adopted a faulty method

of revenue recognition. He noticed that the assessee was spreading over lease

premium at 1/99th on the basis of the lease period of 99 years, and in case of

transfer, it was recognizing the same at 1/78th, apart from showing profit at

10% of the amount of Premium on the lease of plots of land. The Ld. CIT held

that entire amount of the lease premium was chargeable to tax in the year of

receipt itself and hence the AO committed a serious mistake by accepting the

shifting of income from the year of receipt of Premium to several years by

means of spreading it over to 99/78 years. After entertaining the objections

from the assessee, the Ld.CIT set-aside the assessment order by holding it to

be erroneous as well as prejudicial to the interest of the Revenue. He directed

the AO to frame the assessment de novo after taking into account the facts of

the case and the submissions made by the assessee. The assessee is aggrieved

by the order passed by the Ld.CIT.

against holding the assessment order erroneous and prejudicial to the interest

of the Revenue by the ld. CIT. In support of such grounds, the Ld. AR

submitted that 10% of total premium was declared as income in the year of

receipt of premium itself and the remaining 90% of the premium was spread

over the life of lease, viz., 99/78 years. The Ld. AR argued that the AO

examined each and every aspect concerning the revenue recognition in this

manner, even though there is no specific discussion made in the assessment

order. It was thus argued that the assessment order could not have been

termed as erroneous and prejudicial to the interest of the Revenue so as to

enable the ld. CIT to take recourse to the provisions of section 263 of the Act.

This was strongly opposed by the Ld. DR who heavily relied on the impugned

order.

record, it is noticed that the assessee, a Town Development authority, is

leasing out plots as well as buildings for a period of 99 years. During the year

under consideration, only plots were leased out. Transfer of lease is permitted

after a certain period. Certain sum is received at the time of signing of the

lease agreement, which is termed as `Premium’. In addition, the lessee is

required is pay rent at the rate of Re.1/- per annum during the entire lease

period. The controversy is on treatment to be given to the amount of Premium

received by the assessee. The assessee is showing 10% of lease premium as

revenue in the year of receipt in addition to 1/99th of the remaining amount or

1/78th of the remaining amount in case of transfer of lease, as the case may

be. The ld. CIT has canvassed a view that the entire amount of Premium is

chargeable to tax in the year of receipt, without any spread over the life of

lease.

the year of receipt or spread over the life of lease, depends upon the fact

whether the assessee acquired the unbridled right to receive and adjust full

amount of such Premium as its own at the time of receipt itself without there

being any legal obligation of repaying a part of it during the term of lease or

the accrual of such Premium takes place on annual basis and the assessee

can be made to return a part of the premium for the unused period of lease by

terminating the lease agreement. Or, in the alternate, has the lessee any right

to claim refund of the proportionate part of Premium at any time during or at

the end of the lease period under any circumstance?

consideration, which have been stated to be representative of all the lease

agreements inasmuch as the terms and conditions of all the lease agreements

are stated to be similar. We have gone through the copy of one of such lease

agreements, which is dated 18-07-2002, entered between the assessee and

one Shri Kurkute Jivan Kumar Dinkar. It can be seen from this Agreement

that the assessee gave a plot of land on lease to the lessee for a period of 99

years and, in consideration, it received a sum of Rs.2,07,774/-, being the

amount of Premium and also rent of Rs.1/- payable every year during the life

of the lease. The assessee declared 10% of such Premium as income in the

year of receipt and also recognised revenue at 1/99th of the remaining amount

in the year of receipt and then continued to show revenue at the rate of 1/99th

in the successive years. We have gone through the terms of the lease

agreement, from which it is apparent that the lessee is supposed to pay rent @

Re.1/- per annum and pay all existing and future taxes. The lessee has to

construct building structure on the land so allotted to it and the

commencement and completion of the construction work has to be done within the stipulated period in addition to maintaining sanitation etc. Such a

