Vidarbha Irrigation Development ... vs Additional Commissioner Of ...
2004 Latest Caselaw 817 Bom

JUDGMENT

D.D. Sinha, J.

1. Heard Shri Manohar, learned senior counsel for the appellant, and Shri Jaiswal, learned Counsel for the respondent.

2. The present income-tax appeal is directed against the order dated February 28, 2003, passed by the Income-tax Appellate Tribunal, Nagpur Bench, Nagpur, whereby appeal preferred by the appellant-assessee against the order of the Commissioner of Income-tax (Appeals) was partly allowed.

3. The substantial questions of law involved in the present appeal are thus :

(I) Whether the income of the assessee is not exigible to tax by virtue of the exemption under Section 10(20A) of the Income-tax Act, 1961 ?

(II) Whether the assessing authority and the Tribunal were in gross error in holding that the business of the assessee has not commenced and as such its income under Section 28 of the Income-tax Act, 1961, cannot be computed ?

4. Shri Manohar, learned senior counsel for the appellant, states that Vidarbha Irrigation Development Corporation is a "development authority" within the meaning of Section 10(20A) of the Income-tax Act, 1961 (hereinafter referred to as "the IT Act"). The Corporation is established for the purpose of planning, development or improvement of cities, towns and villages and the moment such an authority is constituted, its income is exempted under Section 10(20A) of the Income-tax Act. It is submitted that the assessee-corporation is established and incorporated for promotion and operation of some irrigation projects in Vidarbha region, command area development and schemes for generation of hydro-electric energy to harness the water of Godavari and Tapi Rivers allocated to the State of Maharashtra under the Water Disputes Tribunal Award and other allied and incidental activities including flood control. It is further submitted that the Vidharbha Irrigation Development Corporation Act, 1997 (hereinafter referred to as "the VIDC Act") came into force on March 12, 1997. The area of operation of the corporation is defined in the Schedule to the Act and any other area or areas to which the provisions of the Act are extended by the State Government by notification in the Official Gazette under Sub-section (2) of Section 1 of the Act. It is contended that Clause (c) of Section 2 of the Act provides definition of "hydro-electric power project", which means and includes the planning, construction, maintenance and management of hydro-electric power projects, within the area of operation of the corporation and shall also include such hydro-electric power projects as are assigned, handed over or transferred to the Corporation by the State Government. Similarly, Clause (e) of Section 2 of the Act provides the definition of "irrigation project", which means planning construction, maintenance and management of (i) major irrigation project having irrigable command area of more than 10,000 hectares, (ii) medium irrigation project having irrigable command area of more than 2,000 hectares and up to 10,000 hectares, (iii) minor irrigation project having irrigable command area of more than 250 hectare and up to 2000 hectares and shall include command area development, flood control and other allied activities.

5. Learned senior counsel Shri Manohar states that in view of the provisions of Section 15 of the VIDC Act, from the appointed date, the assigned projects of the Corporation and their assets comprising movables and immovables including irrigation projects, hydro-electric power projects, works under construction specified in that behalf, situated in the area of operation of the corporation, which immediately before the appointed date vested in the State Government and were under the control of the irrigation department, shall vest in and stand transferred to the corporation and all income derived and expenses incurred in that behalf be brought on the books of the corporation and the rights, liabilities and obligations of the State Government, whether arising out of any contract or otherwise pertaining to the said projects of the State Government shall be deemed to be rights, liabilities and obligations of the corporation. It is, therefore, contended that from the appointed date, the assessee-corporation stepped into the shoes of the State Government and performs all the duties and acts, which were prior to the appointed date, performed by the State Government through the irrigation department.

6. Learned senior counsel Shri Manohar submits that the functions and powers of the assessee-corporation are defined in Section 18 of the Act, which contemplates that the functions of the corporation shall be--(a) to promote and operate--

(i) some irrigation projects mentioned in the Schedule and command area development including flood control ; and

(ii) some schemes for the generation of hydro-electrical energy ; (iii) to plan, investigate, design, construct and manage the schemes of the generation of hydro-electric energy.

7. It is, therefore, contended that the assessee-corporation is established to perform sovereign functions of the State Government, which the State Government was performing before the appointed date through its irrigation department. The corporation is also expected to promote irrigation related activities such as fisheries, pisciculture, floriculture, horticulture, sericulture, tissue culture, etc., and tourism, water sports and other related activities on and around the irrigation and hydro-electric power projects and to develop the land around or nearby lake and other infrastructure facilities and lease a part or the whole of such developed properties to interested parties, to prepare an annual plan and five year working development plan. The corporation is also entitled to undertake any other project and other activities entrusted by the State Government in furtherance of the objectives for which the corporation is established. It is, therefore, contended that the powers and functions of the corporation enumerated in Section 18 clearly demonstrate that the corporation is a development authority discharging sovereign functions of the State.

8. Learned senior counsel Shri Manohar further submits that the general powers of the corporation are defined in Section 19 of the VIDC Act, which read thus :

"19.(1) The Corporation shall have the power to accord technical sanction, acceptance of all tenders, sanctioning budget and making financial provisions, settling disputes arising out of contracts and any other thing which may be necessary or expedient for the purposes of carrying out its functions under this Act.

