ORDER
N.K. Agrawal, Judicial Member
1. These two appeals, by the assessee, relate to assessment years 1983-84 and 1984-85 and since there are common questions involved, they are being decided by this consolidated order, for the sake of convenience.
2. Ground No. 1 in both the appeals is general in nature and does not
3. Ground No. 2 in both the appeals relates to the question of exemption sought by the assessee-corporation under Section 10(20A) of the Income-tax Act, 1961. The assessee is a company incorporated on 31-8-1981. The Government of Punjab Intended to develop a rural settlement called Goindwal in Tarn Taran Tehsil, District Amritsar. The said rural area had a population of about 1850 persons (1971 census). This area was situated on the right bank of Beas river. People around Goindwal wanted the setting up of a nucleus industrial complex there. 3600 applications were received by the Government for allotment of industrial plots. An integrated project for the development of an industrial area and an urban township was, therefore, prepared by the Government under a complex plan. In the first phase of the project, industrial area was intended to extend to 800 acres and township to spread over an area of 3200 acres. The Government of Punjab acquired about 475 acres of land for establishing there an industrial area. The Punjab Government after acquiring land, handed over the same to the assessee for development of first phase of the industrial complex. The land was transferred to the assessee at the cost price of Rs. 43,06,663. The assessee-corporation had to develop the land and sell industrial, residential and commercial plots, after providing infra-structural facilities. The assessee-corporation, under an agreement with the Government had to pay the cost of land, as aforesaid, with interest @ 5% per annum, in six annual installments. In this way, Goindwal was acquired to be developed as an industrial township.
4. The 1d. counsel for the assessee has contended that the Punjab Government established the assessee-corporation with the main object of developing an industrial township at Goindwal and since the corporation was required to develop a township also, it was entitled to the benefit of exemption of income under Section 10(20A). Section 10(20A) reads as under :
10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included ** ** ** (20A) any income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both;
The aforesaid provision requires two conditions to be satisfied so as to give the benefit of exemption to an authority. First, benefit could be claimed only by an authority which is constituted by or under any law. The assessee-corporation, as we have earlier noted, was incorporated as a company, by the Government of Punjab. It is, therefore, a company within the meaning of Section 3(1)(iii) of the Companies Act, 1956. Therefore, it will appear that the assessee is a company established under the said Act and not under any special enactment. The words ‘authority’ and ‘constituted’ occurring in the first part of Clause (20A) signify that the assessee, claiming exemption of income, must be an authority constituted by or under any enactment. The assessee-corporation has been established as a company under the Companies Act and, therefore, it cannot be held to have been constituted as an ‘authority’ under the said Act. The assessee can be treated to be a Government undertaking/company, as defined in Section 617 of the Companies Act, but it will be difficult to call it a ‘statutory authority’ or an ‘authority’. It is noted that in Article 2 of the Articles of Association of the company, the assessee has been described as a private company.
5. When we examine the second part of Clause (20A), we find that the authority must be constituted under a law which has been enacted for the purposes of dealing with housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages. It does not appear that the assessee was specially constituted under any special enactment relating to housing accommodation of city planning. The Companies Act is a general law whereunder a company is incorporated and is then governed by the provisions of the said Act. Therefore, it will be difficult to hold that reference to the law enacted in connection with housing accommodation or for the purpose of planning, development or improvement of cities and villages, would include the Companies Act. The very purpose of Clause (20A) appears to be to exempt income of such authority which is constituted under a special law enacted especially for dealing with housing accommodation or for the purpose of planning and development of a city or a village. Therefore, emphasis is not only on the constitution of an authority by or under a law but also on such law which is specially framed for dealing with housing accommodation or town planning. It will be thus clear that the second ingredient in Clause (20A) also excludes the assessee-corporation from the benefit of the said clause. The assessee has not been constituted as an authority under any special law but as a company under the Companies Act.
