DCIT(EXEMPTION), CIRCLE-1(1), KOLKATA, KOLKATA vs. HOOGHLY RIVER BRIDGE COMMISSIONER, KOLKATA

1. 1. Whether on the facts and circumstances of the case, Ld. CIT(A) has erred in holding that grants received from government cannot be considered as income despite the fact that the assessee has considered the said grant as income in their return of income.

The brief facts of the case are that the assessee is a corporation established under Hooghly River Bridge Commission Act, 1969. The assessee organisation constructs bridges and other infrastructure by receiving grants from the Government of West Bengal. The plea of the assessee organisation is that it receives grants from the government for specific projects. These projects are constructed and then handed over to the government. The surplus amount, if any, is refunded to the government. The case of the assessee is that the assessee organisation is not doing any work on profit basis rather, it is just an organisation which has the responsibility to execute the development work on behalf of the State Government. It acts like a trustee of the funds of the government, spends the funds on development works on behalf of the government and, therefore, there is no income element involved in respect of the grants received by the assessee organisation.

The Assessing Officer (in short the “AO”) however, treated the grants received by the assessee organisation from government as income of the assessee. He also disallowed the expenditure incurred on infrastructure development work, treating the same as capital in nature.

The Ld. counsel, at this stage, stated that initially, when the assessee received grant for the first time before the year 1992, the same was booked as loan in the books of account of the assessee and thereafter, the assessee is also continuously booking the notional interest payable to the government on the said amount as per the instructions of the Auditor. Thereafter, the assessee organisation whenever received grants from the government, the same were booked as income in the books of account and whatever the amount was incurred on projects/infrastructure the same was booked as expenditure. As per the Ld. Counsel for the assessee, if there was any surplus left, that was refunded to the government. The Ld. Counsel for the assessee has further submitted that the assessee has been authorised to collect toll tax on the bridges constructed by the assessee. That the expenditure is also incurred out of the toll tax/toll charges collected by the assessee on the infrastructure development work. Further, that the assessee trust had applied for registration as a charitable organisation u/s. 12A of the Act in the year 2019 and it has been registered as a charitable organisation by the Commissioner of Income Tax (Exempt) w.e.f. AY 2019-20 onwards.

Before the Ld. CIT(A), the assessee made two fold submissions, firstly, that the assessee organisation is working on no profit no loss basis as an instrument of the government and the works are carried out by the assessee trust from the grants received from the Government, on behalf of the government, itself, and hence, the grants received by the assessee cannot be treated as income of the assessee. Secondly, that the assessee trust has been registered as a charitable organisation u/s. 12A of the Act. That though, the assessee organisation has been registered as a charitable institution from AY 2019-20, however, the appeal for the assessment year under consideration i.e. AY 2012-13 was pending before the Ld. CIT(A) on the date of grant of registration to the assessee. The Ld. Counsel, in this respect, has relied upon the proviso to section 12(2) of the Act (as it was on the statute at the time of registration of the assessee organisation in the year 2019, which, however, stood omitted vide Finance Act, 2023 w.e.f. 01.04.2023) which provided that where registration has been granted to a trust or organisation u/s. 12AA/12AB of the Act in a subsequent year then the benefit of such registration will be available to said trust or institution for an earlier assessment year for which the assessment was pending before the Assessing Officer as on the date of such registration and objects and activities of such trust or institution remained the same for such preceding assessment year.

The Ld. CIT(A) though did not adjudicate upon the second contention raised by the assessee for grant of benefit of exemption u/s. 11 of the Act, the assessee being registered as a charitable organisation u/s.12A of the Act and the appeal of the assessee for AY 2012-13 being pending before the Ld. CIT(A) on the date of said registration, however, the Ld. CIT(A) admitted the plea of the assessee organisation that the assessee organisation was doing work on behalf of the government on no profit no loss basis. He treated the assessee organisation as subsidiary of the government and held that no income element was involved in the activities of the assessee. He, accordingly, deleted the addition so made by the AO.

Being aggrieved by the said order of the Ld. CIT(A), the revenue has come in appeal before us.

We have heard the rival contentions and gone through the material available on record. So far as the contention of the Ld. Counsel for the assessee that the assessee organisation is doing all the infrastructure development/creation work on behalf of the government is concerned, we are not convinced with the above arguments of the Ld. Counsel. The assessee organisation has been created as a statutory body. It not only receives grants from the Government but has also been authorized to collect toll charges from the user of the bridges constructed by it. In this way, the assessee organisation has been given the authority to generate its own income by way of collection of toll charges. The working model/operation of the assessee organisation is to develop, maintain and operate the infrastructure and collect charges for its usage from the users/public. Thus, it is a clear cut business model which is done in other projects also, sometimes in collaboration with private parties by the Government, wherein, the license is given to the private parties to build, operate and maintain the infrastructure project and a right is given to collect toll charges from the public who uses such infrastructure, generally the roads and bridges etc. In our view, it is purely a business model and, therefore, it cannot be said that the assessee organisation is working on no profit no loss basis. Whenever, there would increase in the total collection of the assessee over the expenditure, it would definitely be the income of the assessee.