(2) Without prejudice to the generality of the foregoing provision, such power shall include power--

(a) to acquire and hold property, both movable and immovable as the Corporation may deem necessary for the performance of any of its functions, duties, activities and to lease, sell, exchange or otherwise transfer any property held by it on such conditions as may be deemed proper by the Corporation ;

(b) to construct or cause to be constructed such dams, barrages, reservoirs, power houses, power structures, electrical transmission lines and sub-stations, navigation works, irrigation, flood control and drainage canals and such other works and structures as may be required ;

(c) to take measures to prevent pollution of any water under its control and to take all measures deemed necessary to prevent discharges into such water of effluents, which are harmful to water supply, irrigation, public health or fish life ;

(d) to stock its reservoirs or water courses with fish and to sell fish or fishing rights and prohibit taking out fish from the water under its control ;

(e) to assist in the establishment of water users association and other organisations formed under the Maharashtra Co-operative Societies Act, 1961 (Mah. XXIV of 1961), for the better use of facilities made available by the Corporation ;

(f) to lease rights for water sports, other recreational activities related to the use of reservoir and its surroundings and reservoir water ;

(g) to establish, maintain and operate laboratories experimental and research stations and farms for conducting experiments and research for--

(i) utilising the water, electrical energy and other resources in the most economical manner for the development of the Godavari and Tapi River Valley in Vidarbha region ;

(ii) determining the effect of its operations on the flow conditions in the Godavari and Tapi River and its tributaries in Vidharba region ;

(iii) providing navigation condition in the Godavari and Tapi River and its tributaries in Vidharba region ;

(h) to engage suitable qualified consultant or person having special knowledge or skill to assist the Corporation in the performance of its functions ;

(i) to do all such other things including making interest being monetary advances to the contractors executing works on the projects of the Corporation and perform such acts as may be necessary for, or incidental or conducive to any matters, which are necessary for furtherance of the objectives for which the Corporation is established."

9. It is contended by learned senior counsel Shri Manohar that the corporation is vested with powers to plan and carry out developmental activities in order to achieve the objective of the VIDC Act. Section 20 of the VIDC Act deals with power vested in the corporation to determine and levy water charges according to volume for supply of water for irrigation, industrial and domestic purposes to the State Government, local authorities, Government agencies, cultivators and water users associations. It is, therefore, contended that the objectives of the Corporation are not only to complete the incomplete irrigation projects, but also required to do planning for the purpose of constructing irrigation projects, its maintenance and management as well as supply of water for the various purposes mentioned in Section 20 and is also entitled to determine levy of water charges. It is submitted that Section 24 of the Act makes it clear that the corporation notwithstanding anything contained in the Maharashtra Irrigation Act, 1976, and the Bombay Canal Rules, 1934, may carry out all or any of the functions and exercise all or any of the powers of the State Government or the appropriate authority and any officer of the corporation authorised in this behalf by the corporation may carry out all or any of the functions and exercise all or any of the powers of the canal officer. It is, therefore, contended that the assessee-corporation is discharging the sovereign functions of the State after the appointed date and is carrying out various developmental activities and is established to achieve developmental goals.

10. Learned senior counsel Shri Manohar states that the above referred provisions of the VIDC Act demonstrate that the process would embrace the activities from construction of dams, canals, etc., to the actual supply of water and, therefore, activities which are carried out by the corporation under the provisions of the VIDC Act are undoubtedly development activities, which are bound to cause improvement of cities, towns and villages. It is submitted that it could not be disputed that water is an essential natural resource and adequate supply of which has a direct effect on the development and improvement of the cities, towns and villages. Similarly, productivity of lands in villages and basic survival of human beings in cities, towns and villages as well as proper functioning of industries located therein depends amongst other factors on adequate supply of water and power. Adequate and timely availability of water is the most important factor for optimum agricultural produce and has the direct effect on development and improvement of lands. It is contended that the provisions of the VIDC Act make it evident that the object of the assessee-corporation falls within the ambit of Section 10(20A) of the Income-tax Act.

11. It is contended by learned senior counsel Shri Manohar that the requirement under Section 10(20A) of the Income-tax Act is that the assessee-corporation must be established with the object of planning, development or improvement of cities, towns and villages and once it is proved that the activities which the corporation is required to carry out and sovereign functions, which it discharges result in development or improvement of cities, towns and villages, the provisions of the said section are attracted and, therefore, the corporation is not liable to pay tax on the income it earns.

12. Learned senior counsel Shri Manohar further submits that the appellant had raised the following specific grounds before the Income-tax Appellate Tribunal :

"(I) That, the Assessing Officer and the Commissioner of Income-tax (Appeals) failed to consider the amendment vide the Ordinance dated January 2001 in the VIDC Act, the Maharashtra Irrigation Act, 1976, and the Maharashtra Project Affected Persons Rehabilitation Act and the Bombay Canal Rules in its proper perspective while deciding the appeal.

(II) It is submitted that the Commissioner of Income-tax (Appeals) wrongly arrived at the conclusion that the appellant-corporation is not a 'developmental authority' within the meaning of Section 10(20A) of the Income-tax Act, 1961, and deprived the corporation of its legitimate claim of exemption available under the said section despite strong plea put up by the corporation."

13. It is contended by learned senior counsel for the appellant that the submissions were advanced before the Appellate Tribunal by pointing out relevant provisions of the VIDC Act. However, the Appellate Tribunal, without giving proper consideration to the object, purpose and the provisions of the Act, recorded a cryptic finding, which is without any reasons. It is submitted that the Appellate Tribunal has not considered any of the provisions of the VIDC Act, which were placed before the Tribunal for the purpose of showing that the corporation is established with the object of carrying out planning and development, which ultimately has resulted in improvement of cities, towns and villages. However, the Appellate Tribunal has overlooked this aspect and disallowed the benefits flowing from Section 10(20A) of the Income-tax Act to which the assessee-Corporation is entitled to.

