MAHARASHTRA AIRPORT DEVELOPMENT COMPANY LIMITED,MUMBAI vs. NATIONAL FACELESS ASSESSMENT CENTRE, INCOME TAX DEPARTMENT, DELHI, DELHI

During the hearing, by referring to Ground No.2(a), the learned Authorized Representative (“learned AR”) submitted that as the assessee is a State by itself or a surrogate of the State or an agent, performing the functions of the State and/or on behalf of the State of Maharashtra and the assessee is a State also within the meaning of Article 12 of the Constitution of India and therefore, in view of clause (1) of Article 289 of the Constitution (A.Y. 2021-22) 4 of India, the interest income earned on Fixed Deposits is exempt from tax as the said interest income is not derived from trade or business carried on by the assessee. The learned AR submitted that similar addition on account of interest income earned on fixed deposits maintained by the assessee came up for consideration before the Co-ordinate Bench of the Tribunal in assessee’s own case for the assessment years 2007-08 and 2016-17, wherein the Co-ordinate Bench of the Tribunal agreed with the submissions of the assessee and held the assessee to be a State being an instrumentality/agent of the State, resulting in its interest income earned on fixed deposits not chargeable to tax as per Article 289 of the Constitution of India.

From the perusal of the record, we find that this issue has been raised for the first time by the assessee in the present appeal before us and was not raised by the assessee in its appeal before the learned CIT(A). Though this fresh issue should have been raised by way of an application seeking admission of an additional ground, the assessee has raised the same in the main appeal filed before us. During the hearing, the learned AR orally prayed that the issue raised in Ground No.2(a) of the present appeal be considered as an additional ground, as the same has raised a legal issue, which goes to the root of the matter, and the same may be admitted for adjudication. It is undisputed that, being a legal issue, it can be raised at any stage of the proceedings provided the relevant material for its adjudication is on record. After considering the submissions and perusing the material on record, we are of the view that the issue raised by way of (A.Y. 2021-22) 5 Ground No.2(a) is a legal issue, which can be decided on the basis of the material available on record. Accordingly, the same is admitted for adjudication in view of the ratio laid down by the Hon’ble Supreme Court in NTPC vs. CIT, reported in (1998) 229 ITR 363 (SC).

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee was constituted as a company under the Companies Act, 1956, in the year 2002 by the Government of Maharashtra as a Special Purpose Company to develop Multi-modal International Hub Airport at Nagpur (“MIHAN”), Special Economic Zone (“SEZ”) and Aviation Infrastructure in the State of Maharashtra to provide the regional air connectivity and operationalizing certain government schemes. The broad objective of the assessee was the development of MIHAN as a world-class multi-modal International Hub Airport, development of the adjacent area of MIHAN as a multi-product SEZ and to provide supporting infrastructure, build and operate airports in the other parts of the State of Maharashtra, facilitate intra-state and inter-state connectivity, encourage overall growth of the aviation sector in the State of Maharashtra, and ensure planned development around airports.

For the year under consideration, the assessee filed its return of income on 11.03.2022, declaring a total loss of Rs.20,58,17,877/-. The return filed by the assessee was selected for scrutiny under CASS, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee has maintained fixed deposits with certain banks and has earned interest income of Rs.3,66,25,480/-, which was not offered to tax but was carried to the work in progress. Accordingly, the assessee was asked to furnish the details. In response, the assessee submitted that it has earned interest on fixed deposits/current accounts with banks and these fixed deposit funds were not placed out of surplus funds. It was further submitted that the interest on fixed deposits / current account is inextricably linked to the main business activity of the assessee, and therefore, is being treated as business income and the same has been reduced from the cost of the project by the assessee except an amount of Rs.52,619/- received pertaining to Shirdi Project, which is credited to the Profit & Loss Account. The assessee submitted that, following the consistent method of accounting, the interest paid on borrowing is added to the cost of the project by debiting the same to the work in progress. On the same line, interest earned on short-term fixed deposits, which has resulted in a reduction in the cost of projects undertaken, is reduced from the cost of the project.

