WATCO, Bhubaneswar V. CIT(Exemptions), Hyderabad

ITA 78/CTK/2021

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 2450 (ITAT-CUTTACK)
• Duration Of Justice: 1 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2020-2021
• Appeal Filed On: 21-07-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Opportunity of being heard
• Section: 40A(3); 12A; 12AA

Judgement Text

आयकर अपीऱीय अधिकरण, कटक न्यायपीठ,कटक IN THE INCOME TAX APPELLATE TRIBUNAL CUTTACK BENCH CUTTACK श्री जाजज माथन, न्याययक सदस्य एवं श्री अरुण खोड़पऩया ऱेखा सदस्य के समक्ष । BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER AND SHRI ARUN KHODPIA, ACCOUNTANT MEMBER ITA No.78/CTK/2021 (नििाारण वषा / Asses s m ent Year :2020-2021) W AT CO, Ground F loor, Unn ati Bha wan, Satyana ga r, Bhuba nes war P AN No. AAB CW 7 947 A ............ ......As sess ee Versus CIT (E xem ption ), H yde rabad ... ......... ........ Re venue Shri B.R.Pattnaik, AR for the assessee Shri Suresh Shivnandan, CIT-DR for the Revenue Date of Hearing : 27/09/2022 Date of Pronouncement : 27/09/2022 आदेश / O R D E R Per Arun Khodpia, AM : This appeal is filed by the assessee against the order passed u/s 12A of the Income Tax Act, 1961 by the Commissioner of Income Tax (Exemptions), Hyderabad, dated 06.12.2019, on the following grounds :- 1. The order passed by the learned CIT(Exemption), Hyderabad is capricious, invalid, illegal and bad in law. 2. The learned Commissioner (Exemption) erred in rejecting our application for registration u/s 12AA of Income Tax Act on the ground that the appellant was carrying on activities in the nature of commerce & the object of the appellant were not to be treated as for Charitable purpose u/s 2(15) of Income Tax Act, 1961. 3. The appellant craves leaves to amend, modify, oblige, add to or resigned any or all of the above ground. ITA No.78/CTK/2021 2 2. Brief facts of the case are that the assessee, a wholly owned not- for-profit company set up by Government of Odisha vide notification No. 17402-HUD-13-REFM-65-SCH-17-0065/2014/HUD dated 09.07.2015 in the name of Water Corporation of Odisha Limited (In short „WATCO‟). WATCO was incorporated on 24.11.2015 to oversee the ring-fenced operation of water supply production & distribution system, operation & maintenance of sewage collection, treatment and operation & maintenance of sewerage network, sewage treatment & disposal. Notification No. 17402-HUD-13-REFM-65-SCH-17-0065/2014/HUD dated 09.07.2015 is extracted as under:- ITA No.78/CTK/2021 3 3. The initial authorized and paid-up capital of the Company shall be Rs. 100 Lakh divided into 1,00.000 equity shares of Rs. 100 each. 4. The Registered Office of the Company will be in Bhubaneswar, Odisha. 5. The main objectives of the Company will be – (i) To take over from the PHEO, the functions in regard to Operation & Maintenance of water supply and sewerage services at present being handled by it together with assets and liabilities pertaining to such activities; (ii) To carry on the function of Operation & Maintenance of production, distribution and management of water supply and sewerage services including sewage treatment disposal. (Hi) To render all necessary services in regard to Operation & Maintenance of water supply and sewerage to consumers and on request to private institutions or individuals also. (iv) To take up Operation & Maintenance of water supply and sewerage facilities to be developed in the existing and developing new regions in future. (v) To assess the adequacy of water supply & sewerage services & Infrastructure. (vi) To prepare Plan & Schemes for & Implement creation of capital assets in water supply system & to prepare plans and schemes for Operation & Maintenance and supply of drinking water to the required national standards; (vii) To prepare Plan & Scheme for creation of capital assets in sewerage network & treatment and to prepare plans and schemes for Operation & Maintenance of Sewerage, Sewage treatment and disposal of sewage to the required national standards; (viii) To collect water and sewerage service charges on behalf of the urban local body; (ix) To review and establish revision of the tariff, and charges of water supply and sewerage systems from time to time and implement in the areas of Urban Local Bodies; (x) To review annually the technical financial, economic and other aspects of water supply and sewerage system of every scheme; (xi) To outsource part of its activities to achieve higher efficiencies and outcomes in the achievement of its business goals. 6. The following persons/entities shall be promoters of the company and subscribers to the Memorandum and Articles of Association of the Company:— Sl.No. Name of Subscriber No. of Equity shares to be taken (i) Governor of Odisha represented by Secretary, Housing & Urban Development Department, Government of Odisha. 