14. It is submitted by learned senior counsel Shri Manohar that the assessee had raised other grounds before the Appellate Tribunal in order to demonstrate that the provisions of Section 10(20A) of the Income-tax Act were attracted inasmuch as the assessee is the local authority. Similarly, it was also pointed out that the assessee-Corporation is "State" within the meaning of Article 289 of the Constitution. The assessee-corporation specifically pointed out the provisions of the VIDC Act referred to hereinabove and also argued on the basis of the said provisions of the VIDC Act that the activities of the corporation are required to be understood in the backdrop of the provisions of the VIDC Act, which clearly establish that the functions and duties of the corporation are sovereign in nature and developmental in character, which undoubtedly results in improving cities, towns and villages, and, therefore, the provisions of Section 10(20A) of the Income-tax Act are attracted. However, the Appellate Tribunal gave a complete go-by to the grounds raised by the assessee-corporation and in paras. (20) to (51) of the impugned judgment recorded a finding that the provisions of Section 10(20A) of the Income-tax Act are not attracted only in view of the preamble to the VIDC Act and did not discuss the provisions of the VIDC Act. It is contended that the provisions of the VIDC Act are required to be considered as they are and appropriate meaning must be given to the plain language of the provisions of the Act and on the basis of that, the Appellate Tribunal was required to find out the object and purpose of the Act. It is further contended that the preamble of the Act can be looked into only if the provisions of the Act are ambiguous and incapable of conveying meaning enumerated in those provisions and not otherwise. However, in the instant case, the Appellate Tribunal has disallowed the benefit of Section 10(20A) of the Income-tax Act to the corporation only on the basis of the object and purpose spelt out in the preamble to the Act. It is, therefore, submitted that the Appellate Tribunal has utterly failed to consider the above referred aspects and, hence, in the interest of justice, the matter may be remanded back to the Appellate Tribunal for reconsideration of issue No. 1 referred to hereinabove. In order to substantiate the contentions, reliance is placed on the judgment of the apex court in Gujarat Industrial Development Corporation v. CIT and CIT v. Rajasthan Land Development Corporation .

15. It is further contended by learned senior counsel for the appellant that so far as the second ground is concerned, the same is rejected by the Appellate Tribunal for the reasons thus :

"(a) Thus, according to the assessee, the assessee has not commenced business, but has also generated revenue out of business. This claim of the assessee is, however, contrary to its categorical admission before the Assessing Officer that it has not yet commenced its business. This stand of the assessee has also to be judged from the method of accounting regularly employed by the assessee." (para. 66)

16. Learned senior counsel states that it is a well-settled legal position that the assessee cannot ask for two different methods--one for writing books of account for the purpose of his business and another for having his tax liability determined under the Income-tax Act. It is submitted that the Appellate Tribunal after reproducing letter dated February 16, 2001, has concluded that it is apparent that the assessee had followed the method of accounting by which it has not recognised itself as having commenced business.

17. It is contended by learned senior counsel for the appellant that the business of the assessee has commenced from its inception inasmuch as the assessee has taken over the existing business being irrigation projects of the State of Maharashtra. The submission of the assessee is supported by the statement of objects and reasons at the time of issuing of Ordinance by the Governor of Maharashtra. It is submitted that the Appellate Tribunal has reproduced the same in para. (17) of its order. A perusal of the aforesaid statement will clearly indicate that the irrigation projects were transferred to the corporation. It is thus evident that the existing irrigation facility was taken over by the assessee-corporation in addition to development of further projects under construction as well as future projects to be established. The offer document and status report submitted also indicate that partially completed projects wherein irrigational facilities were operational were transferred to the assessee-corporation for operation.

18. Learned senior counsel for the appellant states that the preamble to the VIDC Act indicates that apart from completion of some ongoing irrigation projects in a time bound manner, the corporation has also to promote and operate existing projects. It is contended that Section 15 of the VIDC Act clearly indicates that irrigation projects, hydro-electrical power projects and work under construction shall vest in and stand transferred to the corporation. It is further stipulated that income derived and expenditure incurred in that behalf be brought in the books of the corporation. Thus, it signifies that out of the projects transferred to the corporation, some were already partially completed projects wherein the irrigation activities were already commenced. The corporation has further continued to promote and operate such existing facilities for development of irrigation. Similarly, the provisions of Section 18 provide that the function of the corporation established is to promote and operate some irrigation projects mentioned in the Schedule and command area development including flood control. In the irrigation project, a dam is constructed where water is accumulated and canals are taken out from the dam which regulate the water to area covered under the irrigation project. The canals are of very long length running into more than 50 kilometres. However, even after construction of small portion of the canal, the irrigation facility was commenced. The water is drawn by the nearby agricultural fields from the canal. The activity of selling water thus stands commenced. The project may still be ongoing and may be ongoing for more than a decade. However, for the purpose of commencement of business, it would be sufficient even if the canal is able to give irrigation facility to some of the agricultural fields.

19. Learned senior counsel Shri Manohar states that the assessee in its letter dated February 16, 2001, has never stated that the assessee has not commenced business. The assessee has only stated that the projects were ongoing and are yet to be completed. The explanation of the assessee was that projects, which envisage irrigation facility, extended to a very large area have not been completed during the previous year and, therefore, it was submitted that they are not completed. The authorities have misread the aforesaid letter of the assessee and concluded that the assessee has admitted that the business of the assessee has not commenced.

20. It is submitted by learned senior counsel Shri Manohar that Sections 29 to 45 of the VIDC Act provide that the assessee-corporation has to maintain accounts in accordance with the special provisions under which the corporation is established. The assessee is thus under mandate of statute to prepare the financial statement in accordance with the provisions of Sections 42 and 43 of the VIDC Act. The letter dated February 16, 2001, filed before the Assessing Officer only explains the method of accounting considered by the assessee in the financial statement prepared by the assessee. The revenue authorities, however, without appreciating the contention of the assessee and the provisions of the VIDC Act with regard to preparation of account have concluded that the method of accounting adopted by the assessee is such that by itself it recognises that the business of the assessee has not yet commenced. The entire transaction and facts were available on record and therefore the Assessing Officer ought to have considered the entire facts rather than merely going by the presentation of entries of the books of account of the assessee in the financial statement.