land on which construction is to be carried out by the lessee becomes his

residential building to be used by him with all amenities etc. There is no

clause in the Agreement under which the assessee can terminate the lease

and re-possess the land on which construction has been done by the lessee

and being used for his residence. Clause 3(q) of the Agreement provides that

at the expiration of the lease period, the lessee shall deliver to the lessor the

demised land. There is an obligation on the lessee for not selling, mortgaging

or assigning etc., of the demised land without the previous written consent of

the Development authority and at the same time, the Development Authority

is obliged to give such a consent, if requested. There is another clause in the

Agreement, which prohibits the lessee from Mortgaging his leasehold rights,

but that too, can be done with the consent of the assessee. In other words,

there is no possibility of the assessee-lessor terminating the Agreement during

the currency of the lease period of 99 years and hence it can, under no

circumstance, dispossess the lessee from the leased property. At the same

time, our attention has not been drawn towards any clause in the lease

Agreement, which entitles the lessee to claim refund of the part or the full

amount of Premium in any situation whatsoever. Thus, it is manifest that

upon entering into the lease agreement for 99 years, the assessee acquires an

enforceable right to receive the full amount of Premium at the threshold itself

without there being any obligation to repay the same as there is no possibility

of the assessee terminating such lease during its currency and dispossess the

lessee from the demised property. It shows that the full amount of Premium

becomes the income of the assessee at the time of its receipt and there is no

legal rationale in spreading it over a period of 99 years. It is the other

consideration of Re.1/- per annum, which is dependent upon the user of the

property. If the lessee pays a sum of Rs.99/-, being the lease rent for a full period of 99 years in advance at the time of entering into lease, it is this

amount of Rs.99/-, which will be a liability of the assessee and can be

charged to revenue only at the rate of Re.1/- per annum, by keeping the

remaining amount as liability. Since the right to receive the Premium amount

gets crystalized and vests in the assessee at the time of entering into

agreement only, without there being any corresponding right of the lessee to

claim refund of it, such an amount assumes the character of income there

only, as the income not only gets accrued but is also received. Ergo, it is

manifest that the amount of full Premium is required to be taken as income in

the first year itself.

99 years, no prejudice has been caused to the Revenue and hence no revision

is possible on this count, is misplaced. Every year is an independent unit of

assessment. A particular amount of income which is required to be taxed in

the first year, if spread over certain years, causes prejudice to the Revenue

insofar as the income of the first year is concerned. Such a treatment of

income offered and accepted by the AO not only renders the assessment order

erroneous but also prejudicial to the interest of the revenue.

matter of revenue recognition in the assessment order, but took a decisive

stand after due consideration of the matter in accepting such a treatment of

revenue shown by the assessee. He, therefore, argued that taking such a

possible view is sufficient to prohibit the CIT from undertaking the exercise of

revision.

revenue in the assessment order. Secondly, on a specific query, the Ld. AR

could not draw our attention towards any judicial pronouncement accepting

the spread over of lease premium over the life of lease in the hue of the terms

of the lease agreement as are prevalent in the case of the assessee. Under

such circumstances, the assessment order passed by the AO accepting such

spread over has necessarily to be held as erroneous, even if the assessee had

put forth its explanation about the spreading over of Premium and the AO

accepted the same without recording anything in the assessment order.

the life term of the lease period, the Ld. AR relied on Circular No.05/2001,

dated 02-03-2001. This was opposed by the Ld. DR.

getting due credit for tax deducted at source under section 199’. It provides

that where tax is deducted at source u/s 194-I on advance rent pertaining to

more than one financial year to be adjusted against future rent, credit shall be

allowed in the same proportion in which such income is offered for taxation

for different assessment years based on the single certificate furnished for tax

so deducted on the entire advance rent. Thus, this Circular primarily deals

with the cases in which advance rent is received which has suffered deduction

of tax at source at the time of receipt, but the income is to be offered in later

years as well.

