IN THE ITAT CUTTACK BENCH
Assistant Commissioner of Income-tax
Cuttack Development Authority
IT APPEAL NO. 230 (CTK.) OF 2012
C.O. NO. 32 (CTK.) OF 2012
ASSESSMENT YEAR 2007-08
SEPTEMBER 14, 2012
K.K. Gupta, Accountant Member – The appeal by the Revenue for the Assessment Year 2007-08 is against the order dt.19.1.2012 of the CIT(A), raises the following grounds:
1. In the facts and circumstances of the case, the ld. First Appellate Authority is not justified in directing for acceptance of the loss in the revised return especially when the books of account were not produced for verification before the AO even at appellate stage and the discrepancies in the figures in the revised return vis-a-vis original return could not be explained.
2. In the facts and circumstances of the case the ld. CIT(A) is not at all justified in directing to accept the loss mentioned in the revised return filed u/s. 139(5) as the original loss return had been filed in time u/s. 139(1) before the AO having regard to the judgment of Hon’ble Madras High Court in CIT v. Periyar District Cooperative Milk Producers Union Ltd  266 ITR 705, which was not the real issue involved in the impugned assessment order. The AO has disallowed the total loss claimed for non-production of books of account and details asked for during the assessment proceedings.
2. Cross objection has been filed by the assessee objecting to the learned CIT(A) confirming the status of the assessee as Artificial Juridical Person vis-à-vis as returned by the assessee as a local authority.
3. As per the assessment order, the facts are that the genesis of the assessee is relegated from section 3(3) & (5) of Orissa Development Authorities Act,1982 (Orissa Act 14 of 1982). As such Cuttack Development Authority is assigned with the overall responsibilities of development of Cuttack township. The assessee was availing the benefit of exemption u/s 10(20A) of the Income-tax Act, 1961 up to AY 2002-03, but the said provision regarding exemption u/s 10(20A) was omitted w.e.f 01.04.2003 by the Finance Act, 2002. The assessee filed its original return of income in ITR-5 form on 31.10.2007 showing total loss at Rs. 1,30,80,680/-. Subsequently, the original return was revised by filing a revised return in ITR-5 form on 25.02.2008 showing total loss at Rs. 4,17,04,339/-. This case was selected for scrutiny assessment vide clause 2(vi) of the scrutiny guidelines 2007-08 issued by the C.B.D.T. statutory notice in terms of section 143(2) of the Income-tax Act, 1961 was issued by fixing the case for hearing. The Assessing Officer after verifying the status of the assessee, held that the assessee is not a local authority as claimed but an Artificial Juridical Person and brought the discrepancy in the two returns of income proposed to bring the huge difference of amounts as unreliable and the loss returned was taken as NIL.
4. Aggrieved the assessee appealed before the first appellate authority, who considered the assessee’s submissions and held as follows:
“5.3. …… The appellant filed its original return of income in ITR-5 on 31.3.2007 showing total loss at Rs. 1,30,80,680. Subsequently a revised return was filed on 25.2.2008 showing total loss Rs. 4,17,04,439. As per Section 139(5), if any person, having furnished a return u/s. 139(1) or in pursuance of a notice issued u/s. 142(1) discovers any omission or any wrong statement therein, he may furnish a revised return within one year from the end of the relevant assessment year or before the assessment is made, whichever is earlier. It has been held in CIT v. Periyar District Cooperative Milk Producers Union Ltd.  266 ITR 705 (Mad) that there should have been no difficulty for revising the loss return filed within time u/s.139(5) of the Act. Special Leave Petition has also been dismissed in this case (2004) 270 ITR (St.) 3. The AO has not made any specific enquiry on the income/expenditure of the appellant which could have made an impact on the loss shown by the appellant in the revised return. Therefore, following the judgment of the Hon’ble Madras High Court in CIT v. Periyar District Cooperative Milk Producers Union Ltd.  266 ITR 705, the AO is directed to accept the loss as shown by the appellant in the revised return.”
5. The learned CIT-DR submitted that the learned CIT(A) was not justified in accepting the loss in the revised return specifically when books of account were not produced for verification before the Assessing Officer and even at appellate stage. Having considered the time available for filing the revised return u/s. 139(5) it was not the case of the Assessing Officer to bring the discrepancy in record insofar as the learned CIT(A) has allowed the brought forward losses not indicated in the original return but by way of a revised return only. Section 139(1) clearly indicates that a loss return has to be u/s.139(1) and 139(5) which as a matter of error has been allowed by the learned CIT(A).