51,000 (ii) Bhubaneswar Municipal Corporation 26,000 ITA No.78/CTK/2021 4 (iii) Public Health Engineering Organisation 5,000 (iv) Orissa Water Supply and Sewerage Board 5,000 (v) Khurda Municipality 5,000 (vi) Jatni Municipality 5,000 (vii) Bhubaneswar Development Authority 3,000 7. The WATCO Ltd. shall initially take over the functions of PHEO in line with the objectives above for the Bhubaneswar Municipal Corporation, Khurda and Jatni Municipalities area and any other Urban Local Body so assigned through Gazette Notification in Housings Urban Development Department from time to time. By Order of the Governor G. MATHI VATHANAN Commissioner-o/m-Secretary to Government 3. Subsequently, on 16.08.2017, the assessee has filed an application in Form 10A for seeking registration u/s 12A of the Income Tax Act, 1961 („the Act‟ in short) on 30.06.2019. The said application was rejected by Commissioner of Income Tax (Exemption), Hyderabad with certain observations, vide order u/s 12A dated 06.12.2019. 4. Aggrieved by the said order of CIT(E) the assessee is in appeal before us. 5. At the outset, the Ld AR of the assessee had explained the facts of the case. The main facts and submissions of the Ld AR, relevant for adjudicating the issue, are as under:- 1. Auhtorised and paid up share capital of the WATCO was Rs. 100 Lakh divided into 1,00,000/- shares of the Rs. 100/- each. Regarding share capital, it is submitted by the Ld AR that the share holder of the WATCO are consisting of either Government of Odisha or associated institutions run by Government of Odisha, thus WATCO is a wholly owned company of Govt. of Odisha. ITA No.78/CTK/2021 5 2. According to the notification dated 09.07.2015 (supra) the Members of the Board of WATCO are government employees or nominated by the government. 3. Original and revised objectives of the WATCO were as under:- Clause No of the Main objects Original object clause Revised object clause (viii) To collect water and sewerage service charges on behalf of the Urban Local Bodies i.e. BMC, Khorda and Jatni Municipalities. To collect water and sewerage user fees for sustaining the service provision without any intention of making profit on behalf of the urban local bodies i.e. BMC, Khorda and Jatni Municipalities. (ix) To review and establish revision of water and sewerage service charge from time to time To review and establish revision of water and sewerage user fee from time to time to accommodate the cost of escalation in service provision without any intention of making any profit and implement in the areas of the Urban Local Bodies. (xi) To outsource part of its activities in the achievement of its business goals To outsource part of its activities to achieve higher efficiencies and out comes in the achievement of the Company's main objective. 4. It is submitted that revised objective of the WATCO were approved by Board of directors of the company and also by shareholders in AGM dated 28.11.2018. These amended objectives along with other necessary documents were submitted to the Ld CIT(E) on 22.11.2019 in his camp at Bhubaneswar. 6. CIT(E) has refused to grant registration u/s 12AA with his observations in the order. Extracted as under:- 3. Rejection of earlier application filed on 22.02.2017: The assessee has earlier filed application in Form 10A seeking registration u/s. 12A of the Act on 22.02.2017 and the said application has been rejected vide order dated 16.08.2017. ITA No.78/CTK/2021 6 The relevant portion of the order is reproduced below for ready reference: "2. On going through the Aims & Objectives of the Society, it is noticed that some of the objects speaks as under: "(vi) Creation of capital assets in water supply system. (vii) Creation of capital assets in sewerage. (viii) To collect water and sewerage service charges on behalf of the Urban Local body, (ix) To review and establish revision of water and sewerage service charges from time to time. (xi) To outsource parts of its activities in the achievement of its business goals". 3.1 During the present proceedings, the assessee has submitted that they have carried the amendments to the MoA and filed a copy of Resolution- dated 28.11.2018, wherein certain amendments were carried out to the objects. However, the said Resolution has not been registered before the RoC. Hence, the objects as appearing in the original MoA are valid as on date. Further, the application of the assessee has been rejected based on such objects. Hence, there is no change in the facts of the case. Therefore, the application of the assessee filed in Form 10A for registration u/s. 12A of the Act is rejected. 7. On observation of the Ld CIT(E) in his order that ―Copy of Resolution dated 28.11.2018 wherein certain amendments were carried out to the objects. However, the said Resolution has not been registered before ROC. Hence, the objects as appearing in the original MOA are valid as on date.‖ Ld AR submitted that such an bald observation made by the Ld CIT(E) was without providing an opportunity of being heard to the assessee or to rebut with supporting documents. 