21. Learned senior counsel Shri Manohar states that the observations of the Appellate Tribunal that the assessee cannot ask for two different methods--one for writing books of account for the purpose of his business and another having its tax liability determined under the Income-tax Act is contrary to the law laid down by the apex court in the decision in the case of United Commercial Bank v. CIT [1999] 240 ITR 355. It was a case where bank had prepared financial statement of accounts as per the provisions of the Banking Regulation Act, 1949. In the balance-sheet, the bank was disclosing the investment in securities at cost. However, before the revenue authorities, the claim of the bank was that the fall in value of assets be allowed as deduction while computing the income of the assessee. On these facts, the apex court has held that it is open for the purpose of the assessee to prepare books of account in a particular manner whereas make a claim before the income-tax authorities to show and get assessed on real income. The observations of the apex court on which reliance is sought to be placed read thus (page 365) :

"Hence, for the purpose of income-tax whichever method is adopted by the assessee a true picture of the profits and gains, that is to say, the real income is to be disclosed. For determining the real income, the entries in a balance-sheet require to be maintained in the statutory form, may not be decisive or conclusive. In such cases, it is open to the Income-tax Officer as well as the assessee to point out the true and proper income while submitting the income-tax return."

22. Similarly, the other observations of the apex court, which are relevant for our purpose read thus (page 367) :

"Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of income-tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case."

23. Learned senior counsel Shri Manohar further states that the assessee placed reliance on the decision of the apex court in Sutlej Cotton Mills Ltd. v. CIT , wherein it is observed as under (page 5) :

"But it is now well-settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper accountancy principles, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee.

(emphasis supplied)

24. learned senior counsel for the appellant states that the appellant-assessee also placed reliance on the judgment of the Bombay High Court in CIT v. V.S. Dempo and Co. Pvt. Ltd. wherein it is held as under (page 301) :

"The way in which the entries are made by an assessee in the books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee."

25. It is further submitted by learned senior counsel Shri Manohar that the appellant-assessee has already demonstrated that the assessee has taken over the existing business of irrigation activity. Thus, according to the assessee, it is only change of ownership of irrigation project from the State Government to that of the assessee-Corporation. In the case of change of ownership, it cannot be said that the business is being set up over and over again at the time at which change of ownership takes place. In the case of the appellant-assessee, the business had already commenced prior to formation of corporation. The business thus as per the assessee being an existing business of the Government, continued from the date of its formation itself. In order to substantiate this proposition, reliance is placed by learned senior counsel for the appellant on the decision of the Madras High Court in CIT v. Ponds India Ltd. [2002] 253 ITR 686. The relevant observations read thus (page 688) :

"In a case where the product manufactured remains the same, as in this case, and expenditure was being incurred on publicity for that product for several years prior to the formation of the assessee-company which had continued the business that had already been set up, it cannot be said that the assessee had 'set up' an industrial undertaking. The words 'set up' in the context in which they are used refer to an industrial undertaking which commenced manufacture in the year in which the claim for deduction is made or had commenced such manufacture within a period of three years preceding the year of claim. An industrial undertaking which had been set up long prior, and which had commenced manufacture several years earlier, clearly cannot be regarded as an industrial undertaking set up in the year in which the ownership changes. It is not the year in which the legal entity that owns the undertaking is formed that matters ; what is material is the year in which the industrial undertaking is set up. Every change in the ownership of that undertaking does not result in the same industrial undertaking being set up over and over again."

26. It is contended by learned senior counsel for the appellant that in the present case, there is no question of commencement of business as partly completed projects had vested in the assessee from April 1, 1997, and business was continued by the assessee. It is submitted it is a fact on record that the assessee has received receipts of sale of water running into Rs. 1.12 crores from various projects. Thus, the assessee has generated revenue and, therefore, there cannot be any manner of doubt that the assessee has commenced business. It is further submitted that the Appellate Tribunal has recorded that query of Bench was that if there had been sale of water, it only leads to presumption that the assessee has commenced business notwithstanding the stage of completion of various irrigation projects undertaken by the assessee. The Appellate Tribunal, however, for the reason that the assessee has recorded net deficit of the year as capital cost to the project concluded that business is not commenced. The presumption raised in favour of the assessee has not been rebutted by the Revenue.

27. Learned senior counsel Shri Manohar states that the Appellate Tribunal has relied on the decision of the Privy Council in CIT v. Sarangpur Cotton Manufacturing Co. Ltd. [1938] 6 ITR 36. The Appellate Tribunal has reproduced part of para. (1) of the said decision, which reads thus (page 40) :

"Their Lordships are clearly of opinion that the section relates to a method of accounting regularly employed by the assessee for his own purposes--in this case for the purposes of the company's business--and does not relate to a method of making up the statutory return for assessment to income-tax. Secondly, the section clearly makes such a method of accounting a compulsory basis of computation unless in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom. It may well be that, though the profit brought out in the accounts is not the true figure for income-tax purposes the true figure can be accurately deduced therefrom. The simplest case would be where it appears on the face of the accounts that a stated deduction has been made for the purpose of a reserve. But there may well be more complicated cases in which nevertheless, it is possible to deduce the true profit from the accounts, and the judgment of the Income-tax Officer under the proviso must be properly exercised. It is misleading to describe the duty of the Income-tax Officer as a discretionary power."