6. The learned Counsel for the assessee first, on the learned CIT-DR’s arguments, submitted that the assessee, Cuttack Development Authority, is a Government authority, which is formed u/s 3(3) & (5) of Orissa Development Authorities Act, 1982 (Orissa Act 14 of 1982). As such Cuttack Development Authority is assigned with the overall responsibility of development of Cuttack Township. The Books of Account were duly produced before the A.O. The A.O. might not have recorded the production of the books of account which is produced by us on 30.12.11. The same is explained before the ld. CIT(A) along with the books of account. Theld. CIT(A) nowhere mentioned in his appellate order that the assessee has not produced the books of account. Therefore Theld. CIT(A) is justified in directing the A.O. to accept the loss as shown in the revised return. The judgment of the Hon’ble Madras High Court in CIT v. Periyar District Co-op. Milk Producers Union Ltd.  266 ITR 705, is squarely applicable to the issue involved in the impugned assessment order. A loss return filed within time can also be revised and in such case the loss as per the revised return can be carried forward. The judgment clearly elaborates as follows:
“If any person who has sustained a loss in any previous year under the head Profits and gains of business or profession or under the head Capital gains and claims that the loss or any part thereof should be carried forward under sub-section (1) of section 72, or sub-section (2) of section 73, or sub-section (1) or sub-section (3) of section 74, or sub-section (3) of section 74A, he may furnish, within the time allowed under sec. 139(1), a return of loss in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and all the provisions of this Act shall apply as if it were a return under sub-section (1).
139(5)- If any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.
A bare perusal of the aforesaid two provisions, more particularly the provision contained in Section 139(3), makes it clear that a return of loss filed under section 139(3) may be filed within the time allowed under section 139(1). Once such a return is filed, all the provisions of the Income-tax Act shall apply as if such return has been filed under section 139(1). This position is clear from the expression – all the provisions of this Act shall apply as if it were a return under sub-section (1). In other words, a return filed under section 139(3) is deemed to be a return filed under section 139(1). In view of such a specific provision there is no reason to exclude the applicability of section 139(5) to a return filed under section 139(3).”
The learned Counsel for the assessee submitted that the assessee filed the return of Income u/s 139(3) of Income-tax Act 1961 within the time allowed u/s 139(1) i.e., within the due date of filing the return and subsequently we find that in the original return we have committed some mistake bona fidely then we revised the return of income u/s 139(5) of Income-tax Act. The return is revised within the time-limit u/s.139(5). In support thereof he relied upon the following case laws.
1. It is to be noted also that once a revised return is filed the original return stands withdrawn – Dhampur Sugar Mills Ltd. v. CIT  90 ITR 236 (All.)
2. A loss return filed within time can also be revised and in such case the loss as per the revised return can be carried forward as it was held in Periyar District Co-op. Milk Producers Union Ltd.
3. Principles of natural justice are applicable – The principles of natural justice are applicable to assessment proceedings. The elementary principle of natural justice is that the assessee should have knowledge of the material which is going to be used against him so that he may be able to meet it – Gargi Din Jwala Prasad v. CIT  96 ITR 97 (All.).
4. Assessee must be given reasonable time and opportunity – The ITO should give the assessee reasonable time and opportunity to produce evidence, as otherwise the order of assessment will be vitiated – Munnalal Murlidhar v. CIT  79 ITR 540 (All.).
7. The learned Counsel for the assessee submitted that considering the above facts & circumstances, the ld. CIT (A) is rightly justified by directing the A.O. to accept the loss. Therefore Theld. CIT (A) is justified in directing the A.O. to accept the loss as shown in the revised return. He further submitted that the case was selected for scrutiny u/s 143(3). The ACIT, Cir-1(2), Cuttack had issued a notice u/s 142 by fixing a date for hearing on 05.05.2009. The A/R appeared on dtd. 05.05.09, 07.07.09 & 17.07.09. So the then A.O. has already completed the hearing of scrutiny assessment & the Assessment Order was awaited by the assessee. Instead of Assessment Order, a fresh notice is issued by ACIT, Cir-2(2) to the assessee by fixing the hearing on 24.12.09. Subsequently it was fixed on 29.12.2009 & 31.12.2009 for hearing. Therefore the completion of assessment u/s 143(3) is illegal, arbitrary and contrary to the natural justice. The learned Counsel for the assessee submitted that the Books of Account were produced before theld. A.O. for verification. However this being a time barred case & the Assessment order is completed in the month of April., 2010 i.e. approximately 4 months after the due date of completion of Assessment. We have received the order on 23.04.2010. Theld. AO. might not have recorded the production of the Books of Account, which is produced by the assessee on 30.12.2009. The Books of Account is Audited by M/S Dash & Associates, Chartered Accountants. The Audit report was signed Mr. Rabindra Kumar Dash, Memb. No. 6058679 on 30.09.07. However at the time of filing the return, the ITR-5 was duly filed up & subsequently when it comes to the knowledge of the auditor that the Self Asst. Tax of Rs. 1,98,000/- paid on FBT is varied from the original return which reflects Rs. 1,97,998/-, the revised return was filed. The discrepancies found in the return is due to the different grouping of the major heads. The case was transferred from ACIT, Circle-1(2) to ACIT, Circle-2(2). Cuttack vide jurisdiction order passed by the CIT, Cuttack. No reasonable opportunity of being heard is given to the assessee as per sec. 127(1). Therefore, transfer of jurisdiction is illegal. Therefore, the learned CIT(A) is justified in directing the Assessing Officer to accept the loss as shown in the revised return.
