IN THE ITAT HYDERABAD BENCH ‘B’
Assistant Director of Income-tax (Exemption) II, Hyderabad
A.P. Forest Development Corporation
IT Appeal No. 875(Hyd.) of 2011
[Assessment Year 2005-06]
MAY 4, 2012
Smt. Asha Vijayaraghavan, Judicial Member
This appeal filed by the Revenue is directed against the order of the CIT(A)-IV, Hyderabad dated 28.2.2011 for the assessment year 2005-06.
2. The only grievance of the Revenue in this appeal is against the relief granted by the CIT(A), by accepting the claim of the assessee for ex-emption of its income under S.11 of the Income-tax Act, and also for exemption of its agricultural income under S.10(1) of the Act.
3. Facts of the case in brief are that the assessee, for the assessment year 2005-06 filed return of income, claiming exemption under S.11 of the Act, and thereby declaring income at Rs. NIL. The assessment was re-opened on 26.3.2007 and re-assessment order was passed by the assessing officer on 31.1.2007, determining the total income of the assessee at Rs. 9,67,92,152. On appeal by the assessee, by way of order dated 15.8.2008, the CIT(A), allowed the appeal of the assessee for statistical purposes, with a direction to the assessing officer to re-examine the case, along the lines suggested by the ITAT in assessee’s own case for the assessment year 2003-04.
4. The assessing officer thereafter passed the consequential assessment order dated 31.12.2009, under S.143(3) read with S.250 of the Act, whereby in the first place the assessing officer noticed that the assessee corporation extended a loan to the Government of Andhra Pradesh, which is founder of the assessee-corporation and holding such advancing of money as violative of the provisions of S.13(1)(d) read with S.11(5) of the Act. Referring to the explanation of the assessee that it was appointed by the State Government as its agent for the payment of wages to the beedi leaf collectors and has utilised sometimes its “own funds” for effecting the sales of beedi leaves on behalf of the State Governments, the assessing officer taking serious cognizance of the harmful effects of smoking and incalculable damage to health of the people done by smoking, concluded that what is committed by the assessee is more than a mere violation of the provisions of S.13(1(d) read with S.11(5) of the Act. He also noted that the Forest Department as a wing of Government of Andhra Pradesh is getting a rent of Rs.10 per Ha upto financial year 2000-01 and Rs. 20 per Ha from the financial year 2001-02 for total extent of land of 84,654 Ha leased to the assessee, and even this transaction is directly hit by the provisions of S.13(1)(c)(ii) read with S.13(3)(a) and (b) of the Act. While arriving at such a conclusion, he found no merit in the plea of the assessee that what was collected was only a nominal rent and any exception can be taken and violation of the provisions of S.13(1)(c)(ii) read with S.13(3)(a) and (b) of the Act can be attributed, only if unreasonable amounts of rent are charged. Thereafter, he proceeded to complete the assessment, determining the income of the assessee at Rs. 11,38,73,120, rejecting the claim of the assessee with regard to even agricultural income claimed as exempt under S.10(1) of the Act, vide order of assessment dated 31.12.2009 passed under S.143(3) read with S.250 of the Act, in the following manner-
|(a)||Other Income||Rs. 1,27,07,596|
|(b)||Income claimed as agricultural income||Rs.10,11,65,524|
5. During the course of appellate proceedings before the CIT(A), the learned Authorised Representative submitted that the assessee is a fully owned State Government Corporation and is administered by the Government. It is a charitable institution established with the main intention of promoting green cover in forest areas by agricultural operations, raising industrial plantation and preservation of forest environment. It was also averred that the surplus generated is being ploughed back for the above purposes only and not a single rupee was parted in the form of dividends or profits to the share holders, viz. the State Government. The assessee also submitted a copy of the note filed before the assessing officer, explaining the nature of agricultural operations undertaken by it during the year. It was averred that all the plantations are grown by it by performing manually and mechanically all agricultural operations. It was submitted that the assessee had contended that the income from agriculture is exempt under S. 10(1) of the Act, regardless of its application. It was further submitted that the income from other sources for the year was a loss, as there was no other income liable to tax. It was contended that even if there was any surplus income, being charitable institution and having complied with all the requirements of S.11 to 13, no income was liable to tax. It was averred that the assessing officer was guided by his own personal views in making assessment and many of the issues pointed out in the assessment order were not put to the assessee for being explained.