28. It is, therefore, contended that the finding recorded by the Appellate Tribunal in the impugned order that it is the discretion of the assessing authority to accept the method of accounting in view of incorrect reading of para. (10) of the decision of the Privy Council in the case of Sarangpur Cotton Manufacturing Co. Ltd. [1938] 6 ITR 36 is misconceived. On the other hand, on a correct reading of para. (10) of the decision of the Privy Council, it is evident that it was the duty of the Assessing Officer to determine the income in accordance with the provisions of law and it is unjustified on the part of the Appellate Tribunal in relying upon the method of accounting as in the financial statement to come to the conclusion that there was no commencement of business by the assessee.

29. Learned senior counsel Shri Manohar states that the Appellate Tribunal has dealt with the grounds raised by the assessee in respect of rent from employees and contractors being not chargeable to tax in its order and concluded by observing thus :

"To put it differently the letting out of the residential quarters to the employees was incidental to and subservient to the business of the assessee and so it is manifest that the residential quarters were occupied by the assessee for the purpose of the business carried on by it. It follows, therefore, that the rent derived by the assessee from the letting out of the residential quarters to its employees is assessable not under Section 22 of the Income-tax Act, but under Section 28 of the Income-tax Act under the head Income from business or profession'."

30. Learned senior counsel Shri Manohar further states that reliance is placed on the decision of the apex court in the case of India Cements Ltd. v. CIT and the decision of the Gujarat High Court in the case of Deputy CIT v. Core Healthcare Ltd. . It is contended that on the basis of the law laid down by the Supreme Court and the High Court, it is amply clear that the Appellate Tribunal misdirected itself on the pure questions of law regarding the primary duty of the assessing authority to compute the real taxable income of the assessee irrespective of the method of accounting adopted by the assessee. The finding regarding non-commencement of business is perverse as it is contrary to the admitted facts and material on record.

31. Shri Jaiswal, learned Counsel for the respondent, states that during the course of arguments, learned senior counsel for the appellant has made a statement that he is restricting his arguments only in respect of the above referred questions of law involved in the present appeal and is giving up all other grounds raised in the present memo of appeal. This Court formulated two questions of law, namely :

(I) Whether the income of the assessee is not exigible to tax by virtue of the exemption under Section 10(20A) of the Income-tax Act ?

(II) Whether the assessing authority and the Tribunal were in gross error in holding that the business of the assessee has not commenced and, as such, its income under Section 28 of the Income-tax Act, 1961, cannot be computed ?

32. Learned Counsel Shri Jaiswal, therefore, states that he will advance the arguments on behalf of the respondent justifying the impugned order vis-a-vis above referred two questions of law only since the other grounds raised in the memo of appeal are given up by learned senior counsel for the appellant.

33. Learned Counsel Shri Jaiswal submits that so far as ground No. 1 is concerned, the contentions canvassed by learned senior counsel for the appellant in this regard are misconceived and erroneous. It is contended that in order to get exemption provided under Section 10(20A) of the Income-tax Act, it must be an authority, which is constituted by or under any law and the law must be for the purpose of either satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages. Admittedly, the Vidarbha Irrigation. Development Corporation Act is not enacted for the purpose of dealing with and satisfying the need for housing accommodation. Even according to the assessee, as has been clearly stated in the course of arguments, the VIDC Act does not deal with planning of cities, towns, and villages. It is further contended that the entire thrust of the argument of the assessee is that since the assessee is required to promote and operate certain irrigation projects and power projects and the outcome of these projects, namely, water and electricity, is given to certain towns and villages, the assessee is carrying on development and improvement of these towns and villages. It is submitted that this argument is clearly erroneous. Merely supplying of certain commodities does not amount to "development or improvement". The term "development and improvement" as contemplated by Section 10(20A) of the Income-tax Act, has to be read in the context of the entire section. The term "planning, development and improvement" clearly contemplates the functions of the actual planning, development and improvement of areas, which are inhabited by persons, namely, cities, towns and villages. They do not deal with the concept of development and improvement of agriculture, which is not an activity which is carried on within the confines and boundaries of any city, town and village. Therefore, to fall within the exemption given by Section 10(20A) of the Income-tax Act, the Act which constitutes the authority must deal with planning, development or improvement within the cities, towns and villages, which necessarily means civic activities. Even otherwise, the appellant merely supplies the water to the concerned local authority, which then distributes it within its jurisdiction. It is also not incumbent on the local authority to purchase water from the appellant, but it may do so from any other source. The area which is sought to be developed by the appellant is not any village, town or city, but the catchment area, submergence area and the command areas of the irrigation projects.

34. Learned Counsel Shri Jaiswal submits that the provisions of Section 10(20A) of the Income-tax Act contemplate that the authority could be dealing with housing accommodation or planning, development and improvement of cities, towns and villages or both. This clearly shows the intent of the Legislature in granting exemption to the authorities, which are carrying on civic activities. It is only such authorities that are contemplated under this provision.

35. It is contended by learned Counsel for the respondent that actual development must be of the city, town and village only and not general development. Although irrigation would fall within general development, it does not directly develop a city, town or village. The Supreme Court has held time and again that while interpreting a provision, every word must be given meaning and an interpretation, which results in some words becoming redundant cannot be accepted. In order to substantiate this contention, reliance is placed on the judgments of the apex court in Aswini Kumar Ghose v. Arabinda Bose, ; Rao Shiv Bahadur Singh v. State of Vindhya Pradesh, ; State of Bombay v. Ali Gulshan, ; J.K. Cotton Spinning and Weaving Mills Co. Ltd. v. State of U. P. and Mohammad Ali Khan v. CWT [1997] 224 ITR 672 (SC).