8. It is further submitted by the Ld AR that, Ld CIT(E) has not appreciated the facts of the case correctly and held that the object of the appellant are in the nature of business/commerce and thus not falls ITA No.78/CTK/2021 7 within the ambit of charitable activity as prescribed by section 2(15) of the Act. The appellant thus has strongly rebutted to the assertion of the Ld CIT(E). 9. Before arguing for the main grounds of this appeal, it was the prayer of the Ld AR to admit an additional ground as per Rule 11 of the Income Tax (Appellate Tribunal) rules 1963. The permission was granted. Additional ground pressed by the assessee was as under:- ―On the facts and in the circumstances of the case, the appellant may kindly be held as a ―State‖ making it not liable to pay income tax under the Income Tax Act, 1961 as per the provisions of Article 12 read with Article 289 of The Constitution of India.‖ 10. Written submission in support of the additional ground submitted in paper book was as under:- Written submission for Additional Ground 1. The appellant has already sought the leave of this Hon'ble Bench to take the following additional ground. "On the facts and in the circumstances of the case, the appellant may kindly be held as a "State" making it not liable to pay income-tax under the Income tax Act, 1961 as per the provisions of Article 12 read with Article 289 of The Constitution of India." 2. Now, in support of this additional ground, the appellant would like to present its submission in the following paragraphs. 3. Article 12 of the Constitution of India defines the term "state" as under: Definition In this part, unless the context otherwise requires, the State includes the Government and Parliament of India and the Government and the Legislature of each of the States and all local or other authorities within the territory of India or under the control of the Government of India ITA No.78/CTK/2021 8 4. Article 289(1) of the Constitution of India says that "The property and income of a State shall be exempt from Union taxation." 5. In the case of Som Prakash Rekhi vs Union Of India & Anr 1981 AIR 212, 1981 SCR (2) 111, Hon'ble Apex Court in paragraph 97 of the judgment dated 13.11.1980 has held as under: "Let us cull out from Airport Authority (supra) the indicia of "other authorities.........under the control of the Government of India" bringing a corporation within the definition of "the State". The following factors have been emphasised in that ruling as telling, though not clinching. These characteristics convert a statutory corporation, a government company, a cooperative society and other registered society or body into a State and they are not confined to statutory corporations alone. We may decoct the tests for ready reference: 1. "One thing is clear that if the entire share capital of the corporation is held by Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of Government." 2. "Existence of "deep and pervasive State control may afford an indication that the Corporation is a State agency or instrumentality." 3. "It may also be a relevant factor........whether the corporation enjoys monopoly status which is the State conferred or State protected." 4. "If the functions of the corporation are of public importance and closely related to governmental functions, it would be a relevant factor - in classifying the corporation as an instrumentality or agency of Government." 5. "Specifically, if a department of Government is transferred to a corporation, it would be a strong factor supportive of this inference" of the corporation being an instrumentality or agency of Government." 6. Applying the aforesaid tests, as enunciated in the case of Som Prakash Rekhi vs Union of India, it has been held in the case of Smt. Sapna Sanjay Raisoni v. ITO [2016] 70 taxmann.com 7 (Pune - Trib.) that Maharashtra State Road Transport Corporation is a 'State' and therefore payment to it could not be disallowed under section 40A(3) being protected by rule 6DD(b). [Annexure-A; Page-7-14] 7. In the case of DCIT v. Vinod Arora 137 taxmann.com 450 (Amritsar - Trib.), the Hon'ble Bench, applying the tests as ITA No.78/CTK/2021 9 propounded in the case of Som Prakash Rekhi vs Union of India, has also held that payment to (i) M/s Rajasthan State Beverages Corporation Ltd and (ii) M/s Rajasthan State Ganganagar Sugar Mills Ltd. would not be hit by the provisions of section 40A(3) of IT Act, 1961 as these undertakings fall within the meaning of the term "Government". [Annexure-B; Page 15-21] 8. Similarly, in the case of Maharashtra State Board of Technical Education v. ITO [2019] 104 taxmann.com 98 (Mumbai - Trib.) it has been held that Maharashtra State Board of Technical Education, a statutory body established under Maharashtra State Board of Technical Education Act, 1997, being under complete superintendence, and control of State Government financially as well as administratively fall under definition of 'State' as per Article 12 of Constitution of India and therefore, its income is not chargeable to tax.