6. It was also submitted before the CIT(A) that the assessing officer has not denied that the assessee was carrying on agricultural operations and thereby raising plantations. However, the assessing officer, observing that the assessee had not obtained any licence or any exemption from payment of market fees at 2% on Eucalyptus and Cashew sales under the Sales Tax Act, held that there was violation of sales tax Act, while effecting the sale of agricultural produce. Similarly, in respect of the Bamboo sales also, the assessing officer opined that it was not permissible to cut the bamboos and therefore, the assessee’s raising bamboo plantation and cutting the same for sale was contrary to the National Forest Policy. In respect of the sale of Coffee plantation and pepper also, the assessing officer pointed out that they were non-forest activities and therefore, the said plantations were raised in violation of Forest laws. With regard to Red Sanders also, it was held that such cultivation was not done by the assessee Corporation and that the said produce was belonging to the forest department of the State Government. The assessing officer, therefore, concluded that such cultivation also offended the forest laws and forest policy assuming that the assessee itself was growing the Red Sanders Plantation. The assessing officer concluded in the final analysis that the exemption in respect of agricultural income claimed by the assessee cannot be granted, as the agricultural operations in question have been done by the assessee in violation of various legal provisions and other forest laws or forest policies of the State. Disputing these findings of the assessing officer, it was argued that the definition of the agricultural income as given in S.2(1A) of the Act, nowhere states that if in carrying on an agricultural activity, there is any violation of law, it ceases to be an agricultural income. It was also argued that even if there is any violation of the State Act or any Central Act or any forest policy, it is for the concerned authorities to take action or penalise the assessee corporation and not for the assessing officer to take up the cause of other departments. It was also contended that the assessee’s activities are being monitored by the State and Central Governments on a continuous basis, and therefore, as long as it is accepted that the plantations were raised by carrying on agricultural operations, any income derived therefrom would be agricultural income, exempt under S.10(1) of the Act.
7. As for the violation of provisions of S.13, the learned Authorised Representative submitted that the sum of Rs. 1,43,00,000 amounts to application of income and is not a loan or even an investment made for earning interest. Referring to the explanation dated 8.12.2009 submitted before the assessing officer, it was reiterated that the money spent by the Corporation was on behalf of the State Government, in pursuance of the role assigned to the assessee in relation to beedi leaf collectors, and it amounts to application and the interest is only compensatory in nature and represents the actual cost suffered by the Corporation towards monies spent by it on behalf of the State Government. It was averred that all such amount had been spent for the purpose of creating employment for the down trodden people as per the Directions of the State Government itself.
8. Besides making elaborate submissions on the above lines, learned Authorised Representative also filed a petition under Rule 46A of the Income-tax Rules, for admission of additional evidence during the appellate proceedings before the CIT(A). It was claimed in the said petition that the assessment was made without seeking proper clarifications from the assessee-Corporation. After receipt of the assessment order, therefore, the assessee had forwarded the same to the Forest Department of the State Government for issuing appropriate clarifications on the violations pointed out by the assessing officer. Accordingly, the Principal Chief Conservator of Forests, Government of A.P. had addressed a letter, bearing No.5876/2010/F5 dated 8.2.2010 to the DDIT(E)-II, Hyderabad explaining the position and clarifying the issues directly. Since the said reference was made after passing of the assessment order, the same, according to the assessee, was required to be admitted as additional evidence. The CIT(A) forwarded the petition so filed by the assessee before him to the assessing officer for his comments. The assessing officer submitted his report thereon dated 4.2.2011 to the CIT(A), wherein though he did not offer any comments on the contents of the letter of the Principal Chief Conservator of Forests of Govt. of A.P. dated 8.2.2010, he reiterated his observations in the assessment order with regard to violation of the conditions of S.13, as also observations regarding harmful effects of smoking, etc. and justified the view taken by him in the assessment order.