8. Addressing to the cross objection filed by the assessee, the learned Counsel for the assessee submitted that the Assessing Officer has mentioned in the first para of Assessment Order that “the assessee was availing the benefit of exemption u/s 10(20A) of the Income-tax Act 1961”. The assessee grossly disagreed with the above contention of the A.O. However the assessee has never availed such exemption. In Asst. Year 2003-04 & on wards, the assessment were completed u/s 143(3). However in earlier assessment proceedings, A.O.s had not raised any issue regarding status of the assessee. The learned Counsel for the assessee contended that the following amendment has been made as per the Finance Act, 2002
“(I) in clause (20) of Sec. 10 the following Explanation has been inserted with effect from the 1st day of April, 2003, namely:—
‘Explanation—For the purposes of this clause, the expression “local authority” means—
(i) Panchayat as referred to in clause (c) of article 243 of the Constitution; or
(ii) Municipality as referred to in clause (e) of article 243P of the Constitution; or
(iii) Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or
(iv) Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924).”
Therefore the above amendment clearly explains the above Explanation is applicable to sec. 10(20) only. The said explanation specifically made for grant of the exemption under Section 10(20) of the 1961 Act. However the assessee is not availing such exemption. The same is not applicable to sec. 2(31). The learned Counsel for the assessee referred to Finance Act, 2002 – Explanatory notes on provisions relating to Direct Taxes in Circular No. 8 of 2002, dated August 27, 2002, which reads as under:
11. The Finance Act, 2002 as passed by the Parliament, received the assent of the President on 11th day, 2002 and has been enacted as Act No. 20 of 2002. This circular explains the substance of the provisions of the Act relating to direct taxes.
12. Income of certain Local Authorities to become taxable
12.1 Under the existing provisions contained in clause (20) of section 10, the income of a local authority chargeable under the head Income from house property, ‘Capital gains’ or Income from other sources or from a trade or business carried on by it which accrues or arise; from the supply of a commodity or service within its jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area is exempt from payment of income-tax.
12.2 Through Finance Act, 2002, this exemption has been restricted to the Panchayats and Municipalities as referred to in Articles 243(d) and 243P(e) of the Constitution of India respectively, Municipal Committees and District Boards, legally entitled to or entrusted by the Government with the control or management of a Municipal or a local fund and Cantonment Boards as defined under section 3 of the Cantonments Act, 1924.
12.3 The exemption under clause (20) of section 10 would, therefore, not be available to Agricultural Marketing Societies and Agricultural Marketing Boards etc. despite the fact that they may be deemed to be treated as local authorities under any other Central or State legislation. Exemption under this clause would not be available to Port Trusts also.
12.4 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years.”
The learned Counsel for the assessee submitted that from instruction 12.3 in the above Circular, it is crystal clear that exemption under sub-section (20) of section 10 would not be available to the assessee w.e.f. 1.4.2003. However, nothing is stated for the period preceding 1.4.2003 which clearly shows that there was no intention of the C.B.D.T. to make circular effective retrospectively rather it is prospective, therefore, assessee was entitled to the status of “Local Authority” before amendment which is effective from 1.4.2003. Further more the Hon’ble Supreme Court of India in the case of Agricultural Produce Market Committee v. CIT  173 Taxman 115 has considered its earlier judgment in the case of Union of India v. R.C. Jain  2 SCC 308. The said judgment has not been overruled. Therefore functional tests as laid down in the aforesaid case i.e. R.C. Jain (supra) are applicable for the years which falls prior to the amendment made by the Finance Act, 2002 in section 10(20) of the Act. The Hon’ble Supreme Court of India observed as under:
“Para-30 : Therefore, in our view the judgment of this Court in the case of R.C. Jain (supra) followed by judgments of various High Courts on the status and character of AMC(s) is no more applicable to the provisions of Section 10(20) after the insertion of the Explanation/definition clause to that sub-section vide Finance Act, 2002. AMC(s) is, therefore, not entitled to exemption under Section 10(20) of the Income-tax Act, 1961 after insertion of the said Explanation vide Finance Act, 2002 w.e.f. 1.4.03.”