The learned CIT(A) vide impugned order, dismissed the ground raised by the assessee on this issue and upheld the addition on interest income received by the assessee from fixed deposits by treating the same as income from other sources. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. We find that while deciding the similar issue, as (A.Y. 2021-22) 8 raised by the assessee in Ground No.2(a) before us, the Co-ordinate Bench of the Tribunal in assessee’s own case in Maharashtra Airport Development Company Ltd. vs. ACIT, in for the assessment year 2007-08, vide order dated 27.09.2024, after taking into consideration the provisions of Article 12 and 289 of the Constitution of India as well as the main objects, shareholding structure and the purpose for the constitution of the assessee held that the assessee fall within the definition of State as per the provisions of Article 12 read with Article 289 of the Constitution of India and thus the interest income earned on fixed deposits is not chargeable to tax. The relevant findings of the Co-ordinate Bench, in the aforesaid decision, are reproduced as follows: - “6. To deal with this additional ground, we appraise ourselves with Article 289 of the Constitution of India which is reproduced as under: "(1) The property and income of a State shall be exempt from Union taxation. (2) Nothing in clause (1) shall prevent the Union from imposing, or authorizing the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. (3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of Government." 6.1. From the above, we note that Article 289 exempts state income or property from taxation. On plain reading of above article, it is clear that Union can (i) itself impose or authorize to impose (ii) any tax to such extent, as parliament may by law provide (iii) in respect of a trade or business of any kind carried on or on behalf of Government of a state. Further, Article 289 (2), which is the exception to 289(1), it is important to note that parliament by law provide to tax the property or income in relation to only trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith.

Existence of deep and pervasive State control may afford an indication that the corporation is a State agency or instrumentality.

Whether the Corporation enjoys monopoly status which is State conferred or State protected.

If the functions of the corporation are of public importance and closely related to governmental functions. It would be a relevant factor in classifying the corporation as an instrumentality or agency of the Government 5. If a department of a Government is transferred to a corporation, it would be a strong factor supporting this inference of the corporation being an instrumentality or agency of the Government. 7.2. After applying the cumulative effect of all the relevant factors mentioned above, if the body is found to be an instrumentality of the agency of the Government, it would be an authority included in term "State" under Article 12 of the Constitution of India. However, the tests indicated by the Hon'ble Apex Court in the case of Som Prakash Rekhi are merely indicative and not absolute and thus, have to be applied discretely. If any body or organisation falls within the criteria as laid down by the Hon'ble Apex Court, it can be considered that it falls within the term "State".

With the above understanding, we look at the status and structure/set up of the assessee. The assessee, Maharashtra Airport Development Company Limited ('MADC') was constituted as a company under the Companies Act, 1956 in the year 2002 by the Government of Maharashtra ('GoM') as a special purpose company to develop Multi-modal International Hub Airport at Nagpur ('MIHAN') and aviation infrastructure in the State of Maharashtra to provide the regional air connectivity and operationalizing certain government schemes. MADC is governed under the Maharashtra Regional and Town Planning Act, 1966 (for short, "MRTP Act") and as per section 160 of MRTP Act, assessee shall be dissolved once the purpose of the GoM is achieved and from such date, all properties, funds and dues vested in MADC shall vest in or be realisable by the State Government.

