By TIOL News Service

PUNE, JAN 30, 2019: THE ISSUE - at hand before the bench is an Urban Improvement Trust performing various municipal functions, can be treated as an arm of the State Government & so be entitled to exemption u/s 10(20) of the Act. NO IS THE ANSWER.

Facts of the case

The assessee was enjoying the benefit of exemption u/s 10(20A) for the AY. Further, the AO opined that the assessee was supposed to file its return, which it did not. Hence, notice was served on the assessee claiming that its income should be treated as exempt u/s 11 r.w.s. 13. During the assessment, the AO held that the assessee was not eligible for exemption u/s 11 as it was not registered u/s 12A. However, the AO noted that the Commissioner passed the order u/s 12AA r.w.s. 12A rejecting the application of the assessee. Further, the CIT invoked the provisions of sec 263 and held that the assessment order passed by the AO was both erroneous and prejudicial to the interest of the Revenue inasmuch as the assessee adopted a faulty method of revenue recognition. The CIT also 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. Further, the CIT set-aside the assessment order by holding it to be erroneous as well as prejudicial to the interest of the Revenue and hence directed the AO to frame the assessment afresh.

On appeal, the Tribunal held that,

++ 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 assessee is a statutory authority and is not a State Government in itself so as to claim any immunity from taxation. Thus, this issue is no more res integra in view of the latest judgment dated 12-10-2018 rendered by the Supreme Court in ITO Vs. M/s. Urban Improvement Trust. The 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 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 Counsel of assessee said 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.

(See 2019-TIOL-277-ITAT-PUNE)