By TIOL News Service

SHIMLA, DEC 18, 2018: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether VAT collected by State appointed agency, followed by deposit of balance surplus in Government Treasury after retaining its actual expenditure incurred on the collection, cannot be construed as 'real income' in the hands of agency for purposes of
I-T Act. YES IS THE VERDICT.

Facts of the case

The assessee is a society registered under the Societies Registration Act, 1860, to facilitate the general public dealers carrying goods and crossing the barriers established by the State Govt. and also to diffuse awareness amongst the general public/dealers about the sales tax laws. The primary funds of the Assessee were to be augmented by collecting the statutory levy u/s 34 of Himachal Pradesh VAT Act, 2005, whereunder the State Government was empowered to establish check post(s) or erect barriers with a view to preventing or checking evasion of tax under the VAT Act. In terms of the ByeLaws, the Assessee used to deposit Re.1/per 'Declaration' with the Government Treasury out of the Rs.5/till the year 2009 which was later enhanced to Rs.2/after the tax amount was increased from Rs.5/to Rs.10/per 'Declaration'. During the year under consideration, the assessee applied for registration u/s 12AA to the CIT, Shimla, who rejected the application, holding that the activities carried out by Assessee did not benefit the general public rather those were meant to provide the infrastructural facilities to the Excise and Taxation Department of Government of Himachal Pradesh. As the Assessee in its Income Expenditure Statements, had been showing surplus of income over expenditure, the AO issued notices u/s 148 r/w/s 147 for taxing the excess of income over expenditure. The Assessee contested the notice on the premise that no surplus income accrued to it as all the surplus income was payable to the State Government and therefore, it had earned no taxable income. The AO however, turned down the said plea and 'excess income over expenditure' was computed for the purpose of Assessee's tax liability.

On appeal, the CIT(A) after going through the activities of assessee held that 20% of the tax amount collected & paid to the State Government could not be treated as 'income' of assessee, as it was paid directly to the Government Treasury. As regard to the remaining 80% of the tax collection, it was held to be a part of character of income, as according to the CIT(A), the assessee had the freedom to utilize the said amount for the objective(s) of the Society.

On further appeal, the Tribunal has gone in extenso into the MoA of Assessee as well as the details of its background, functional requirements, operation and model, accounting structure and ultimate payment to the exchequer of the Government. With an intent to analyze the functioning of Assessee vizaviz provisions of the VAT Act 2005, the Tribunal also dwelled upon Section 34 of the said Act r/w Rules 61 and 62 of the VAT Rules, 2005, and concluded that the surplus of income over expenditure of the Assessee belongs to the State Government and had been duly deposited in the public Exchequer, hence not taxable.

High Court HC held that,

++ the question which arises for determination is whether the retention of a part of the VAT collected by the Assessee till the process of determination of its actual expenditure incurred on the collection, followed by deposit of balance surplus amount in the Government Treasury for onward transmission to the State Government, can be treated as the 'real income' in the hands of Assessee for purposes of I-T Act. It is true that 'income' has not been defined in Section 2(24) of I-T Act, but with the addition of expression 'includes', the scope and ambit of 'income' stands enlarged. Various components illustrated in the definition Clause including 'profits and gains' are part of the 'income'. In view of the comprehensive definition chosen by the Legislature, something which is not expressly included in Section 2(24), can also form part of the 'income'. However, none of the receipts illustrated u/s 2(24) except 'profits and gains' have been cited or applied by the Revenue to adjudge the 'income' of the Assessee;

++ the word 'profit' means the gross proceeds of a business transaction minus the costs of transaction. 'Profits' imply a comparison of the value of an asset when the asset is acquired with the value of the asset when such asset is transferred and the difference between the two values is the amount of 'profit' or 'gain' made by a person. The expression 'gain', on the other hand, is not synonymous with the word 'profit', for it is not restricted to pecuniary or commercial profits only as it includes other considerations of value gained also. Applying these principles to the facts of the cases in hand, it may be seen that the Assessee continued to receive Rs.5/per Form till May, 2009 out of which Re.1/was straightaway deposited in the Government Treasury and out of the balance of Rs.5/-, only the actual expenditure incurred by it on collection process was deducted and the balance amount was duly deposited in the Government Treasury to be paid to the Excise and Taxation Department of the State Government. In this entire process, the Assessee neither gained anything nor earned any profit. The VAT amount recovered by Assessee was/is an entrustment of the statutory function of the State which alone is competent to levy VAT u/s 34 of the VAT Act. The Assessee thus neither created any source of income nor generated any profit or gain out of such source. Even if the tax collection remains temporarily parked with the Assessee for some time, it cannot be treated as 'income' generated by the Assessee as the said amount does not belong to it;

++ the non-registration of Assessee u/s 12AA of I-T Act is inconsequential, for an occasion to seek exemption from payment of tax on the income by a Trust or Institution serving the cause of general public utility would arise only when some actual income is derived. The Assessee though is a 'juristic person', but in the absence of any income having been earned by it through 'profits or gains' within the meaning of Section 2(24), the Assessee is indeed not obliged to seek exemption u/s 12AA of Income tax Act, for it does not have any taxable income.

(See 2018-TIOL-2621-HC-HP-IT)