6. The Id. counsel has vehemently argued that the primary object of the assessee-corporation is to prepare an integrated scheme for an industrial area and a township. His main plan of argument is that an integrated project is being implemented by the assessee for the development of an industrial area as well as a township. Concept of a city is said to have been visualised by the Punjab Government and the assessee-corporation in para 5 of the plan prepared in this regard (copy at page 6 of Annexure P. 6 of the assessee’s paperbook). According to the concept plan relating to the industrial town of Sri Goindwal Sahib, industrial and urban area is to be segregated by a zone of fairly thick foliage by incorporating two linear forests on either side. The industrial area stretching across almost 1200 acres has been given the form of a corridor. The location of the industrial zone effectively tends to create a twin city concept. A grid pattern of roads and services has also been adopted. Major civic and community facilities like educational institutions, hospitals, grain market and warehousing etc., have also been planned. In para 3 of the said plan, it has been specified that a perspective of 50 years has been approved and a concept plan for a population of about 3 lakhs has been prepared. Out of 3600 applications received for industrial plots, about 33% of them were found to be genuine. It was envisaged that total size of industrial area would be about 1200 acres. Based on standard town planning norms of 30 persons per acre gross industrial density, the projected industrial work force has been estimated at 36000 persons. Based on an average family size of 5, the population linked to industrial activity would be about 1.80 lakhs.
The 1d. counsel has thus submitted that looking to the broad parameters of the plan, it cannot be said that the assessee-corporation is not engaged in the work of housing accommodation and town planning. Our attention has also been drawn to paras 9, 10, 11 and 13 of Clause III(B) of the Memorandum of Association, which outlined the incidental or ancillary objects as under :
9. To acquire, purchase, hire, lease or receive in any way whatsoever, land and to develop, construct on, or otherwise manage such land.
10. To acquire, purchase, hire, lease or build, cause to be built or manage structures and facilities suitable for industrial, residential and all or any other activities necessary for the functioning of an industrial or urban estate.
11. To acquire, purchase, hire, lease or receive in any way whatsoever, or construct roads, water supply and public health installations, distribution and supply arrangements for power and all such other infrastructural facilities as may be required to build and maintain an industrial or urban complex at Goindwal Sahib or elsewhere in the State of Punjab.
13. To provide or cause to be provided civic facilities like hospitals, dispensaries, markets, banks, post offices, fire stations, internal commuting services, schools, recreation facilities etc., in the industrial and urban estates at Goindwal Sahib, or elsewhere in the State of Punjab.
7. The 1d. D.R. has, on the other hand, contended that the main object to be pursued by the company is to develop and promote an industrial complex at Sri Goindwal Sahib, Tehsil Tarn Taran, Distt. Amritsar. The assessee is also to carry on business of an investment company for providing finance to industrial enterprises. Its main function is as specified in Clause III(A) of the Memorandum of Association, to promote, improve, establish, execute, manage and administer industries, projects or enterprises. Another main object for which the assessee has been established is said to be the development of industrial infrastructure in Punjab. So far as the other functions assigned to the assessee are concerned, these are said to be incidental or ancillary to the attainment of the main object. Clause III(B) of the Memorandum of Association specifies such incidental or ancillary objects. All other activities like developing a township or providing civic amenities are said to be incorporated as incidental or ancillary objects only. Our attention has also been drawn to the Directors’ Report for accounting year 1982-83, wherein the background is given for the purpose of showing as to how the assessee-corporation came to be established. In the introductory part of the report, it has been noted that the Punjab Government conceived the Goindwal Nucleus Industrial Complex’ in pursuance of the Government of India’s new Industrial Policy Statement of July 1980. The assessee-corporation is said to have been incorporated on 31-8-1981 with the main object of developing and promoting the growth of an integrated industrial and urban complex at Goindwal Sahib. The Government of Punjab, therefore, acquired 475.75 acres of land for development of the first phase of the industrial complex. The said land was transferred by the Government to the assessee for development and sale of industrial, residential and commercial plots by providing infrastructural facilities. It will be thus clear from the Directors’ report also that the assessee-corporation was primarily established as a company for the purpose of developing an industrial area-cum-township at Goindwal. Therefore, looking to the main object, it will be difficult to hold that the assessee-corporation fulfils the conditions laid down in Section 10(20A) of the Act.