should be receipt of advance rent. The primary question which, thus, falls for

our consideration is, whether the amount of lease premium received by the assessee, can be construed as rent. In our considered opinion, the answer to

this poser can be in negative alone. Lease premium received by the assessee

cannot be categorized as rent, much less the advance rent, as argued by the

Ld. AR. We have noticed above that the amount of lease premium accrues to

the assessee at the time of its receipt. Such a lease premium does not bear

any traits of rent, which in the extant case resembles with annual payment

by the lessee at the rate of Re.1/-. Since the amount of lease premium has no

characteristics of rent, in our view, such amount cannot be subjected to TDS

u/s 194-I of the Act, which, therefore, rules out the application of Circular

No.05/2001. It is further noted that the CBDT has recently clarified vide

Circular No.35/2016 dated 13.10.2016 that on the amount of lump sum lease

premium, which is not adjustable against the periodic rent, as is the case

under consideration as well, there is no requirement of tax withholding u/s

194-I of the Act. We therefore jettison the contention raised on behalf of the

assessee on this aspect of the matter.

premium in the year of receipt and the AO accepted such a position, we are

satisfied that the Ld.CIT was justified in invoking the provisions of section 263

of the Act and thus holding that the assessment order to be erroneous and

also prejudicial to the interest of the Revenue. We therefore uphold the same.

“7. The appellant is an authority notified under Maharashtra Regional and Town Planning Act of Maharashtra State and carries out functions as development Authority for New Town. Hence the appellant functions as extended Arm of State Government of Maharashtra. Consequently income of the Appellant is exempt from taxation under Income Tax Act, 1961. As such, the assessment order passed by learned AO cannot be said to be prejudicial to interest of the revenue.”

requiring no fresh examination of facts, we admit it and take up for

consideration and decision.

assessee functions as an extended arm of the State Government of

Maharashtra and hence does not come within the ambit of taxation. To put it

simply, he stated that there is no question of allowing or not allowing any

exemption to the assessee as at the threshold, it does not fall within the tax

net as it is an extended arm of the State Government of Maharashtra.

score. The assessee is a statutory authority and is not a State Government in

itself so as to claim any immunity from taxation. In our considered opinion,

this issue is no more res integra in view of the latest judgment dated

12-10-2018 rendered by the Hon’ble Supreme Court in ITO Vs. M/s. Urban

Improvement Trust. The Hon’ble Apex Court has held that Urban

Improvement Trust constituted under the Rajasthan Urban Improvement Act,

performing various municipal functions, is chargeable to tax in respect of its

income and further no exemption u/s.10(20) is available to it. Since the

Hon’ble Supreme Court has held that Urban Improvement Trust, doing

admittedly activities similar to those of the instant assessee, is chargeable to

tax and further not entitled to exemption u/s. 10(20) of the Act, the argument

of the Ld. AR that assessee should be treated as not at all chargeable to tax as

an arm of the State Government, deserves to be and is hereby repelled.

ITA No.614/PUN/2011 - A.Y. 2004-05 :

A.Y. 2004-05 are mutatis mutandis similar to those of A.Y. 2003-04. In fact,

both the sides adopted their earlier arguments without making any fresh

submission. In this year again, the assessee spread over the lease premium

to 1/99 or 1/78, as the case may be, and also declared 10% and the lease

premium as income during the first year of lease. The AO accepted such a

position and the Ld. CIT held the assessment year to be erroneous and

prejudicial to the interest of the Revenue.

circumstances for this year are similar to those of preceding year, following

the view taken herein above, we uphold the impugned order revising the

assessment order u/s.263 of the Act.

Order pronounced in the Open Court on 26th October, 2018.

Sd/- Sd/- (VIKAS AWASTHY) (R.S.SYAL) �याियक �याियक सद�य �याियक �याियक सद�य सद�य /JUDICIAL MEMBER उपा�य� सद�य उपा�य� उपा�य�/ VICE PRESIDENT उपा�य� पुणे Pune; �दनांक Dated : 26th October, 2018 सतीश

आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to : अ�ेिषत अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. आयकर आयु�(अपील) / The CIT-V, Pune. 3. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “बी 4. बी बी” / DR ‘B’, बी ITAT, Pune; गाड� फाईल / Guard file. 5. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER,स आदेशानुसार

/ True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune.*