BANGALORE METRO RAIL CORPORATION LTD.,,BANGALORE vs. DCIT, BANGALORE

Accordingly, the Govt. of Karnataka, among other things, was to : 1. bear the entire cost of the land, 2. ensure electric power supply to the project on NO PROFIT NO LOSS basis,

During the previous year relevant to AY 2009-10, the funds received by the assessee which were not immediately required for execution of the project were invested in Fixed Deposit and Mutual Funds. As a result, it had earned interest and dividends as follows: Sl.No. Source of income Amount (In Rs.) 1. Interest earned on Term 26,84,84,585 Deposit 2. Interest – others 44,53,456 3. Dividend – Mutual Fund 36,80,124 – SBI 4. Dividend – UTI 56,08,307 5. Dividend – UTI 9,22,766 Apart from the above, the assessee also received miscellaneous income of Rs.2,55,96,584/- in the form of tender fees of Rs.2,18,24,568/- and other receipts of Rs.37,72,016/-. In the return of income filed on 29.09.2009 for Assessment Year 2009-10, the assessee claimed the aforesaid income as exempt.

The submissions made by the assessee were however not accepted by the AO. The AO was of the view that the decision of the Hon’ble Karnataka High Court relied upon by the Assessee in the case of KUIDFC was distinguished by the AO by pointing out that KUIDFC after implementation of urban infrastructure would not commercially exploit the infrastructure developed whereas the Assessee would after creation of BMRCL would commercially exploit the facility by charging for travel from the commuters. The AO also observed that in the case of KUIDFC there was no profit motive. According to the AO though the ultimate goal of the Assessee is to develop infrastructure, the said infrastructure facility will be ultimately used for commercial purpose. According to the AO after completing the project passenger will necessarily have to purchase the ticket and commute. The revenue so earned will result in profit. So a comparison cannot be drawn between a company which would utilize the fund for welfare schemes and the company which would be using the fund for commercial purposes. The AO also observed that from the facilities like sewerage boards or water supply systems which M/s KUIDFC would develop, a nominal fee will be charged on the consumers. Whereas, M/s BMRCL would issue tickets and run the facility on commercial basis. Hence, the explanation given by the assessee company basing on the case Law of M/s KUIDFC was not accepted. The interest income and miscellaneous income was brought to tax by the AO.

As far as the application for condoning delay in filing this appeal is concerned, it has been submitted in an affidavit in support of the application for condonation of delay that the assessee was subjected to wrong professional advice on the matter that no relief may be expected in the appellate forum and therefore no appeal may be preferred, and the disputed taxes may be remitted. The assessee followed the professional advice. The order of the CIT(A) for the preceding A.Ys.2007-08 & 2008-09 were challenged before this Hon’ble Tribunal. The Hon’ble ‘A’ Bench of this Tribunal vide its order in & 1071/Bang/2011 dated 31/10/2014 held that income earned on investments made out of surplus funds are not taxable in the case of the assessee. When the then Counsel advised the assessee that in the light of the Tribunal’s order in the assessee’s favour, it must file the statutory appeals for the orders which were not challenged, the assessee immediately took every step to ensure that this appeal is filed at the earliest. It is also stated that no appeal was filed earlier on account of professional advise. Accordingly the assessee has preferred appeal against the order of the CIT(A) before this Tribunal. 12. It has also been submitted that it is only because of the wrong professional advice that there arose a delay in filing of this appeal. The assessee is a government company and as a matter of established practice, went by the advice of the professional. It was submitted that if the delay is not condoned, great injury would be inflicted, given that the subject matter of the appeal is covered in favour of the assessee and the amount involved in the appeal is very huge. This tribunal has already held that the amount in dispute is not exigible to Income Tax, and therefore if this appeal is dismissed on the technical ground of delay in filing, it would amount to taxes being collected on amounts that do not constitute income under section 4 of the Act, which is not the intention of the legislature. Dismissing this appeal on account of delay, would deprive the justice by not giving the assessee the refund that it deserves and therefore it was pleaded that the Tribunal may take a lenient view and condone the delay. It was further submitted that the assessee is a government company and the decision making body is the board consisting of the representatives of both the Government of India and the Government of Karnataka and due to frequent restructuring of the Board, delays take place in decision making as regards to tax and financial matters.