8. The 1d. D.R. has placed reliance on a decision of the Gujarat High Court in the case of Gujarat Industrial Development Corpn. v. CIT [ 1985] 151 ITR 255 in which it was noted that the assessee in that case had been constituted under a special enactment. It was, however, found that the said corporation had been created not as a Housing Board but to secure orderly establishment of industries in industrial areas and industrial estates in the State of Gujarat. It was found that the assessee-corporation therein had no object whatsoever to plan, develop or improve any city, town or village in the Gujarat State. Developing any city, any town, any village or any area would require roads, buildings, sanitation, parks, educational institutions and several other amenities. It will be an integrated activity by which an area could develop. The Gujarat State Industrial Corporation was held to be not a corporation set up with the larger purpose of developing a particular city, town or village and, therefore, it was held to be not entitled to exemption Under Section 10(20A) of the Act. The 1d. counsel for the assessee has, however, pleaded that the Gujarat case made it very clear that since the corporation had no objective to develop a township, it was rightly held to be not entitled to exemption. The 1d. counsel has attempted to draw support from the said case on the plea that, in the case of the present assessee, the objectives have been specified in the Memorandum of Association as well as the concept plan, which did include the housing accommodation as the object of the assessee-corporation. The 1d. D.R. has in reply contended that the main object of the assessee has been very clearly specified, in the Memorandum of Association to be the development of industrial area. It is only by way of ancillary object that the development of a township, for the people engaged in the industries, has been specified. It is therefore, contended by the 1d. D.R. that the assessee-corporation has not been established for developing the rural area of Goindwal as such but to establish an industrial area at that place. Merely because an integral project has been prepared to develop industrial area and also an urban township, it will never mean that the main object of the corporation was to provide housing accommodation or to develop a town or a village.
9. We have considered the rival contentions and we find that not only on the ground of distinct primary object of the corporation being clear but also in view of the specific provision contained in Section 10(20A) of the Act, the assessee is not entitled to exemption of income as such. The assessee’s main object is to develop an industrial area and the incidental or ancillary object is to provide housing and other facilities for the proper development of the industrial township. The assessee has also not been found to be an authority constituted under any Act. Since the assessee is not the creation of any special statute enacted for the purpose of dealing with housing accommodation of planning and development of a town or village, the assessee is not covered Under Section 10(20A). We, therefore, find that ground No. 2 has no force and it is rejected.
10. Now, we shall take up ground Nos. 3, 4 and 5 together because they involve an important question about commencement of business. Ground No. 3 relates to the expenditure claimed at Rs. 20,86,552 in assessment year 1983-84 and Rs. 24,73,965 in assessment year 1984-85. Ground No. 4 relates to income shown at Rs. 8,73,771 in assessment year 1983-84 and Rs. 4,97,984 in assessment year 1984-85. Ground No. 5 pertains to set off of amount of interest payable to the Government against income. The expenditures claimed in both the years have been disallowed by the revenue authorities on the ground that these relate to the pre-operative stage and have to be capitalised. Since the assessee is said to have not yet commenced the business, the expenditures are said to be not in the nature of business expenditure. As regards income, on the same analogy, the revenue authorities have held that the interest earned from bank would not be business income but income from other sources. The 1d. counsel for the assessee has argued that the assessee has already received the possession of land from the Punjab Government and it was, in the hands of the assessee, as stock-in-trade. The Punjab Government acquired about 475 acres of land for development of the first phase of the industrial complex. That land stands transferred to the assessee, though formal conveyance deed or any other document has not so far been executed nor the assessee has made payment of the cost of land. It may be noted that the assessee, being a Government undertaking, has been given possession of land by the State Government and it is also found that the land measuring 268542 sq. yds. has been allotted by the assessee-corporation to various parties in the assessment year 1983-84 and land measuring 287542 sq. yds. is shown to have been allotted in the next assessment year. The primary question is not whether the title of land has vested in the assessee or not or whether a proper conveyance has been executed by the Government or not because those questions are altogether not relevant for determination of the point whether the assessee has commenced business or not. The assessee has received Rs. 42.15 lakhs as allotment money, land subsidy and earnest money for allotment of 58 industrial plots in the assessment year 1983-84. Besides, a sum of Rs. 34.12 lakhs has been received from the Government on account of estimated development cost of 12.5 acres of land allotted for industrial use and 2.5 acres of land for residential purpose to BHEL. Similarly, in the next assessment year, the assessee has received Rs. 22.62 lakhs on account of money for allotment of 20 industrial plots. The said money also includes land subsidy in respect of plots allotted in earlier years. The 1d. counsel has, therefore, argued that the assessee has already started development work and thereby the business had been commenced. The assessee’s case also came to be examined by the revenue authorities in the preceding assessment year 1982-83. Income earned by way of interest etc. and similar expenses have been allowed in that year by the CIT (A) on assessee’s appeal. Revenue’s appeal before the Tribunal was rejected by order dated 10-3-1989 in I.T.A. No. 1058/Chd./85 for assessment year 1982-83. As in the case relating to the two years under consideration here, the assessee had shown the receipt of income by way of interest and the other expenses in the assessment year 1982-83 and that were duly allowed by the first appellate authority. It has, therefore, been submitted by the 1d. counsel for the assessee that the business had already entered the second year in 1983-84. Since development of land was the primary function of the assessee, the entire expenditure pertained to such development only. Since the lands have already been allotted in both the years, it further want to suggest that the assessee had already commenced business. As we have already seen, the assessee-corporation has been established to develop an industrial estate/township and, therefore, development of land and its allotment are its primary functions. In both the years under consideration, the assessee has developed the land as well as made the allotment. Therefore, there is nothing to suggest that the business has not yet commenced. It is not a case of trading or manufacturing but a case of developing an area for establishing an industrial estate. Therefore, the very nature of business of the assessee is to develop the land, provide necessary facilities and to make allotment to the entrepreneurs. In this light, it will be very difficult to support the view of the revenue authorities that the assessee has not yet commenced business.