In order to decide the issue in controversy we would decide if the assessee company is a state while executing the work of development of airports, repair and maintenance of airports as an arm of the state, 23. Undisputedly the assessee company was incorporated as a company under the Companies Act, 1956 by the Government of Maharashtra as a special purpose company to develop multi model international hub airport at Nagpur and aviation infrastructure in the State of Maharashtra in order to provide regional air connectivity and operationalising certain government schemes. It is also not in dispute that the assessee company was formed with equity participation from various government companies namely CIDCO, MIDC, NIT, MSRDC, SICOM & NMC which are owned and controlled by Government of Maharashtra; that the entire management and functional control of the assessee company is that of Chief Minister of Government of Maharashtra and all other board persons are senior officers of the State Government of Maharashtra, that grant-in-aid was received by the assessee company from Government of Maharashtra in order to carry out statutory functions and its activities are for the development of the state in general and for the benefit and welfare of the general public in particular; that it is also not in dispute that the assessee company is appointed by the State Government as a special planning authority under section 40(IB) of the Maharashtra Regional Town Planning (MRTP) Act, 1966; that it is also not in dispute that the assessee company being a special

Having considered the above findings of the Co-ordinate Bench of ITAT in assessee's own case as well as in other decisions referred above, we are in agreement with the same to hold the assessee to be a State, being an instrumentality / agent of the State, thereby resulting in its interest income earned on fixed deposits not chargeable to tax. Further, we note that clause (2) of Article 289 provides an exception and authorises the Union to impose a tax in respect of the income derived by the Government of a State from trade or business carried out by it or on its behalf. In this respect, it is undisputed fact that Id. Assessing Officer has himself assessed the interest income on fixed deposits under the head "income from other sources". The said interest income thus, cannot be said to be derived from trade or business carried out by the assessee. Accordingly, clause(2) of the Article 289 is inapplicable. Since the assessee is held to be a State, or a surrogate of the State or an agent, performing the functions of the State and/or on behalf of the State of Maharashtra, whereby its income is not chargeable to tax within the meaning of clause(1) of the Article 289, all the other grounds of appeal raised by it in Form no.36 including the revised one and other additional grounds are rendered academic in nature and therefore not adjudicated upon. In terms of our above stated findings, even the grounds raised by the Revenue in its appeal relating to Id. CIT(A) not fulfilling the conditions of Rule 46A of the Rules are rendered infructuous.”

The brief facts of the case pertaining to this issue, as emanating from the record, are: For the MIHAN Project, the Government of Maharashtra has released the grants to meet the cost of land acquisition, PAR rehabilitation and construction of the Air Force Road. During the assessment proceedings, the assessee submitted that it has been treating grants as part of other equity in its books of account, except for the grant for repairs and maintenance, and that this accounting treatment has been consistently accepted by the company's statutory auditors in all years. The assessee further submitted that the contribution made by the State Government towards land acquisition, rehabilitation and infrastructure development for various purposes is as per the budgetary approval process of the Government of Maharashtra and therefore is in the nature of Promoters’ Contribution. The assessee submitted that all the contributions made by the State Government are with an earmarked objective and are used as per the direction of the Government of Maharashtra, and their utilisation can only be (A.Y. 2021-22) 15 as per the directions that may be issued by the Government from time to time.

The AO, vide order passed under section 143(3) read with section 144B of the Act, disagreed with the submissions of the assessee and held that the Grant-in-Aid received by the assessee, Government of Maharashtra, is not towards equity or share capital. The AO held that the basic nature of the assessee’s business is that of a developer, wherein the assessee acquires land, develops it in the form of SEZ – non SEZ / Airports and then sells / gives it on long-term lease in lieu of revenue, and to acquire such land and to rehabilitate people, the assessee receives Grant-in-Aid from the Government of Maharashtra. Thus, the AO held that the Grant-in-Aid for acquisition of land, which in turn is sold to earn revenue, is offered for taxation. Therefore, it was held that the Grant-in-Aid received by the assessee is of a revenue nature. In this regard, the AO also placed reliance on the provisions of section 2(24)(xviii) of the Act, whereby with effect from 2016-17, all the assistance, grants, whatever name called, received from the Central Government, State Government, etc., in whatever form, are treated as income. Accordingly, the AO treated the Grant-in-Aid amounting to Rs.174,03,00,000/- received by the assessee from the Government of Maharashtra as income of the assessee.