Reliance was placed on the decision of the Hon’ble jurisdictional High Court in the matter of Karnataka Forest Development Corporation Limited v. ACIT in where the Hon’ble Court held : No doubt, it is the law that every days delay has to be explained, but, at the same time, where, Government is the appellant, having regard to the way that the Government and its officers function, the Courts have been taking lenient view in condoning the delay in the appeals filed by them. In the instant case, it is not disputed after the order came to be passed, the Managing Director was changed and thereafter, the Chartered Accountant took a decision to prefer the appeal and though papers were sent for signature was not signed and appeal was not filed. What is to be seen in such matters is that, the appellant was negligent and by not filing the appeal within time, whether there is any valuable right of the appellant, which would be taken away by not condoning the delay in the matters arising under the Income-tax Act, ultimately the question is, what is the tax payable under law. It is not an adversary litigation. An assessee cannot be charged without statutory authority. [emphasis supplied] 14. Reliance was also placed on the following decisions wherein it has been held that for the purpose of condoning the delay in filing of appeal, the appellate authority/court have to take a lenient view and dispose-off the matter based on the merits of the matter and not on the basis of technicalities. (i) Collector, Land Acquisition vs. MST. Katiji and Others (1987) 167 ITR 471 (SC); (ii) Concord of India Insurance Co. Ltd., vs. Smt. Nirmala Devi and Others 118 ITR 507 (SC);

We have carefully considered the rival submission. At the outset, we observe that the Hon’ble Supreme Court, in the case of Mst. Katiji (supra), has explained the principles that need to be kept in mind while considering an application for condonation of delay. The Hon’ble Apex Court has emphasized that substantial justice should prevail over technical considerations. The Court has also explained that a litigant does not stand to benefit by lodging the appeal late. The Court has also explained that every day’s delay must be explained does not mean that a pedantic approach should be taken. The doctrine must be applied in a rational common sense and pragmatic manner. In the case of Shakuntala Hegde, L/R of R.K. Hegde v. ACIT, ITA No.2785/Bang/2004 for the A.Y. 1993-94, the Hon’ble Tribunal condoned the delay of about 1331 days in filing the appeal wherein the plea of delay in filing appeal due to advice given by a new counsel was accepted as sufficient. The Hon’ble Karnataka High Court in the case of CIT v. ISRO Satellite Centre, ITA No. 532/2008 dated 28.10.2011 has condoned the delay of five years in filing appeal before them which was explained due to delay in getting legal advice from its legal advisors and getting approval from Department of Science and PMO. In the aforesaid decision, the Hon’ble Court found that the very liability of the assessee was non-existent and therefore condoned the delay in filing appeal.

As far as the merits of the appeal of the assessee is concerned, we find that in respect of interest income, the Hon’ble Karnataka High Court in its order dated 23.11.2021 in and 118/2015 in assessee’s own case for Assessment Years 2007-08 and 2008-09 held that identical interest income is not taxable for the following reasons: “We have carefully considered the rival submissions of the learned counsel appearing for the parties and perused the material on record. In Tuticorin Alkali Chemicals and Fertilizers Ltd., supra, the facts were that M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd., which was incorporated on 03.12.1971 for the purpose of, inter alia, manufacturing heavy chemicals such as ammonium chloride and soda ash, begun its production during June. 1982. The term loans taken from various banks and financial institutions for the purpose of setting up the factories, which was not immediately required by the company, were kept invested in short-term deposits with banks, which was specifically permitted by the Memorandum and Articles of Association of the Company. Interest earned by the company from the various loans given by the company and also from the bank deposit:; which were considered by the departmental authorities as income and brought to tax was the subject matter of the tax reference case before the Hon'ble Apex Court. The following question of law was referred to the Court for the decision:- "Whether, on the .facts and in the circumstances of the case, interest derived by the assessee from the borrowed funds which were invested in. short-terrn deposits with banks would be chargeable to tax under the head "Income from other sources" cr would go to reduce the interest payable by the assessee on the term loans secured by the assessee from financial institutions, which would be capitalised after the commencement of commercial production." In that context, it was held thus: "4. The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income tax. Profits and gains of business or profession is only one of the heads under which the company's income is liable to be assessed to tax. If a company has not commenced businesf_ there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. if the company, even before it commences business, invests the surplus fund in its hand for purchase of land or house property and later soils it at profit, the gain made by the company will be assessable under the head `Capital gains'. Similarly, lf a company purchases a rented house and gets rent, such rent will be assessable to tax, under s. 22 as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under s. 56 of the Act. The company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interests will be chargeable under s. 56 of the Act."