9. The CIT(A), after detailed consideration of the arguments of the assessee, as also the report of the assessing officer dated 4.2.2011, held in the first place that insofar as the loan of Rs. 11.43 crores by the assessee to the State Government is concerned, there was no violation of the provisions of S.13(1)(c) read with S.13(3) of the Act. The reasons discussed by the CIT(A) for arriving at this conclusion are 8.4 of the impugned order dated 28.2.2011, on pages 15 to 17 thereof, which in brief are as under-
(a) Government is not a taxable entity. It is the authority that levies taxes and is not itself subject to the tax statute enacted by the legislature and that is the reason why “Government” has not been included in the definition of the term “person” under S.2(31)of the Act.
(b) The Government does not have any financial stake in the assessee’s Corporation. Despite having made substantial contribution, it is not ‘a person who has a substantial interest’ in the assessee corporation and it is not entitled to any part of the profits.
(c) Even if funds are given by the assessee to the State Government as an ‘advance’, the Government did not get any ‘personal benefit’ nor granted any personal benefit to any other interested person of the assessee corporation. It is clear that no personal advantage or profit or privilege accrued to the Government itself or any other interested person in the present case.
(d) Even if funds were provided by the assessee to the State Government as an ‘advance’, the same cannot be considered as a violation of the provisions of S.13, as the assessee was duly compensated by way of interest by the State Government and further since the funds were given to the State Government only, the security for the funds so given also could not have been doubted and consequently, there was no violation of the provisions of S.13(1)(c) read with S.13(3) of the Act.
(e) It is clear that the funds were advanced to the State Government by the assessee only as a temporary arrangement, as per the directions of the State Government itself. It is not a part of the money accumulated or set apart as per the provisions of S.11(2)(b).
(f) Further the action of the assessee in advancing funds to the State Government cannot be considered as a ‘deposit’ or ‘investment’, contemplated under S.11(5), which is indeed made with a view to earn regular interest/income. Whatever interest is received by the assessee in the instant case is only of compensatory nature and the same has not been earned on account of any deposits or investments made by the assessee with a view to earn any income.
10. With regard to payment of rent to the Government of A.P. is concerned, the CIT(A) firstly noted that the Government of A.P. itself cannot be considered as an ‘interested person’ in view of the discussion made by him in the context of the advance made by the assessee to the State Government, summarised above. He also agreed with the assessee that the rent paid to the Government of A.,P. for the lease land is not excessive or unreasonable by any standards, and the assessing officer has not brought on record any evidence or instance to establish that the lease rentals so paid or unreasonable ore excessive. Accordingly, he held the view that the assessee cannot be charged with violation of the provisions of S.13(1)(c) even on this count.
11. Relying on the decisions of the Apex Court in the case of EP Royoppa v. State of Tamil Nadu 1973 Ind Law SC 66; and of the Hob’ble Gujarat High Court in the case of Surat City Gymkhana v. Dy. CIT  254 ITR 733/125 Taxman 82, the CIT(A) held that the burden to establish any mala fide is heavily on the person who alleges it, and the exception of S.13(1)(c) has to be stated and established by the person who seeks to invoke and apply the exception. As against this settled position of law, the CIT(A) observed that the assessing officer in the instant case, proceed to deny the exemption to the assessee without establishing his statement and opinion regarding ‘benefit’ to any ‘interested persons’, leave alone the State Government, which, according to him, cannot be considered as a person within the definition of that term in the Income-tax Act.