36. Learned Counsel Shri Jaiswal states that even in the case of Gujarat Industrial Development Corporation , the apex court has held that the term "development" deals with development of a city, town or village and does not deal with general development, but specifically with development of a civic nature. Similarly, so far as the judgment of the Rajasthan High Court in Rajasthan Land Development Corporation's case is concerned, the Corporation had the object of planning and development of villages specifically. However, in the instant case, Vidharba Irrigation Development Corporation does not develop any city, town or village and hence cannot fall within the purview of Section 10(20A) of the Income-tax Act.

37. Learned Counsel Shri Jaiswal states that the contention of the appellant-assessee that it had already started its business is totally falsified by its own statement in its letter dated February 16, 2001, which is extracted in para. 69 of the order of the Appellate Tribunal. There is a categorical admission that none of the projects with the assessee were completed or ready for their intended use. Once having made a statement to that effect and not having retracted it till today, the assessee cannot go back and claim that its business had commenced. Besides this, mere sale of water is not a business or function contemplated by the statute. The functions under the statute are for promotion and operation of irrigation and power projects. The reasoning given by the Appellate Tribunal in the order clearly shows that the system of accounting followed by the assessee itself recognised that the assessee had not commenced its business. For this purpose, the respondent relies on the decision in CIT v. L. and T. Mcneil Ltd. .

38. It is further contended by learned Counsel for the respondent that the third ground as to whether the interest paid to the bondholders is an allowable deduction from the interest received from the bank is not before this Court and hence, cannot be considered. Besides this, it is not a ground, which can be raised under Section 260A of the Income-tax Act as will be clear from the decision of the Rajasthan High Court in the case of Deputy CIT v. Marudhar Hotels (P.) Ltd. . Even otherwise, the Appellate Tribunal has clearly dealt with this aspect in its order, pointing out that the business of the assessee was not investing funds and earning interest and there was no business compulsion or inextricable link between the business of the assessee and the investment of the funds in temporary short-term deposits. It is submitted that besides this, the assessee was free to use the funds in any manner it liked for the purpose of its business. Merely because it chooses to make temporary investments to earn interest will not alter the character of the income into income from business. This aspect is clearly decided by the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT and the decision of the Madras High Court in the case of South India Shipping Corporation Ltd. v. CIT . It submitted that the Appellate Tribunal has rightly held that the interest earned was totally independent of the borrowings. For the purpose of getting the benefit of Section 57 of the Income-tax Act, the expenditure incurred must be for the purpose of making or earning the income. This is not the case here and hence the claim of the assessee is without any basis. Learned Counsel Shri Jaiswal states that the findings recorded by the Appellate Tribunal on all the points are sustainable in law and there is no case made out for remand.

39. We have considered the contentions canvassed by the learned respective counsel for the parties and perused the impugned order passed by the Appellate Tribunal as well as the authorities cited by the learned respective counsel for the parties. In the instant appeal, Shri Manohar, learned senior counsel for the appellant, has made a categorical statement that the appellant restricts itself to the above referred grounds and gives up all other grounds raised before this Court and, therefore, the scope of adjudication in the present appeal is restricted only to the extent of the above referred three grounds.

40. So far as the first ground is concerned, the appellant-assessee is claiming exemption in view of the provisions of Section 10(20A) of the Income-tax Act on the ground that the appellant-corporation is established for the purpose of planning and development or improvement of cities, towns and villages and, therefore, its income is exempted from payment of tax. Before we adjudicate upon this aspect, it will be proper for us to consider what are the grounds raised by the appellant-assessee in the appeal before the Appellate Tribunal other than the ground that the appellant-corporation is a local authority. The appellant is claiming that though the appellant had raised specific grounds and also submitted in its written note of the arguments that in view of the provisions of the VIDC Act, the purpose and object of the appellant-Corporation is planning, development or improvement of cities, towns and villages and, therefore, it falls within the ambit of Section 10(20A) of the Income-tax Act and is entitled for the benefit provided therein from payment of tax on the income of the corporation.

41. A perusal of the grounds in the memo of appeal filed by the appellant-assessee before the Appellate Tribunal shows that the appellant had raised ground No. 2, which read thus :

"It is submitted that the Commissioner of Income-tax (Appeals) wrongly arrived at the conclusion that the appellant-corporation is not a 'developmental authority' within the meaning of Section 10(20A) of the Income-tax Act, 1961, and deprived the corporation of its legitimate claim of exemption available under the said section despite strong plea put up by the corporation."

42. Similarly, the statement of facts submitted by the assessee-Corporation to show that the activities of the assessee-Corporation amount to planning and development in terms of the provisions of Section 10(20A) of the Income-tax Act and, therefore, its income is exempt from tax, reveals that the following grounds were raised by the assessee-corporation.

