Maharashtra Tourism Development ... vs Assessee

The aforesaid appeal has been preferred by the Assessee against order dated 27.03.2012, passed by the Ld.CIT-4, Mumbai, for the quantum of assessment passed u/s 143(3) for the A.Y. 2007-08, mainly on the following grounds:-

"1. The learned Commissioner of Income Tax (Appeals) erred in estimating the net profit ignoring the results as reflected in the accounts which had been subjected to tax audit u/s 44AB and consequently erred in partially confirming the action of the Assessing Officer in rejecting the books of - accounts invoking section 145 of the Act.

ITA No. 3555/Mum/2012 2 Maharashtra Tourism Development Corporation Limited.

Assessment Year: 2007-08

2. The learned Commissioner (Appeals) erred in not accepting the provisional financial statements of the company for the relevant financial year and not appreciating the fact that the non- completion of statutory audit of the appellant a public sector corporation was beyond its control.

3. In the alternative and without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in ignoring the fact that the average net profit of the past years was 9.13%.

4. The learned CIT (Appeals) erred in confirming the interest credited to the grant-in-aid account of Rs.13,76,73,805/- as income chargeable to tax and failed to appreciate the fact that the said interest did not accrue or belong to the appellant owing to the principle of over-riding title.

5. In the alternative and without prejudice to the above the learned CIT (Appeals) erred in not appreciating that income being interest on unutilized grants was in the nature of contingent income.

6. In the alternative and without prejudice to the fact that the interest of Rs.13,76,73,805/- is not accruing or taxable in the hands of the appellant corporation, the learned Commissioner (Appeals) failed to consider and appreciate the contention that if the said interest on bank fixed deposits is held to be taxable, the same ought to be charged under the head" Income from Business" instead of "Income from Other source."

Ground No. 6 has been raised as additional ground, for which separate petition for admission of the said ground has been filed by the assessee vide letter dated 05.10.2011.

2. Brief facts of the case are that, the assessee corporation is a State Government undertaking, wherein 100% stake is owned by the Government of Maharashtra. It is mainly engaged in the business of tourism and allied activities. During the course of the assessment proceedings, on the perusal of the tax audit report 44AB, the assessing ITA No. 3555/Mum/2012 3 Maharashtra Tourism Development Corporation Limited.

Assessment Year: 2007-08

officer noted that, following observations and comments were made by the auditors:-

"(i) The statutory audit has not been completed since F.Y. 2003-

04 & hence opening balances are subject to finalization.

(ii) Relevant provisions of Companies Act & Accounting Standards as prescribed by ICAA have not been strictly followed.

(iii) The records of Regional Office were not available for verification hence unable to comment on the same.

(iv) The impact of observations i to iii above on balance sheet and profit and loss account is unascertainable."

Balance sheet and the P&L Account filed along with the return of income was also provisional. In response to the show cause notice as to why profit should not be estimated @ 30% gross receipts, the assessee submitted as under:-

"(a) we are following mercantile system of accounting consistently. Also the accounting standards as notified in the official Gazette from time to time under section 145 of the Income Tax Act, 1961 are being complied with to the extent possible in preparation of accounts.

(b) We respectfully submit further that our organization is a body incorporated where in 100% stake is owned by the State of Maharashtra. We are subjected to statutory Audit as well as audit by the Comptroller and Auditor General of India. Our statutory Audit and AG Audit are completed only up to Assessment year 2004-05. Appointment of statutory auditors is done with the approval of State Government, hence the authority is not with the Corporation. As statutory audits for previous period are pending the financial statements are termed as provisional. However, are receipts & payments of units/regions & However, are subjected to audit under section 44AB of the Income Tax Act, 1961. We have been assessed year to year on the provisional financials with tax audit under section 44AB of the Income Tax Act 1961. Therefore, we respectfully submit that the assessment should be done on the basis of provisional financial statements filed.

Hence, we submit that the assessment should be done on the basis of provisional financial statements.

ITA No. 3555/Mum/2012 4 Maharashtra Tourism Development Corporation Limited.

Assessment Year: 2007-08

3. The assessing officer held that in absence of statutory audit report and proper audited balance sheet and P&L Account, the assessee's income cannot be properly determined, therefore book results of the assessee cannot be accepted. Hence he rejected the books of account. The assessing officer then took comparable case of M/s. Piem Hotel who have shown net profit of 29.11% and on that basis the assessing officer estimated the income by taking net profit @ 30% of the gross receipts of Rs.210,386,908.49 and thereby estimating the income at Rs.6,31,16,070/-. Further the assessing officer noted that assessee has earned interest of Rs.13,76,73,805/- which has not been offered for taxation as income from other sources but has been credited to grant-in- aid account in the balance sheet. The assessee's explanation in this regard before the AO was as under"-

"Corporation has parked unutilized amounts under various grant received in fixed deposits in banks. As per the Office memorandum received from Ministry of Tourism, Government of India the interest accruals on said deposits can be used only for the projects for which grants have been received. Therefore, the interest earned is not in the nature of income but it is part and parcel of grants only. Therefore, the such interest earned Rs.13,76,73,805/- has been credited to grant account."