12. As for the assessee’s claim for exemption under S.10(1) in respect of agricultural income, the CIT(A) held that the assessing officer was not justified in denying the same, as he has not disputed that the assessee has carried out agricultural operations. He also took note of the contents of the letter of the Principal Chief Conservator of Frosts, A.P. dated 10.2.2010, which was filed during the course of appellate proceedings by way of additional evidence, on which the assessing officer has not offered any comments in his remand report, despite opportunity given to him.
13. Further, placing reliance on the decisions of the Tribunal, in that behalf, he also found no merit in the conclusion of the assessing officer that the assessee was not registered under S.43(1) of AP Charitable and Hindu Religious Institutions and Endowments Act, 1987 and as such it was not eligible for exemption under S.11 of the Act.
14. The Commissioner of Income-tax(Appeals) thus allowed the appeal of the assessee.
15. Aggrieved by the order of the Commissioner of Income-tax(Appeals) allowing the appeal of the assessee, Revenue filed the present appeal before us.
16. Effective grounds of the Revenue in this appeal read as under-
1. The order of the CIT(A) erred both on facts and in law.
2. The learned CIT(A) erred in allowing the exemption U/s. 10(1) and U/s. 11 of the I.T. Act without going into the merits of the case.
3. The learned CIT(A) erred in not considering the loan of Rs.11.3 Crores to the Govt. of A.P. which is a founder of the Trust as a violation of provisions of Sec.11(5) of the I.T. Act, 1961.
4. The learned CIT(A) ought not to have considered the claim of the assessee that income derived on the sale of yields like Eucalyptus, cashew, sandal wood, coffee, bamboo, pepper, medical plants, beedi leaves, etc. as agricultural income and is exempt u/s. 10(1) of the I.T. Act, 1961.
5. The learned CIT(A) ought to have consxid3ered the observations made by the Assessing officer in regard to growing and sale of beedi leaves which will lead to hampering to health and most injurious to the public and not as a charitable activity in the interest of public.
6. The learned CIT(A) ought to have cosndier4ed that the assessee is not Registered U/s. 43(1) of A.P. Charitable and Hindu Religious Institution and Endowments Act, 1987.”
16.1 The Learned Departmental Representative, strongly supporting the order of assessment, submitted that there was clear violation of the provisions of S.13(1)(c) read with S.13(3) and S.13(1)(d) read with S.11(5) of the Act, and as such the assessing officer was very much justified in rejecting the claim of the assessee for exemption of its income under S.11 of the Act. Taking us through the relevant paras of the order of assessment, he submitted that the Government of Andhra Pradesh holds 51% of the shares in the assessee corporation and also the founder of the corporation, and that being so, the transaction of advancing of an amount of Rs.11,43,00,000 by the assessee to the State Government, charging interest of Rs.33,46,008 only thereon, was clearly hit by the two provisions viz. 13(1)(c) read with S.13(3) and S.13(1)(d) read with S.11(5) of the Act. He submitted that in terms of S.13(3)(a), an author of the Trust or the founder of the institution is one such person under S.13(3)(a), who can be said to be an ‘interested person’ and in the instant case, the State Government is an interested person, who has secured benefit of huge sum of Rs.1.43 crores as advance. He further submitted that in view of application of the said advance towards beedi leaf collectors and beedi leaf sales, the transaction of the advancing the amount by the assessee is not mere violation of the provisions of S.13 noted above, but is against the public health and State policies in that behalf, as smoking has serious harmful effects on the health and hygiene of the public at large. He invited our attention in that behalf to the elaborate discussion made by the assessing officer in that behalf in the impugned assessment order. The lease rent paid by the assessee to the State Government, which is the founder and author of the assessee-organisation is also in violation of the provisions of S.13(1)(c)(ii) read with s.13(3)(a) and (b) of the Act, irrespective of the quantum of lease rent paid or its reasonableness. He also strongly supported the order of the assessing officer with regard to denial of exemption in respect of agricultural income claimed by the assessee in terms of S.10(1) of the Act, and submitted that the assessee has violated various statutory provisions and as such the agricultural income claimed has no legal sanctity.