The co-ordinate bench of this Court in the case of KUIDFC [(2009) 315 ITR 301], supra, has held thus:- "An identical question had come up for consideration before a Division Bench of this Court in (CIT v. Karnataka Urban Infrastructure Development and Finance Corporation 12006] 284 ITR 582), of 2005 between the same parties, decided on February 21. 2006. The said judgment has been placed for consideration before us and we have gone through it.

In the case of Karnataka State Agricultural Produce Processing and Export Corporation Ltd., supra, the co-ordinate bench of this Court (where one of us the Hon'ble SSJ was a member) following the judgments in the case of KUIDFC [(2006) 284 ITR 582], Tuticorin Alkali Chemicals and Fertilizers Ltd., supra, as well as Bongaigaor Refinery and Petrochemicals Ltd., vs. Commissioner of Income-tax reported in (2001) 251 ITR 329 (SC) and Commissioner of Inconte-tax vs. Jokaro Steel Ltd., reported in (1999) 236, ITR 315 (SC), has held thus:- "in the light of the judgments referred to above, we have examined the case on hand. It is clear that the assessee has received the grant of Rs.10 crores from the Government of Karnataka for a particular project i.e., for improvement of infrastructure and to promote export of horticultural produce. Before the said grant was utilized for the specific purpose it was parked in fixed deposits and the interest was earned and by the subsequent additional evidence produced by the assessee before the Tribunal, it is further made clear that the State Government has categorically specified that any interest earned on those grants originally granted has to be considered as an additional grant and not an income of the assessee-Company. As explained by the Apex Court, in Bongaigaon Refinary and Petrochemicals Ltd. case, (supra), in Tuticorin's case, the investment in deposits was made by the Company during its formative period by investments and in Bokoro Steels Ltd., case (supra) the extricable link between the interest earned and the set up of the plant was established. Thus, in. the present case we are of the view that this is not an investment made subsequent to the setting up of the project but this is the unutilized income parked in fixed deposits for a temporary period and inextricable link for- the interest earned o: the grants and the original grant made by the State Government to set up a project is established as in Bokaro Steel case. Thus we are of the view that the facts and circumstances of the present case is squarely covered by Bokaro Steel Ltd., (supra) and it is not the case of the Revenue that the said interest earned on these fixed deposits was utilized by the Company for any other purpose other than the purpose for which the grants were made by the State Government. Even if we peruse the preamble to the Government Order dated January 23, 2007, by which the grant of Rs.10 crores is made by the Government of Karnataka it is clear that "in view of the National Horticultural Machine Programme implemented in Karnataka and major thrust given by the State Government for the development of horticultural sector, there is unlimited potentiality for export of horticultural produce, but the main constraint is lock of post harvest infrastructures viz., procurement centres, grading, washing, waxing, packing units, refrigerated transport, pre-cooling and cold storages, intermediate cold storages, processing units and export house. In order to harness the potentiality and to increase exports. Further KAPPEC has proposed to create these infrastructure facilities in various parts of State in a phased manner and efforts will also be made to rope in funds from Government of India under the relevant scheme from different agencies". The object of the scheme is to facilitate the farmers and to promote export of horticultural produce. Hence, the very purpose of granting Rs.10 crores to the assessee was to act as a nodal agency for implementation of the scheme. There is no profit motive as the entire fund entrusted and the interest accrued therefrom from deposits has to be utilised only for the purpose of the scheme originally granted. The whole of the fund belongs to the State exchequer and the assessee has to channelise them to achieve the objects of centrally sponsored scheme of infrastructural development as specified in the Government Order. Hence, interest on all these fixed deposits are considered to be capitalized and not revenue receipts to treat it as an income. The Tribunal considering these aspects and more particularly, following the judgment of this Court in KUIDC case has held that the interest earned on these grants is not an income, which we do not find fault with."