The learned CIT(A) vide impugned order, dismissed the ground raised by the assessee on this issue and upheld the addition made by the AO. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. We find that this issue is no longer res integra and has been decided in favour of the assessee by the Co-ordinate Bench of the Tribunal in preceding years. In Maharashtra Airport Development Company Ltd vs. DCIT, for the assessment years 2012-13, 2014-15 and 2015-16, in etc., vide order dated 15.03.2024, the Co-ordinate Bench held that as the assessee is wholly owned company of the State of Maharashtra to carry out / execute the work of development of land acquisition, development of Airport etc. as an arm of the State, therefore it is an instrumentality of the State and thus Grant-in-Aid received by the assessee from the State of Maharashtra is not taxable in its hands. The relevant findings of the Co-ordinate Bench, in the aforesaid decision, are reproduced as follows: - “22. In order to decide the issue in controversy we would decide if the assessee company is a state while executing the work of development of airports, repair and maintenance of airports as an arm of the state.

Undisputedly the assessee company was incorporated as a company under the Companies Act, 1956 by the Government of Maharashtra as a special purpose company to develop multi model international hub airport at Nagpur and aviation infrastructure in the State of Maharashtra in order to provide regional air connectivity and operationalising certain government schemes. It is also not in dispute that the assessee company was formed with equity participation from various government companies namely CIDCO, MIDC, NIT, MSRDC, SICOM & NMC which are owned and controlled by Government of Maharashtra; that the entire management and functional control of the assessee company is that of Chief Minister of Government of Maharashtra and all other board persons are senior officers of the State Government of Maharashtra; that grant-in-aid was received by the assessee company from Government of Maharashtra in order to carry out statutory functions and its activities are for the development of the state in general and for the benefit and welfare of the general public in particular; that it is also not in dispute that the assessee company is appointed by the State Government as a special planning authority under section 40(IB) of the Maharashtra Regional Town Planning (MRTP) Act, 1966; that it is also not in dispute that the assessee company being a special planning authority is required to carry out the work of development and disposing of land in the notified area as an agent of the state.

In view of what has been discussed above, we are of the considered view that the Ld. CIT(A) has erred in treating the grant-in-aid received by the assessee company from State of Maharashtra as capital receipt rather utilization of the grant-in-aid by the assessee company for acquisition of land, development of airports, repair and maintenance of airports is the statutory functions of the assessee company as an agent of the State of Maharashtra, (A.Y. 2021-22) 19 hence, not assessable to tax under Income Tax Act. So the Ground Nos.4, 9 & 13 in & for A.Y. 2012-13, 2014-15 & 2015-16 respectively of Revenue's grounds and ground No.9 of ITA No.7259/M/2017 for A.Y. 2014-15 & ground No.13 of ITA No.798/M/2019 for A. Y. 2015-16 of Revenue are dismissed and ground Nos.1 & 3 and additional ground No.1, 2 & 3 raised by the assessee in ITA No.3682/M/2017 for A. Y. 2012-13 (Assessee's appeal), additional ground No.1, 2 &3 raised by the assessee in ITA No.7258/M/2017 for A. Y. 2013-14 (Revenue's appeal), additional ground No.1, 2 & 3 raised by the assessee in ITA No.7259/M/2017 for A. Y. 2014-15 (Revenue's appeal) of assessee's grounds are allowed.”

We find that following the aforesaid decision, similar findings were also rendered by the Co-ordinate Bench of the Tribunal in the assessee’s own case for the assessment year 2016-17 cited supra, and the addition on account of the Grant-in-Aid received by the assessee was directed to be deleted. Thus, respectfully following the decision cited supra rendered in assessee’s own case, we are of the considered view that Grant-in-Aid received by the assessee from the State of Maharashtra is not taxable in its hands. Accordingly, Grounds No.3(a) to 3(d) raised in the assessee’s appeal are allowed. In view of our aforesaid findings, Ground No.3(e) is rendered academic and, therefore, needs no separate adjudication.

In the result, the appeal by the assessee is partly allowed.