By TIOL News Service

ALLAHABAD, AUG 05, 2016: THE issue is - Whether the onus is on the assessee to prove that the case has been selected for scrutiny wrongly on the basis of the directions of the higher authorities without application of mind. YES is the answer.

Facts of the case

The assessee is legal entity engaged in real estate development in state of Utter Predesh. The assessee is an authority notified under the UP Urban Planning and Developemnt Act. In the relevant year, AO selected its case for scrutiny assessment and issued notice u/s 143(2) of Act. Assessee challenged the validity of the said proceedings before the CIT(A), who passed order in favour of Revenue. Aggrieved assessee filed appeal before Tribunal. Assessee took a plea that it was an instrumentality of State and accordingly had deemed status of State under Article 12 of the Constitution of India and therefore exempted from the levy of the Income Tax.

Upto the AY, 2002-03, assessee was enjoying the exemption from income tax as a local authority u/s 10(20) of the Act. Section 10(20) stand amended by insertion of an explanation by the Finance Act, 2002 w.e.f. 1.4.2003, the assessee therefore applied for the registration u/s 12A of the Act as assessee was established for charitable purpose as defined u/s 2(15) of the Act as it was involved in advancement of any other objects of general public utility. The CIT rejected the application for registration by holding that assessee acts like a trader, earning profit by buying and selling of the land, building etc. on commercial lines. The assessee went in appeal before the Tribunal but the Tribunal in SMC Bench directed the CIT(A) to allow registration u/s 12A of the Act consequentially the earlier assessment had been completed and the assessee was granted exemption u/s.11 in consequence of the order passed u/s 12AA of the Act. During the relevant AY, the AO noted that proviso had been added u/s 2(15) by the Finance Act, 2008 and accordingly the assessee got covered by the proviso to Section 2(15) and in view of this proviso the assessee's activities no more remains to be charitable one and accordingly AO did not grant the exemption to the assessee u/s.11 of Act while making assessment. The assessee went in appeal before the CIT(A), the CIT(A) dismissed the appeal of the assessee. Aggrieved assessee filed appeal before the Tribunal.

After hearing parties, Tribunal held that,

++ if Assessing Officer feels that it will be necessary and appropriate to issue the notice u/s.143(2), in our view the Assessing Officer is entitled to take the case for scrutiny and issue the notice. The argument of the senior counsel is that the Assessing Officer should apply his own mind; it should not be taken for scrutiny on the instructions of the higher authorities. In our opinion, the onus is on the assessee to prove that the case has been selected for scrutiny on the basis of the directions of the higher authorities. No iota of evidence was brought on record or placed before us, Learned advocate to prove that the Assessing Officer has not complied with the conditions as stipulated u/s.143(2)(ii). This is a settled principle in view of the decision of Daulat Ram Rawat Mull Vs. ITO, that the onus is on the party who alleges that apparent is not real. Here the Assessing Officer has issued the notice, the onus is on the assessee to prove that the assessee has not complied with the conditions as stipulated u/s.143(2)(ii). We have also gone through the case laws as has been relied upon by the learned senior counsel but none of the case laws relates to the provision of section 143(2)(ii). We therefore dismissed the grounds no.1 and 2;

++ on the basis of the observation of the Supreme Court in the aforesaid decision which relate to a development authority created under the Bihar Urban Development Authority Act, 1974 which has the similar provision as the UP Urban Planning And Development Act, 1973, the Supreme Court decided against the assessee, income of such authority are not exempted under the Union Act and they cannot be regarded to be the State. We have also gone through the decision of Hon'ble Supreme Court in the case of Ajay Hasi as has been vehemently relied upon by the AR. We noted that the said decision does not relate to the question whether an authority created under the statute of the State Government is entitled for exemption from Union tax. In view of decision of Supreme Court nowhere held that the authority so created will be exempted from Income Tax Act. In the said decision, we noted that the Supreme Court even though relied upon the text laid down in its judgment in the case of International Airport Authority, 1 SCC 177 (1970). In the case of International Airport Authority, the court ultimately under paragraph 13 of the case relied upon by the learned Senior Counsel took the view that ‘but having regard to the various features enumerated in the judgment' the Court held that the Authority was not an agency of the government and hence cannot be regarded as State. We may mention that from paragraphs of the decision of Ajay Hasia as has been relied upon by the Senior Advocate. It is apparent that the definition of the State given under Article 12 is limited in its application only to part III of the Constitution of India and by virtue of Article 36 to Part-IV, it does not extend to other part of the Constitution. Articles 285 and 289 falls under Part-XIII, therefore, this decision in our opinion cannot be applied in the instant case. We have also gone through the Constitution of India, we noted Article 12 gives the inclusive definition of the word ‘State'. From the said definition, it is apparent that the definition given under Article 12 applies only to the Article given under Part-III as has been pointed out by us. Part-III consists of Articles 12 to 35; therefore, we are of the strong view that this cannot assist the assessee for claiming the exemption from the income under Article 289 of the Constitution of India;

++ we accordingly respectfully by following the decision of Adityapur Urban Development Authority vs. Union of India, held that the Development Authority cannot be exempted from taxation under the Constitution of India. Thus the grounds no.3 and 4 stand dismissed;

++ from the perusal of Section 2(15) after the insertion of the proviso, which is applicable only in case where the assessee is engaged in the advancement of any other object of general public utility, the definition of charitable purpose got amended. The proviso as is apparent clearly states that the advancement of any other object of general public utility shall not be charitable purpose and subsequent to that it gives certain conditions if the institution fulfils those conditions as are stipulated in the proviso, the institution will not be regarded to have been engaged for the advancement of any other object of general public utility for the purpose of Section 2(15) of the Income Tax Act and will no longer remain to have been engaged in charitable purposes. In fact, this proviso puts an embargo on the institution that in case the institution falls within the proviso, it will no longer be regarded to have been engaged for charitable purpose even if it is engaged in the advancement of any other object of general public utility. This proviso states that if the institution is engaged in carrying on of any activity in the nature of trade, commerce or business or any activity or rendering any service in relation to any trade, commerce or business for cess or fee or any other consideration, the institution shall not be regarded to have been involved in carrying on charitable purpose. This proviso in the last sentence further states that nature of use or application or retention of the income by the institution from such activity will not be a relevant consideration. In view of this specific provision, we are not concerned to look into how an institution has used, applied or retained its income, if the income has been received by the institution from any activity carried out in the nature of trade, commerce or business or from any activity of rendering any service in relation to trade, commerce or business. The institution will not be for charitable purposes;

++ we therefore in view of our aforesaid discussion as well as the proviso to Section 2(15) and the provision of Section 13(8) as inserted by the Finance Act, 2012 w.e.f. 1.4.2009, confirm the order of the CIT(A) and dismiss the appeal of the assessee.

(See 2016-TIOL-1365-ITAT-ALL)