ACIT,CIR-27(1), KOLKATA, PURBA MEDINIPUR vs. CONTAI MUNICIPALITY HATABARI, PURBA MEDINIPUR

ORDER Per Dr. A.L.Saini, A.M.:

The captioned appeal filed by the Revenue, pertaining to assessment year 2012-13, is directed against the order passed by the Commissioner of Income-tax (Appeals)-7, Kolkata in Appeal No. 3/CIT(A)-7/Kol/Cir-27/16-17, dated 29-09-2016,which in turn arises out of an assessment order passed by the Assessing Officer u/s.143(3) of the Income-Tax Act, 1961 (in short, the Act), dated 11-03-2015.

During the course of scrutiny proceedings the AO noticed certain discrepancies in the WDV of fixed assets and asked the Appellant to submit its clarification. The Appellant submitted that inadvertently the fixed Assets purchased out of grants received from the Government were not included in the Balance sheet enclosed with the return of income and filed a fresh Balance sheet. On a perusal of the said Balance Sheet: the AO noted that the value of fixed assets of Rs.4 7,30,83,237/ ­ as shown in the original return was increased to Rs.56,54,97,483/­ and cash & bank balances was reduced from Rs.7,79,53,084/­ to Rs.7,77,92,692/­. The Net difference of the said two items was added by AO in the hands of the Appellant Assessee as unexplained investments purportedly under section 69 of the Income Tax Act, 1961. The AO was of the view that if the Appellant had got his account audited under section 44AB, this mistake which was noticed by the Appellant during the course of assessment would have come to light much before and such mistake would not have crept in the balance sheet submitted with the return of income. On the other hand the AO also observed that the increase/change in value of assets shows that Assessee Municipality had not revealed true and correct picture of its affairs and treated the same as undisclosed investment made out of undisclosed sources. The AO also observed that the Assessee Municipality will not be entitled to its claim under section 10(20) of the Income Tax Act, 1961. The AO also made addition of the liabilities of Rs.1,33,823/ ­ being sales tax payable and Rs.3,71,233/­ being professional tax payable, which were not paid before the due date of fling of return of income, under section 43B of the Act. After making the aforesaid addition/ disallowances the AO determined the tax payable by the Assessee Municipality in the sum of Rs.2,42,86, 184/­. Para 4. In its written submissions, filed along with supporting documents and evidences, the Appellant Assessee submitted that they are Self Local Government as provided in 74th Constitutional Amendment Act, being an Urban Local Body, and also a Municipality as referred to in clause (e) of article 243P of the Constitution. The Assessee Municipality submitted that all of its income", received in form of municipal tax collections, grant and contributions from the State and Central Government and other miscellaneous income, are all exempt under section 10(20) of the Act. Para 4.1 The Assessee Municipality further submitted that at the time of filing of return of income, due to mistake of its staff, the Assets acquired Contai Municipality 2 out of grant fund of Rs.9,24,14,426/­, received by the Assessee Municipality from State and Central Government," was not shown in the balance sheet and further inadvertently the cash and bank balance was inflated by Rs.1,60,392/­. The said mistake did not come to knowledge of the Assessee Municipality till the scrutiny proceedings. On realizing the said mistake the same was brought to the notice of AO in the note submitted in response to notice dated 12.11.2014 issued under section 142(1) of the Act. The Appellant Assessee also stated that the AO did not considered that difference in value of assets, viz Vacant Land, Roads and Pavements, Building & Stalls, Drains and Culverts, Plant & Machinery, Furniture & Fittings and RCC Reservoir, was on account for not booking fixed assets purchased out of grant fund received from State and Central Government as per the mandate of the State Government of West Bengal and as per the obligatory functions of a Municipality laid down in Section 63 of the West Bengal Municipal Act, 1993 which provided for obligatory duty of every Municipality to make reasonable and adequate provision for spheres of public works, public health and Sanitation, town planning and development and administration within the territorial limits of the municipal area and the financial means at its disposal. Para 4.2 The Appellant referred to ITAT Cuttack bench decision reported in ACIT v. Cuttack Development Authority [2013] 29 .taxmann.com 217 (Cuttack­ Trib.) and contended that due to certain discrepancies in its books of accounts, the exempt income of the Assessee cannot be made taxable as its status as a local authority will not be disturbed. Reliance was, inter­alia, also placed on Chennai ITAT unreported decision dated 26.07.2012, in the case of P. Subramanium v. ITO( to contend undisclosed investments added, under section 69 of the Act, in the hands of the Assessee Municipality will have to be treated as Income from other Sources ill its hands which will ultimately be exempt under section 10(20) of the Income Tax Act 1961. The Appellant also referred to Guwahati ITAT in the case of Tamchikusuk v. Addl. CIT, ITA No.76jGauj2010, judgment dated 15.05.2015 to contend that disallowances made under section 43B are completely tax neutral in as much as whatever is the income arrived at after making these disallowances are all exempt under section 10(20). It was submitted that the disallowances are made at the stage of the computation of business income whereas the amount eligible for exemption is computed at a much later stage of computing the total income. Thus, disallowance under section 43B will not result in any income in the hands of the Assessee Municipality whose income is totally exempt from tax within the meaning of section 10(20) of the said Act.

Para 5 .Findings of CIT(A)­ 5.1 Unexplained Investment­ I have carefully considered the facts of the case and the submissions made by the Appellant. It is an undisputed fact that the Appellant is a Municipality and is covered under the definition of Local Authority as provided under section 10(20) of the Act and thus its income is exempt. Now so far as the increase in the value of assets in the fresh balance sheet is concerned the AO had himself recorded in the Assessment Order that if the accounts of the Appellant would have been audited under section 44AB these mistakes would not have crept in the balance sheet submitted with the return of total income. Thus it is quite clear that said difference in the value of assets was not on account of deliberate act of the Appellant and was a bonafide mistake which was rectified during the course of scrutiny. Thus due to this mere discrepancy the exempt income of the Appellant cannot be made taxable as its status as a local authority will not be disturbed and all of its income will remain exempt under section 10(20) of the Act. I am fortified in my view by the decision of the Cuttack bench in ACIT v. Cuttack Development Authority [2013] 29 taxrnann.com 217 (Cuttack ­ Trib.) and in any case the addition if any made as unexplained investment will have to be treated as "Income from other sources" (as the Assessee don't have any income under the head of "Business and Profession") which again will be exempt under section 10(20) of the Act. Therefore the appeal of the assessee on this issue is hereby allowed.”