However, the assessing officer rejected the assessee's contention and added the same as income from other sources.

4. Before the Ld.CIT(A) the assessee filed detailed submissions as to why net profit @ of 30% cannot be applied and income should be assessed on the basis of audit report u/s 44AB and provisional P&L Account. It was also submitted that the average profit rate of the assessee for various years was 9.03%. However, the Ld.CIT(A) rejected the assessee submissions and held that, 20% net profit ratio should be ITA No. 3555/Mum/2012 5 Maharashtra Tourism Development Corporation Limited.

Assessment Year: 2007-08

estimated on the gross receipts. Accordingly income was estimated by applying the net profit rate of 20%.

5. Regarding taxing of interest as income from other sources, the Ld.CIT(A) held that this issue has been decided against the assessee by the Tribunal in assessee's own case for the A.Y. 2006-07 and accordingly the assessee's ground on this score was dismissed.

6. Before us, learned counsel, Shri Anil Sathe submitted that, now the statutory audit has been carried out by CAG of India and audited balance sheet and P&L Account have come on record. The same has been filed before the Tribunal as additional evidence along with the petition for admission of additional evidence under Rule 29. Thus, he submitted that the income should be now assessed on the basis of statutory audit report, as the only ground for estimating the income by the authorities below was that the said statutory audit report was not available. Therefore, this matter should be restored back to the file of the AO.

7. Regarding taxability of interest, learned counsel though admitted that this issue has been decided by the Tribunal against the assessee, however, now new facts have come on record, which goes to show that the assessee's contention that the interest accrued on grant-in-aid is part of said aid only and it is not the income of the assessee. This new fact he submitted is in form of office memorandum dated 04.01.2014 issued by Government of Maharashtra, and other documents have vital bearing for adjudication of this issue.

8. Ld. DR submitted that, so far as the first issue regarding estimation of net profit, the matter can be sent back to the file of the AO ITA No. 3555/Mum/2012 6 Maharashtra Tourism Development Corporation Limited.

Assessment Year: 2007-08

to carry out fresh assessment in light of statutory audit report. However, for the second issue, he submitted that the decision of the Tribunal in assessee's own case for the earlier years should be followed as a matter of precedence. The additional evidence in the form of office memorandum will not change the facts of the case and the nature of controversy. Thus the order of the Ld.CIT(A) on this score should be confirmed.

9. We have heard the rival submissions perused the relevant finding given in the impugned orders and also the material placed on record. The assessee's income from operational activities and other income have been estimated by the AO as well as Ld.CIT(A), after rejecting the book results on the ground that statutory audit has not been completed. The reasons given by the assessee was that, the audit was to be carried out by the Comptroller & Auditor General of India and such an audit was completed only up to A.Y. 2004-05 at the time of assessment. There is no other authority who can carry out statutory audit in case of assessee. The assessee has appointed his own chartered accountants for obtaining tax audit u/s 44AB and provisional balance sheet & P&L Account, which were filed before the AO. Now that the statutory audit report is available for the relevant financial year, we are of the opinion that such an evidence is to be admitted and this issue should be restored back to the file of the AO to be consider the statutory audit report and complete the assessment afresh taking into account such report. We are order accordingly. Thus Ground No. 1 to 3 is treated as allowed for statistical purposes.

10. So far as the taxability of interest, the same has been admitted by the parties that, similar issue has been decided against the assessee by ITA No. 3555/Mum/2012 7 Maharashtra Tourism Development Corporation Limited.

Assessment Year: 2007-08

the Tribunal in the A.Y. 1996-97. The assessee's case has been that the interest which has been accrued on account of fixed deposits made out of unutilized grand-in-aid fund, partaks the character of grant-in-aid only. That is why, the said interest has been credited to the grant-in-aid account. Now before us, the Ld. Counsel has filed on office memorandum dated 04.01.2014, issued by the Government of Maharashtra clarifying that interest on the utilized grant is to be characterized as part of grant-in-aid only. Such a letter/memorandum has a vital bearing on the issue involved, therefore, we admit the said additional ground and remit the matter back to the assessing officer to take cognizance of such an evidence and other material on record to decide the issue of taxability of interest afresh and in accordance with law. The issue raised in additional ground is also set aside to the file of the AO to be decided afresh. It is needless to say that the assessing officer will provide due and sufficient opportunity to the assessee to represent its case. Thus Ground No. 4 to 6 is also treated as allowed for statistical purpose.

11. In the result, the appeal filed by the Assessee is allowed for statistical purpose.

Order pronounced in the open court on this 12th day of January, 2015.

Sd/- Sd/- (D.KARUNAKAR RAO) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 12.01.2015 *Srivastava ITA No. 3555/Mum/2012 8 Maharashtra Tourism Development Corporation Limited. Assessment Year: 2007-08

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT(A) Concerned, Mumbai The DR "B" Bench

//True Copy//

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.