43. The Vidharba Irrigation Development Corporation is the statutory corporation constituted under the VIDC Act. It is an authority constituted by the said legislation and is exempted under Section 10(20A) of the Income-tax Act. The provisions of Sections 23 and 50 of the VIDC Act are specifically stated in the statement of facts and in reference to these provisions, it was the stand of the corporation before the Appellate Tribunal that the corporation is empowered to make expenditure on the objects for which it is constituted. The corporation is established for the purpose of planning, development or improvement of cities, towns and villages. A ground is also raised in the statement of facts that cities, towns and villages consist of houses, roads, water supply, electricity, plantation and sewerage. Adequate infrastructure facilities should be made available to make a city, town or village a centre for human settlement and habitation. These infrastructure facilities are to be erected by the public bodies, which are formed for that specific purpose by the State Government by way of the statue. To that extent, these statutory bodies are sharing the responsibility of the State Government to construct and maintain these infrastructure facilities. For performing these Governmental civic functions, certain necessary Governmental powers are vested in the authorities, which include power to make planning and development. The appellant-corporation is formed with a view to provide adequate water supply to the civic population. For achieving the objective, the corporation is entrusted to plan, develop and implement the scheme of water supply. The corporation has planned to construct dams, irrigation projects, canals and subsidiaries for water supply to the inhabitants of the area of its operation. The result will be improvement in water supply to cities, towns or villages or both. Specific grounds are raised before the Appellate Tribunal by the assessee in view of the provisions of the VIDC Act. Reference is made to the definition of "hydro-electrical power project" and in view of the said definition specific ground is raised by the assessee that water is an essential natural resource required for any development or improvement of cities, towns and villages. Due to increasing population, drinking water has become a scarcity and, therefore, for supply of drinking water to public, reservoirs are required to be created. This is the basic necessity of any civic population and, therefore, it is a public function to provide adequate quantity of drinking water to the public, which is being fulfilled and planned to be fulfilled as per the objectives of the appellant-corporation. For development of cities, towns and villages, water is required for most of the developmental functions performed by the local bodies and the appellant-corporation is helping in fulfilling the essential necessities for supply of water for development purposes.

44. It is evident that the corporation in fact has raised various grounds on the basis of various provisions of the VIDC Act in order to show that the assessee-corporation is the authority constituted under the VIDC Act for the purpose of planning, development or improvement of cities, towns and villages. However, a perusal of the order of the Appellate Tribunal shows that the issue was not considered by the Appellate Tribunal in the light of various provisions of the VIDC Act and gave undue weightage to the preamble of the VIDC Act while analysing the object and purpose of the assessee-corporation. The taxing statute is to be construed strictly. There is no room for any intendment. There is no equity and presumption about tax. Nothing is to be read in and nothing is to be implied. One can only look fairly at the language used in the statute. In other words, while construing fiscal statute, regard must be had to the strict letter of law and if the court is satisfied that the case falls strictly within the ambit of the relevant provisions of the taxing statute, tax liability under such provisions must be imposed. It is, therefore, evident that while interpreting tax statute, the function of the court of law is not to give words in the statute a strained and unnatural meaning to cover and extend its applicability to the areas not intended to be covered under the said statute. Similarly, it is well settled that the taxing authorities cannot ignore the legal character of the transactions and are required to impose tax on the basis of substance of the matter.

45. It is no doubt true that the preamble of the statute though gives the purpose and object of the statute, however, it will be impermissible to ignore the substantive provisions of the statute and rely only on the preamble for deriving the purpose and object for which the statute is enacted, particularly when the language of the provisions of the statute is clear, unambiguous and capable of conveying the meaning intended to be given to such provisions by the Legislature. In the instant case, it was necessary for the Appellate Tribunal to consider the issue vis-a-vis the provisions of Section 10(20A) of the Income-tax Act in the light of the provisions of the VIDC Act, Maharashtra Irrigation Act, 1976, and the Bombay Canal Rules, 1934, and it is only thereafter, it would have been possible to conclude the issue one way or the other. However, in the instant case, the Appellate Tribunal in para. (51) of the impugned order concluded the issue by observing thus :

"Firstly, the object of the Act as spelt out in the preamble is for the purpose of completing certain irrigation projects. Therefore, it cannot be said that the assessee has been established with the objective of satisfying the need for housing accommodation as laid down in the first part of the Section 10(20A) of the Income-tax Act, 1961. Secondly, the second part of Section 10(20A) deals with the corporation established for the purpose of planning, development or improvement of cities, towns and villages. It cannot be disputed that the main purpose of the VIDC Act is for completion of the irrigation projects, which are handed over to the assessee for completion by the State Government. There is no planning, development or improvement of cities, towns and villages in carrying out the purposes for which the assessee has been formed. Thirdly, as rightly contended by learned standing counsel we find that under Section 50 of the VIDC Act, the rehabilitation is to be carried out only by the State Government and not by the assessee. Whatever planning, development or improvement of cities, towns and villages are done in the process of rehabilitation are done by the State Government and not by the assessee. Fourthly, the rehabilitation of the displaced persons, consequent to any action in the performance of any functions of the assessee is too remote and is not incidental to the main purpose for which the assessee was established."

46. After considering the decision in the case of Gujarat Industrial Development Corporation v. CIT and CIT v. Rajasthan Land Development Corporation , the Appellate Tribunal has observed in the latter part of para. (51) thus :

"We have already held that development of villages, city and town was not undertaken by the assessee and that the said objective even assuming it exists, is too remote an objective. It cannot, therefore, be said that the assessee was established by the VIDC Act with the objective of development of city, town or villages. For the reasons set out above, we are of the view that the case of the assessee that its income is exempt under Section 10(20A) is not acceptable."

47. The above referred conclusion arrived at by the Appellate Tribunal is mainly on the basis of purpose and object for which the assessee-corporation is constituted as mentioned in the preamble of the VIDC Act and without taking into consideration the scheme of the substantive provisions of the VIDC Act, the Maharashtra Irrigation Act, 1976, and the Bombay Canal Rules, 1934. The assessee had raised before the Appellate Tribunal various grounds on the basis of different provisions of the VIDC Act, the Maharashtra Irrigation Act, 1976, and the Bombay Canal Rules, 1934, in order to show that the assessee-corporation is established for the purpose of planning, development or improvement of cities, towns and villages. However, the Appellate Tribunal overlooked these aspects and concluded the issue about the purpose and objectives of the corporation relying on the preamble to the VIDC Act which, in our considered view, is improper.