[Annexure-C; Page 22-39] 9. Recently, this Hon'ble Bench in the case of State Council for Technical Education & Vocational Training v. CIT(Exemptions), Hyderabad in ITA No.414/CTK/2018 has, vide order dated 17.05.2022, held that the appellant assessee is a "State" under the Article 289 of the Constitution of India. [Annexure-D; Page 40-45] 10. Pertinent to mention here that CIT (Exemption), Hyderabad has refused to grant 12AA registration to State Council for Technical Education & Vocational Training and against this order it has filed the aforesaid appeal bearing ITA No.414/CTK/2018. 11. Now coming back to the present case, the appellant would like to submit that if the tests as propounded in the case of Som Prakash Rekhi vs Union of India are applied to the present case then the inescapable conclusion that can be drawn in this case is that the appellant is a "state". 12. The share holding pattern of the appellant is as follow and therefore it fulfils the 1st test as per the aforesaid Hon'ble Apex Court order: Name No of shares to be subscribed Governor of Odisha represented by Secretary, Housing & Urban Development Department, Government of Odisha 51,000 Bhubaneswar Municipal Corporation 26,000 ITA No.78/CTK/2021 10 Public Health Engineering Organization 5,000 Water Supply Sewerage Board 5,000 Khurda Municipality 5,000 Jatni Municipality 2,000 [Refer Page-24 of original paper book dated 27.05.2022] 13. Members of the Board of WATCO are as follows and as the majority of Board of Directors are government employees, the 2 nd test regarding deep and pervasive State control is also fulfilled. ACS/Pr. Secretary/Commissioner-cum- Secretary, Housing & Urban Development Department. Chairperson Commissioner, Bhubaneswar Municipal Corporation Director Vice Chairperson, Bhubaneswar Development Authority Director Representative of Finance Department Director Engineer-in-Chief/Chief Engineer, Public Health Engineering Organisation Director Member Secretary, Orissa Water Supply and Sewerage Board Director Engineer-in-Chief/ Chief Engineer any professional (to be posted by Government) Managing Director 3 Nos. of Independent Directors to be nominated by the Government (at least one of whom shall be women) Ex-Officio Directors [Refer Page-22 of original paper book dated 27.05.2022] 14. WATCO, as empowered by Govt, of Odisha, is the sole governmental agency engaged in supply of water in its area of operation and therefore the 3 rd test i.e. "monopoly status which is the State conferred or State protected" is also fulfilled. 15. WATCO is engaged in water supply and sewerage work and therefore the 4 th test i.e. "functions of the corporation are of public importance and closely related to governmental functions" is also fulfilled. ITA No.78/CTK/2021 11 16. As per NOTIFICATION No.l7402-HUD-13-REFM-65-SCH-17- 0065/2014/HUD dated 09.07.2015 [Refer Page-23 of original paper book dated 27.05.2022] the main objectives of the Company i.e. WATCO is to take over from the Public Health Engineering Organization (PHEO), the functions in regard to Operation & Maintenance of water supply and sewerage services at present being handled by it together with assets and liabilities pertaining to such activities. 17. Thus, the 5 th test regarding transfer of a department of Government to a corporation is also fulfilled in the present case. 18. It is therefore submitted before this Hon'ble Bench that the Appellant may kindly be declared as a state making it not liable to pay income-tax under the Income tax Act, 1961 as per the provisions of Article 12 read with Article 289 of The Constitution of India. 11. On the contrary, Ld DR has supported the orders of the Ld CIT(E) and submitted that the rejection order was justified, as the assessee was failed before the Ld CIT(E) to substantiate that the resolution passed for amended in objectives of the assessee company were registered with the ROC and hence the same could not be considered as valid. It is also submitted that the original objects of the company were not in the nature of charity and thus registration u/s 12AA of the Act cannot be granted. Thus, the Ld CIT(E)‟s order was justified and should be upheld. No arguments regarding additional ground were advanced. 12. We have considered the rival submissions, perused the material available on records and the judgments cited before us in order to prove the contentions by the Ld AR. 13. On perusal of the submission of the Ld AR with respect to additional ground taken the assessee shall be held as “State” and thus no tax can be levied on it under the income tax act. To examine on the ITA No.78/CTK/2021 12 facts that whether the claim of the assessee that it holds the status of “State” is correct or not, definition of the “State” under Article 12 of the Constitution of India, is drawn out as under: Article 12 states : “In this Part, unless the context otherwise requires, ―the state‖ includes the Government and Parliament of India and the Government and the Legislature of each of the States and all local or other authorities within the territory of India or under the control of the Government of India.