17. The learned counsel for the assessee on the other hand, reiterating the contentions urged before the lower authorities, strongly supported the order of the CIT(A). He submitted that the State Government, which has founded and authored the assessee-corporation is not a ‘person’ within the scope of the Income-tax Act, much less an interested person, and even otherwise, the State Government has not got any benefit whatsoever from the assessee-corporation either by way of profits or dividends. He submitted that the advancing of Rs. 11.43 crores by the assessee to the State Government was not by way of any deposit or investment with the State Government, but only by way of incurring the expenditure from out of its own funds on behalf of the State Government, while playing the role assigned to it by the State Government, as an agent for the payment of wages to Beedi leaf collectors and for effecting sales of beedi leaves on behalf of the State Government. The expenditure thus incurred by the assessee from out of its own funds has been reimbursed by the State Government, with some nominal interest, which is only of compensatory nature. He submitted that the lease rent paid by the assessee to the State Government is only nominal and not unreasonable or excessive so as to confer any benefit to the founder/author of the assessee corporation, and so it cannot come in the way of the assessee’s claim for exemption under S.11 of the Act.
18. The learned counsel for the assessee further submitted that the assessee is very much entitled for exemption under S.10(1) of the Act in respect of agricultural income, as the agricultural operations were carried on, applying human skill, labour as well as mechanical operations, and the plantations out of which income is mainly derived are as under-
He submitted that once it is established that the assessee has carried out the agricultural operations, the income derived by the assessee from out of such operations is agricultural income, eligible for exemption under S.10(1) of the Act, it is neither expected nor necessary for the assessing officer to go into the question whether the assessee has violated any provisions of law in the course either such agricultural operations or its sale of agricultural produce. He submitted that it is not the case of the assessing officer that what is derived by the assessee is not agricultural income, but it is his contention that while carrying on the operations, there was alleged infraction of statutory provisions. In this context, he submitted that even if there is any infraction of law, such an infraction does not change the nature or character of the agricultural income. In any event, it is submitted that all the activities of the assessee are approved by the State Government, viz. Forest Department and also by the Government of India, Ministry of Environment and Forests, as clarified by the Principal Chief Conservator of Forests of Government of Andhra Pradesh by his letter dated 8.2.2010.
19. Once agricultural income of the assessee is accepted to be exempt under S.10(1) of the Act, there is no income assessable in the hands of the assessee, because the total income as per the Act has to be first determined before applying the provisions of S.11 of the Act, and in determining the total income, agricultural income has to be first excluded under S.10(1) of the Act, and hence on this very preliminary ground itself, no part of the sum of Rs. 13,55,48,526 is liable to tax regardless of application of S.11 of the Act. He further submitted that the income from other sources is a negative figure, i.e. excess of expenses of Rs. 2,16,75,403 and not income of Rs. 1,27,07,596 as computed and assessed by the assessing officer, and on this issue the CIT(A) vide para 8.10 of his order directed the assessing officer to verify this figure while giving effect to his order. He further submitted the amount of income applied towards activities of the Corporation out of other sources, viz. increasing the green cover in the State is Rs. 2,50,63,441, which is more than the income assessed under other sources and the taxable component of the other income. Even if it is taken at Rs. 1,27,07,596 as assessed, as the application is more, and therefore, no portion of this amount is liable to tax, and in any event there is no taxable income from other sources. He also submitted that for claiming the benefit of S.11 of the Act, it is only registration under S.12A of the Act that is warranted and registration of the assessee-corporation under S.43(1) of the A.P. Charitable & Hindu Religious Institutions Endowments Act, 1987 is not mandatory. Reiterating these contentions, the assessee has also filed written submissions before us.