48. So far as Section 10(20A) of the Income-tax Act is concerned, it is in two parts. The first part contemplates the authority constituted by or under any law enacted for the purpose of dealing with and satisfying the need for housing accommodation. The income of such authority could be exempted from the tax. The second part of the section provides that income of such authority whose objectives is of planning, development or improvement of cities, towns and villages or both, is also exempted from tax. It is, therefore, evident that if the authority is constituted under enactment, either for satisfying the need for housing accommodation or for planning, development or improvement of cities, towns and villages or for both, income of such authority is exempted from tax under Section 10(20A) of the Income-tax Act. It was, therefore, necessary for the Appellate Tribunal to consider the issue in the light of the provisions of the VIDC Act, the Maharashtra Irrigation Act, 1976, and the Bombay Canal Rules, 1934. However, the conclusion arrived at by the Appellate Tribunal in respect of question No. 1 mentioned hereinabove in the present appeal appears to be not correct and in our view, needs to be reconsidered by the Appellate Tribunal.

49. So far as the second substantial question of law is concerned, the appellant-assessee had raised the following specific ground before the Appellate Tribunal :

"The appellant-corporation started its business on the inception and the income and expenditure account and the balance-sheet of the year under consideration should be read keeping in view this position. The net deficit after deducting all the allowable business expenditure should be allowed to be recast and worked out and then the resulting losses should be allowed to be carried forward as per the provisions of the Income-tax Act, 1961."

50. So far as the conclusion recorded by the Appellate Tribunal in respect of the second question of law that the assessee has not yet commenced its business and, therefore, it is not possible to compute income under the head "Income from business" is concerned, the same is primarily recorded on the basis of letter dated February 16, 2001, filed by the assessee before the Assessing Officer wherein the assessee has mentioned that the asses-see-Corporation has not commenced the business, without taking into consideration various circumstances placed on record by the assessee in view of the provisions of the VIDC Act to show that the assessee has taken over existing business, such as irrigation projects, etc., of the State Government wherein income from sale of water was already commenced and continued after the Corporation came into existence and stepped into the shoes of the State Government after appointed day under the provisions of the VIDC Act. In other words, the stand of the assessee was that the existing irrigation facility provided by the State Government was taken over by the assessee-Corporation in addition to development of further projects under construction as well as future projects to be established.

51. The appellant-Corporation also pointed out to the Appellate Tribunal that apart from completion of some ongoing irrigation projects, the corporation is also required to promote and operate the existing projects. This fact is evident in view of the provisions of Section 15 of the VIDC Act. The contention of the assessee-Corporation was that some of the projects transferred to the corporation were already partially completed wherein irrigation activity was already commenced and the corporation only continued to promote and operate such existing facilities for development of irrigation. Similar stand was taken in view of the provisions of Section 18 of the VIDC Act by the assessee before the Appellate Tribunal. The Appellate Tribunal considered the method of accounting by the assessee in the financial statement prepared by the assessee in view of letter dated February 16, 2001 filed before the Assessing Officer without considering the entire transaction and facts, which were on record. The Assessing Officer, in fact, should have considered the entire facts rather than considering it only on the basis of presentation of entries of the books of account of the assessee. It was necessary for the Appellate Tribunal to consider the true nature of the transaction and whether the same has ultimately resulted in profit or loss to the assessee-Corporation. It is no doubt true that the entries made by the assessee in the books of account were relevant for the purpose of finding out whether the assessee has earned any profit or suffered any loss, however, the assessment cannot be solely based on this aspect alone unless the authority considers the true nature of the transaction and factual aspect of profit or loss to the assessee. It is therefore, necessary for the Assessing Officer to compute the real taxable income of the assessee irrespective of method of accounting adopted by the assessee.

52. For the reasons stated herein above, in our considered view, the Appellate Tribunal needs to reconsider the second substantial question of law in the light of the observations made by us in the present judgment.

53. Apart from the above referred two substantial questions of law, the assessee-Corporation wanted us to frame another question of law, which reads thus :

"Whether the interest paid to bondholders, which has a direct nexus for earning interest from the bank, is an allowable deduction from the interest received from bank ?"

54. However, there is no specific ground raised by the assessee in the present appeal in this regard and in the absence thereof, it is not possible for us to conclude that such substantial question of law is involved in the present appeal nor can such question of law be framed only on the basis of oral submissions made by learned senior counsel for the appellant and, therefore, we disallow this question.

55. At this stage, Sri Manohar, learned senior counsel for the appellant-Corporation, states that in the instant appeal, interim order granted by this Court on July 4, 2003, may be continued till the decision of the Income-tax Appellate Tribunal in the proceedings after remand. The request made by the assessee, in view of the order dated July 4, 2003, is not unreasonable. Since substantial amount, i.e., Rs. 6,50,00,000 out of entire amount of income-tax for the relevant year 1998-99, which comes to Rs. 6,65,21,867 was deposited by the appellant-assessee and the respondent-Department was also permitted to withdraw the said amount on the ground that if the assessee succeeds in the present appeal, the respondent-Department shall return the entire amount with interest thereon according to law, we see no legal impediment in granting the said prayer of the appellant-assessee.

56. For the reasons stated hereinabove, we set aside the impugned order dated February 28, 2003, passed by the Income-tax Appellate Tribunal and remand the matter to the Income-tax Appellate Tribunal to reconsider the case of the assessee as well as the respondent Income-tax Department in regard to substantial questions of law Nos. I and II, in the light of the observations made by us in the present judgment as well as the law laid down by the apex court and decide the same as early as possible and in any case, not beyond the period of three months from the date of receipt of this judgment. The interim order dated July 4, 2003, passed by this Court in the present appeal shall continue to operate till the Income-tax Appellate Tribunal disposes of the proceedings.

57. The appeal is allowed in the above terms. No order as to costs.