At this stage, we may refer to the provisions of section 10(46) of the Act whereby, certain authorities, boards or trusts, which have been established by the government with the object of regulating or administering any activity for the benefit of general public and if such institution or authority is not engaged in any commercial activity and is notified by the central government in the official gazette for the purpose of said clause, then the specified income of such an organisation, if such income is notified in the official gazette by the central government to qualify under the said provisions of section 10(46) of the Act, would be exempt. However, in this case, firstly, as pointed out, its doubtful, whether, the assessee organisation is not engaged in commercial activity. Secondly, the assessee organisation has not been notified as a board or authority entitled to exemption u/s. 10(46) of the act nor its income has been specified to be so by way of notification in the official gazette, therefore, the provisions of section 10(46) of the act are not applicable in this case.

So far as the claim of the assessee that since the assessee organisation has been registered as charitable organisation u/s. 12A of the Act in the year 2019 and that the appeal of the assessee organisation was pending before the Ld. CIT(A) for the year under consideration (AY 2012-13) on the date of such registration is concerned, it is to be noted that in the wording of the proviso to sec. 12(2) of the Act (since omitted from 01.04.2023) it has been specifically provided that the assessment proceedings should be pending before the Assessing Officer on such date of registration. If the appeal of the assessee was pending for the year under consideration before the Ld. CIT(A), that itself does not mean in any manner that the “assessment proceedings were pending before the AO.” Moreover, no such plea or issue was pending before the Ld. CIT(A) in the said appeal as to whether the assessee organisation was entitled to exemption u/s. 12A of the Act. Though the Ld. Counsel has relied on certain case laws to submit that appeal is a continuation of assessment proceedings, may it be so, however, that proposition may be applied in respect of a claim which is pending adjudication before the Ld. CIT(A) or other appellate authorities, which could not be decided during the assessment proceedings. However, in the relevant statutory provisions as per the proviso to section 12(2) of the Act, it has been specifically written that the benefit of exemption can be granted for the preceding year, if on the date of grant of registration u/s. 12A to an institution, the assessment for a preceding year was pending before the Assessing Officer and the objects and activities of such trust or organisation remained the same for such preceding year. The assessment year under consideration is AY 2012-13. The assessee organisation for the first time applied for registration u/s. 12A of the Act in the year 2019, the assessment for the AY 2012-13, by then, stood completed and was not pending before the AO. 11.1. Secondly, the said provision stood omitted as on 01.04.2023. As on today, when we are adjudicating upon this appeal and claim of the assessee for grant of benefit of proviso to section 12(2) of the Act, the said proviso is no more on the statute. It is settled law that the effect of omission of a provision from the said statute is that it never existed on the statute. Nevertheless, the said proviso is not in existence in the statute as on today. Hence, in our view, the assessee organisation cannot be granted benefit of the said provision by us while adjudicating upon appeal of the assessee in the year 2024, when such proviso already stood omitted w.e.f. 01.04.2023.

So far as the action of the AO in treading the expenditure incurred by the assessee organisation as capital in nature is concerned, we do not find any infirmity in the order of the Assessing Officer to the extent that expenditure incurred on creation of infrastructure would be capital in nature. However, expenditure incurred on maintenance of the infrastructure would be revenue in nature. Office Administration expenditure would also be revenue in nature. The assessee will be entitled to claim depreciation as per law on the infrastructure, which, has been, admittedly booked as ‘asset’ by the assessee in the balance sheet. So far as the flaws in accounting method applied by the assessee are concerned, it is to be noted that the assessee organisation is regularly booking notional interest expenditure payable to the government on the first/initial grant received by it by treating the same as a loan in its account. However, as per the Ld. Counsel for the assessee, it was not a loan but a grant only. He has submitted that due to some advise given at that time, the assessee has treated it as a loan in its account and has also booked the notional interest expenditure upon it. The same, however, has never been paid to the government. If this contention of the assessee is to be accepted then, certainly, any interest expenditure booked by the assessee is not an allowable expenditure. However, the fact on the file is that the said amount was wrongly treated by the assessee as loan in its account whereas the claim of the assessee organisation is that the said amount was a grant received from the government prior to 1992 and that has been incurred by the assessee organisation on infrastructure projects, and that the said projects are booked as ‘assets’ in the Balance sheet of the assessee. Under this scenario, the said grant is required to be treated as income of the assessee and the assessee, of course, would be entitled to claim depreciation on such ‘assets’ as per law. However, in fairness to the assessee organisation, we give an opportunity to the assessee organisation to correct/rectify its account and show the clear picture of accounts to the Assessing Officer and the Assessing Officer to decide the issue accordingly after considering the submissions of the assessee in this respect.

Before parting with the order, it is made clear that the observation made above by us in relation to the adjudication of the issues relating to the assessment year under consideration (AY 2012-13) will not have any effect on the subsequent registration u/s. 12A of the Act or claim of exemption u/s. 11/12 of the Act for any of the subsequent years which have to be examined by the competent authority independently, irrespective of the observation made above.

With the above observations, the appeal of the revenue is treated as partly allowed. for AY 2013-14 :

Since facts and issue involved in this appeal are identical, our observation and finding given above will mutatis mutandis apply to this appeal also. This appeal of the revenue is accordingly, also treated as partly allowed.