20. We have considered the rival submissions and perused the orders of the lower authorities and other material on record. We find that the CIT(A) has passed a well reasoned speaking order, dealing with each aspect of the matter taken up by the assessing officer in the impugned assessment order for denying the claim of the assessee for exemption of its income under S.11 of the Act, and for exemption of its agricultural income under S.10(1) of the Act. As correctly observed by the CIT(A), Government is not a taxable entity, as it is the authority that levies taxes and is not itself subject to the tax statute enacted by the legislature. The founder and author of the assessee-corporation, the State Government, which is, therefore, not a ‘person’ in terms of S.2(31) of the Income-tax Act, and consequently it cannot be held to be an interested person. Even otherwise, it is evident from the orders of the lower authorities that the State Government has not benefited either by way of profit or dividend from the activities of the assessee-corporation. We find that the amount of advance of Rs. 11.43 crores by the assessee to the State Government is merely by way of incurring expenditure on behalf of the State Government, and it is neither by way of deposit nor investment which is prohibited by the provisions of S.11(5) of the Act. The interest received by the assessee from the State Government is also only of compensatory nature to reimburse the cost incurred by the assessee for making the advances in question. The harmful effects of the smoking on public health and other issues taken up by the assessing officer, as against public /State policy, are beside the point, as the assessee-corporation is a creature of the State itself, and its activities are guided, monitored and controlled on continuous basis by the authorities of the State Government, in accordance with the policies laid down by the Central and State Governments from time to time. For these very reasons, even the rents paid by the assessee corporation for the lands taken on lease from the State Government cannot constitute violation of the provisions of S.13 of the Act.
21. Even with regard to the assessee’s claim for exemption under S.10(1) of the Act in respect of agricultural income, we find no merit in the contentions of the Revenue in this appeal. The only aspect that clinches the nature of the agricultural income is whether agricultural operations were carried out or not. Once it is established that such agricultural activities are carried out by the assessee, assessee is entitled for exemption in respect of such agricultural income under S.10(1) of the Act, irrespective of any violation of the statutory provisions as alleged by the assessing officer in the present case. Such infraction of the statutory provisions may expose the assessee to the risks of being penalized or punished under the relevant statutes, but the same do not change nature of the agricultural income, and as such, cannot be fatal to the assessee’s claim for exemption under S.10(1) of the Act.
22. It is pertinent to mention at this juncture that when the letter of the Principal Chief Conservator of Forests, A.P. dated 10.2.2010, clarifying various points of objection raised by the assessing officer while denying the assessee’s claims for exemption, was filed by way of additional evidence before the CIT(A), the CIT(A) forwarded the same to the assessing officer for his comments. In his remand report submitted to the CIT(A), the assessing officer though reiterated his stand denying the claims of the assessee for exemption, has not offered any comments on the contents of the said letter dated 10.2.2010 explaining the position on various aspects.
23. As for the issue relating to non-registration of the assessee under S.43(1) of the A.P. Charitable and Hindu Religious Institutions and Endowments Act, 1987, it is the consistent view taken by the co-ordinate Benches of the Tribunal, as in Kamalakar Memorial Charitable Trust v. DIT  131 ITD 117/9 Taxmann.com 132 (Hyd.), that mere fact that the assessee-trust is not registered under the provisions of the A.P. Charitable and Hindu Religious Institutions and Endowments Act, 1987, shall not render the assessee trust as a non-charitable one, and registration under S.12A of the Income-tax Act alone is enough for an assessee to claim exemption in respect of its income under S.11 of the Act. Since the order of the CIT(A) on this aspect is in consonance with this consistent view taken by the Tribunal on this aspect, we find no infirmity in the same.
24. In the light of the above discussion, we find that the present appeal of the Revenue is devoid of merit, and the same is accordingly dismissed.
25. In the result, Revenue’s appeal is dismissed.