11. The 1d. D.R. has invited our attention to the balance carried to the balance-sheet, with respect to the expenditure, for being capitalised. It has been submitted that since the expenditure has been carried to the balance- sheet for being capitalised, the assessee is bound by its own step/action and could not now take a different plea/stand that the expenditure was of a different nature. The 1d. counsel has, in reply, submitted that the expenditure was in excess of income and, therefore, debit balance from the development expenditure account has been carried to the balance-sheet. This would, however, not mean that the assessee was not entitled to claim the expenditure as business expenditure. The 1d. counsel has placed reliance on a decision of the Gujarat High Court in the case of CIT v. Saurashtra Cement & Chemical Industries Ltd. [ 1973] 91 ITR 170, wherein it has. been observed that ‘business’ connotes a continuous course of activities. All the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily precede all other activities is started. That was a case of a company formed for the manufacture and sale of cement. The assessee-company had obtained a mining lease for quarrying limestone and started the mining operations. It claimed the expenditure incurred for the purpose of extracting limestone as also depreciation and development rebate for the machinery installed for that purpose. The expenditure incurred by the assessee in carrying on the activity of extraction of limestone and also depreciation and development rebate were held to be deductible in computing the trading profits of the assessee. The 1d. counsel has, on the basis of the ratio of the said decision, urged that since the assessee’s business was to develop an area and to make allotment of land, the business shall be deemed to have commenced in the very first year itself. Since these are second and third years of development work, the business has not only commenced but has reached an advanced stage.
12. The 1d. D. R. has pointed out that the assessee has not prepared a profit and loss account but has chosen a new method to carry income and expenditure to the development and incidental expenses account. It has been argued that this action itself suggests that the assessee has not yet commenced business. The 1d. counsel has, on the other hand, pointed out that a mere different description of an income expenditure account would not change the claim of the assessee nor the factum of commencement of business. The very nature of activities must be seen in order to determine whether income and expenditure were business income and business expenditure or not. The assessee has shown income at Rs. 8,73,771 in the accounting year ending 31-3-1983 and at Rs. 4,97,984 in the next accounting year. The primary source of income is interest received from banks’. In assessment year 1983-84, interest received from banks is to the tune of Rs. 4,25,987. In this year, application fee was received at Rs. 23,435 and storage charges at Rs. 1,06,953. Certain earnest and allotment moneys were forfeited and thereby the sums of Rs. 2,64,000, Rs. 20,450 and Rs. 16,962 have been shown as the amounts received by way of forfeiture or the earnest as well as allotment moneys. In the second assessment year, interest received from banks is Rs. 3,48,050. Application fee for residential plots has been shown at Rs. 33,030. In this year also, there is income, from storage charges and also on account of forfeiture of earnest as well as allotment money. The nature of income would suggest that the assessee has already started receiving earnest money on allotment of plots and since there was breach of agreement, certain allotments have been cancelled and earnest money forfeited. It does not show anything but that the assessee has already started doing substantive business. The assessee has already done development work. At para IV of the Directors’ Report for the accounting year 1982-83, expenditure on works has been shown at Rs. 112.62 lakhs. In the next assessment year, expenditure on development works has been shown at Rs 51.75 lakhs. It would, therefore, be clear that the assessee is engaged in development of infrastructural facilities.