“ 14. As per the above definition of “State”, if we check under which head the assessee company would fall, the probable answer is “Local or Other Authorities”. But, the definition of “Local or Other Authority” was not defined in the constitution or any other statute, however, a fundamental guidance was accorded by the Hon‟ble Apex Court in the case of Som Prakash Rekhi vs Union Of India (supra), wherein the Hon‟ble Apex Court has prescribed certain tests to determine as to whether an institution is „State‟ within the meaning of Article 12 of the Constitution of India or not. The conditions to claim eligibility of being a “State” as described in the said order by the Hon‟ble Apex Court, reads as under:- "Let us cull out from Airport Authority (supra) the indicia of "other authorities.........under the control of the Government of India" bringing a corporation within the definition of "the State". The following factors have been emphasised in that ruling as telling, though not clinching. These characteristics convert a statutory corporation, a government company, a cooperative society and other registered society or body into a State and they are not confined to statutory corporations alone. We may decoct the tests for ready reference: 1. "One thing is clear that if the entire share capital of the corporation is held by Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of Government." ITA No.78/CTK/2021 13 2. "Existence of "deep and pervasive State control may afford an indication that the Corporation is a State agency or instrumentality." 3. "It may also be a relevant factor........whether the corporation enjoys monopoly status which is the State conferred or State protected." 4. "If the functions of the corporation are of public importance and closely related to governmental functions, it would be a relevant factor - in classifying the corporation as an instrumentality or agency of Government." 5. "Specifically, if a department of Government is transferred to a corporation, it would be a strong factor supportive of this inference" of the corporation being an instrumentality or agency of Government." 15. We have carefully perused the submissions of the assessee (supra) regarding fulfillment of the aforesaid tests/conditions carved out by the Apex court and found that the assessee company has satisfied the said tests, thus, we hold that the assessee company falls under the definition of “State” within the meaning of Article 12 of the Constitution of India and, therefore, in our considered opinion entitle for immunity from the taxation under the provisions of Income Tax Act 1961 as directed under article 289 of constitution of India 1949, which read as under:- Article 289 in The Constitution Of India 1949 289. Exemption of property and income of a State from Union taxation (1) The property and income of a State shall be exempt from Union taxation (2) Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes ITA No.78/CTK/2021 14 of such trade or business, or any income accruing or arising in connection therewith (3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of government. 16. After thoughtful analysis of the facts, in the backdrop of aforesaid observations, mandates from the Article 12 & 289 of the Constitution of India and respectfully following the principle of law laid down by Hon‟ble Apex Court followed by coordinate benches of the ITAT, referred to supra, we are of the view that the WATCO, the assessee company hold the status of “State” within the meaning of Article 12 of the Constitution of India and entitle for immunity from taxation under the provisions of Income Tax Act 1961 as declared by Article 289 of the Constitution of India 1949. Consequently, the additional ground of the assessee stands allowed. 17. Since the additional legal ground of the assessee is allowed culminating that the income of the assessee is not taxable in terms of our aforesaid observations, the original ground Nos. 1, 2 & 3 of the appeal are became academic and thus needs no separate adjudication. 18. In the result appeal of the assessee allowed. Order dictated and pronounced in the open court on 27/09/2022. Sd/- (जाजज माथन) (GEORGE MATHAN) Sd/- (अरुण खोड़पऩया) (ARUN KHODPIA) न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य/ ACCOUNTANT MEMBER कटक Cuttack; ददनाांक Dated 27/09/2022 Prakash Kumar Mishra, Sr.P.S. ITA No.78/CTK/2021 15 आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to : आदेशाि ु सार/ BY ORDER, (Assistant Registrar) आयकर अपीऱीय अधिकरण, कटक/ITAT, Cuttack 1. अऩीऱाथी / The Appellant- W AT CO, Ground F loor, Unn ati Bha wan, Satyana ga r, Bhuba nes war 2. प्रत्यथी / The Respondent- CIT (E xem ption ), H yde rabad 3. आयकर आय ु क्त(अऩीऱ) / The CIT(A), 4. आयकर आय ु क्त / CIT 5. पिभागीय प्रयतयनधध, आयकर अऩीऱीय अधधकरण, कटक / DR, ITAT, Cuttack 6. गार्ज पाईऱ / Guard file. सत्यापऩत प्रयत //True Copy//