The Income Tax Appellate Tribunal (ITAT) of Delhi bench has held that Cane Development Council is a local authority under section 10(20) of the Income Tax Act, 1961.
The assessee is a local authority thathad filed its return of income declaring a total income of Rs. NIL. The AO notice under section142(1) of the Act show caused the assessee why the assessment is not completed in the status of “Artificial Juridical Person” in view of the amendment in provisions of section 10(20) of the Act, wherein the assessee cannot be treated as a “Local Authority”.
The assessee submitted that it was formed before the amendment was effected in section 10(20) of the Act with effect from 01.04.2003 and objected to the action of the AO in treating it as an “Artificial Juridical Person”.
The AO observed that as per the explanation inserted by the Finance Act 2002 which came into force with effect from 01.04.2003 in section 10(20) of the Act, the local authority will be any of the following four:- i) Panchayatii) Municipalityiii) Municipal committee and District Board iv)Cantonment Board.
The AO observed that other than these four, no other institution or body can claim to be a local authority. The AO proceeded to treat the commission income of Rs. 80,61,086/- received from sugar mills and interest income of Rs. 2,26,759/- received from the bank to be added back as income of the assessee in the status of “Artificial Juridical Person”.
The main contention of the assessee before AO was that it had received funds under head ‘road construction’ from sugar mills as a commission at the behest of the State Government. Effectively, in other words, the State Government had directed the sugar mills to pay this commission to the assessee for utilization of the construction of roads and other connected activities.
The assessee also submitted that it came into existence by section 5 of UP sugar cane (Regulation of supply/purchase/rules) 1954. The AO held that the commission income received becomes income of the assessee and the interest income earned by the assessee was out of the deployment of the aforesaid commission income in banks. Further held thatboth would partake the character of revenue receipt in the hands of the assessee and accordingly chargeable to tax. On appeal, the CIT(A) upheld the action of AO.
The two bench members, Shri C.M Garg(judicial), and Shri M.Balaganesh (accountant) concluded that the provisions of Section 2(24) of the Act would not cover such grant in aid to be included as an income for reasons that it cannot be naturally imputed that the activity of the construction of roads was any part of the business of Cane Cooperative Society and it did not relate to the normal business activities of the assessee cane committee.
The ITAT held that “the assessee to be a ‘local authority’ and its receipts are not chargeable to tax in the facts and circumstances of the instant case.” The appeal of the assessee is allowed.
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