13. As regards expenditure shown at Rs. 20,86,552 in assessment year 1983-84, depreciation has been claimed therein. Details of other expenditures have also been given in the Schedules attached to the balance sheet for that year. In the financial expenses, the amount of interest to be paid to the Punjab Government has been shown as an expenditure. In assessment year 1983-84, amount of interest payable to Government has been shown at Rs. 2,15,333 in Schedule ‘K’ in the Annual Report. In the next accounting year, the amount of interest to be paid to the Government has been shown at the same amount and can be seen in the Annual Report for the accounting year 1983-84. In this way, the assessee-corporation has made provision for interest payable to the Government on the cost of land, which remained unpaid. As per the agreement, the assessee has to pay interest @ 5% per annum on the cost of land determined at Rs. 43,06,663. Since the land has been acquired by the Punjab Government, the cost of land is yet to be paid by the assessee. Therefore, interest payable has already been charged and carried to the expenditure account.
14. The 1d. counsel has submitted that since the cost of land is yet to be paid to the Government, the amount of interest must be allowed as a valid expenditure. The 1d. D.R. has, however, contended that the State of Punjab has not yet executed a conveyance deed in favour of the assessee and since the title has not yet passed to the assessee, the provision made for interest cannot be allowed. We, however, find that the argument is totally misplaced, inasmuch as the assessee is a debtor in respect of the cost of land. If the State Government has already provided in the agreement that it shall charge interest, the assessee has right fully made a provision for interest. We do not find any reason as to how interest payable to the Government could be held to be an expenditure not allowable in law. The land has been acquired by the Government for the purpose of developing an industrial estate. The land has been passed on to the assessee for development and allotment. Therefore, the assessee has to pay the cost of land to the Government in accordance with the agreement. The assessee, appears to have not yet paid any installment, though, as per the agreement, payment is to be made in six annual installments. In the Directors’ Report, it has been specified that the Punjab Government has to be paid the cost of land. We, therefore, find that the assessee can make a provision for interest payable to the Government.
15. The 1d. D.R. has, however, argued that since no amount of interest has been paid to the Punjab Government, it could not be allowed. We do not find any sound reasoning in this plea inasmuch as there is no dispute about the assessee’s liability to pay for the cost of the land. The land is stock-in-trade in the hands of the assessee and its primary and only function is to develop the land by providing infrastructural facilities and then to allot that land. The assessee may be in a position to repay the cost, after collecting moneys from the allotters. Therefore, the interest payable to the Punjab Government cannot be said to be a claim which is not for business. Even if interest has not been actually paid, a provision can definitely be made on accrual basis. It is for the assessee to choose a method of accounting and if the assessee has found it practicable to provide for interest payable to the Government, it can legitimately claim deduction therefor. The 1d D.R. has argued, in respect of interest income in the hands of the assessee, that it must be treated as income from other sources. In this respect, reliance has been placed on a decision of the Madras High Court in the case of CIT v. Seshasayee Paper & Boards Ltd. [1985] 156 ITR 542, where the assessee was found to have not yet established the factory, though the company had been formed. The call deposits in the hands of the assessee-company were invested in bank pending utilisation for construction of factory. The interest received on call deposits was held to be income from ‘other sources’ and not adjustable against interest payable. The 1d. D.R. has, on the basis of the ratio of the said decision, contended that interest received could not be adjusted against interest payable by the assessee in the present case. In the Madras case, relied upon by the 1d. D.R., the assessee was found to have invested call money pending utilisation. Since it was a case of a company going to establish a factory, the business was found to have not been communed inasmuch as factory had not been established. In those circumstances, interest earned from the banks was held to be income from other sources and not business income. Against that background interest payable was held to be not adjustable against interest received. Therefore, we find that the Madras case is distinguishable on facts. In the case before us, the assessee has already commenced business by way of development of land and its allotment. The Tribunal has already in the first year held that the income by way of interest was adjustable against interest payable by the assessee. As we have already remarked, the first appellate authority allowed adjustment of interest received and paid against each other, in the assessment year 1982-83. That order was upheld by the Tribunal by observing that the CIT (A) has impliedly treated interest income as business income and then only allowed the adjustment of interest paid there from. We find that the revenue authorities have already taken a view as regards commencement of business and interest income. Therefore, we find that the assessee-corporation has already commenced business and the expenditure as well as income are to be treated as business expenditure and business income. The amount of interest, shown as payable, is also to be adjusted/set off against interest income. In other words, we can say that the interest payable has to be treated as a valid deduction. The assessee has brought the interest income to the development expenditure account and has also carried payable interest to that account. Therefore, all the three grounds are decided in favour of the assessee.
16. In the result, the appeal is partly allowed.