However status as “local authority” is not denied by theld. Supreme Court. So the status of the “Local Authority” cannot be denied to it when all other tests laid down by the Supreme Court regarding a local authority in Ajay Hasia v. Khalid Mujib Sehravardi AIR 1981 SC 487 & R.C. Jain (supra) have been fulfilled by the assessee. The functional test and the test of incorporation as laid down in the case of R.C. Jain (supra) is no more applicable because of the judgment of Agricultural Produce Market Committee (supra) is wrong. The Hon’able Supreme Court defined in Paras 28 & 29 that the Delhi Development Authority is a Local authority. It cannot be said that all local authority are exempted from tax. The local authority who fulfills the Explanation to sec 10(20) is exempted u/s 10(20). The assessee is not claiming any exemption u/s 10(20A). Therefore the dis allowance of the status as “Local Authority” by the ld. CIT(A) is illegal and wrong. The learned Counsel for the assessee prayed to allow the assessee to continue the status as “Local Authority”.
9. The learned CIT-DR on the submission of the learned Counsel on the cross objection, relied on the order of the learned CIT(A).
10. We have heard the rival submissions and perused the impugned orders of the authorities below and the material on record. On consideration of the facts and circumstances of the case, we are inclined to hold that the assessment has not been made in accordance with the provisions of the Income-tax Act. The discrepancies brought on record have culminated into rejection of the books result could not wash away the fact finding insofar as the assessee continues to be a local authority which it was prior to Assessment Year 2003- 04. The submissions of the learned Counsel for the assessee on the issue of the learned CIT(A) upholding the status of the assessee by the Assessing Officer as Artificial Juridical Person and not a local authority has not been in accordance with the provisions of the I.T. Act insofar as inference of a local authority in a broader sense was held by him was no longer possible in view of the amendment by way of insertion of Explanation in Finance Act, 2002 w.e.f. 1.4.2003 would only lead to a finding that it is an Artificial Juridical Person. When the basic finding of the Assessing Officer with regard to the discrepancies in the original and audited return which led to culmination of claiming of brought forward losses as accumulated loss of a local authority were acceptable to him and were supported by the learned CIT(A) when the revised return u/s. 139(5) was to be given credence in accordance with law therefore rather leaned in favour of the assessee only insofar as it was never the case of the assessee to indicate the discrepancies leading to claim of brought forward losses along with the losses in the impugned Assessment Year when the Assessing Officer mainly jotted down the figures as per the original return and figures as per the revised return to a finding that the assessee has to be assessed as Artificial Juridical Person. We find the contention of the learned Counsel for the assessee appropriate to the extent that the discrepancies should have further required the Assessing Officer to indicate as to how the status of the assessee could be changed when he chose to nullify the book results only. The learned CIT(A) therefore clarified the same on the submissions before him that the revised return has to be accepted which includes the brought forward losses. The learned CIT(A), therefore, erred in confirming the status as assessed by the Assessing Officer but not indicating as to how the brought forward losses could change the status of the assessee. In this view of the matter, we deem it fit to restore the matter to the file of the learned CIT(A) who is to adjudicate the basis which led him to change the status in spite of the assessee’s submissions that the status has remained the same and in compliance to the provisions of the Act, as submitted by the learned Counsel for the assessee. The learned CIT(A) has directed the Assessing Officer to accept the revised return claiming brought forward losses. The discrepancies therefore was to be explained by the Assessing Officer which was considered by the learned CIT(A) appropriately instead of nullifying the loss the learned CIT(A) chose to continue granting status of the assessee as claimed by the assessee in the return for the impugned Assessment Year which could not be an Artificial Juridical Person for the impugned Assessment Year only. No reason was assigned by the Assessing Officer to correlate the discrepancies observed in the original and revised returns insofar as it was not the assessee’s endeavor to explain the brought forward losses in the revised return. The learned CIT(A), therefore, is to establish as to why the assessee has to be assessed as Artificial Juridical Person when he accepted the revised return filed by the assessee including the brought forward losses as a local authority.
11. In the result, the Revenue’s appeal is dismissed and the cross objection filed by the assessee is considered allowed for statistical purposes.