As could be seen from the Government Order dated 25.03.2008 now placed on record, it is ex-facie apparent that the unutilized funds of the project, before the commencement of the functional operation of the project, was invested by the assessee in fixed deposits and mutual funds as per the directions of the Government. It is apt to refer to the said Government Order, the relevant portion of which reads thus:- "The income generated out of earlier release of State Government to BMRC1., before the commencement of BMRCL, project would have to be converted into State's equity towards the project and therefore cannot be counted as income of BMRCL. Further release as equity would be made to BMRCL only after adjusting this income."

In Tuticorin Alkali Chemicals & Fertilizers case (supra), the issue before the Supreme Court was whether interest earned from borrowed capital, lying idle, should be treated as income from other sources or capital s in nature. In the facts of the said case, the Supreme Court was of the view that the company had surplus funds in its hands and in order to earn income out of the surplus funds, it invested the amounts for the purpose of earning interest and, therefore, held that it is revenue in nature and has to be taxed accordingly. The relevant portion is extracted hereinbelow for better clarity:- "In the case before us, the company had surplus funds in its hands. In order to earn income out of the surplus funds, it invested the amount for the purpose of earning interest. The interest thus earned is clearly of revenue nature and will have to be taxed accordingly. The accountants may have taken some other view but accountancy practice is not necessarily good law. In 8. S. C. Footwear's case (1972 (83) ITR 269), the House of Lords had no hesitation in holding that the accounting practice for calculating its profit followed by the assessee and accepted by the Revenue for 30 years could not be treated as sanctioned by law and was not acceptable for the purpose of computation of taxable income."

A reading of the order of the CIT (Appeals) as also the Tribunal would reveal that the CIT (Appeals) has relied on the decision of the Supreme Court in Bokaro Steel case (supra), more particularly, para- 6, which has been extracted above, to come to the conclusion that in the case on hand, the receipt by way of sale of tender documents, even at the pre-commencement stage is inextricably linked to the process of setting up of business and, is therefore, capital in nature. Similar was the view of the Delhi High Court in the case of Indian Drugs & Pharmaceuticals (supra), which view has been endorsed by the Supreme Court.

However, a reading of the order of the Tribunal would reveal that there can be no iota of doubt that the Tribunal failed to appreciate the finding of the Delhi High Court, in similar set of facts, which was ultimately endorsed by the Supreme Court that the receipts which are inextricably linked to the process of setting up of business could not be construed in any other manner other than in the nature of capital receipt. 11. The Tribunal fell in error in merely stating that the decision in Bokaro Steel case (supra) is distinguishable from Tuticorin Alkali Chemicals & Fertilizers case (supra), without even understanding the scope of the decision in Bokaro Steel case (supra). The admitted fact in this case is that the amount received by the appellant/assessee in sale of tender documents at the pre-commencement stage is in relation to the establishment of the unit and, therefore, it could be clearly stated that it is intrinsically connected with the purpose of setting up of the unit. This Court is in agreement with the view expressed by the Supreme Court in Bokaro Steel case (supra), which has affirmed the view of the Delhi High Court in Indian Drugs & Pharmaceuticals case (supra) and is of the considered view that the said decision is squarely applicable to the facts of the present case. Accordingly, the first substantial question of law is answered in favour of the appellant/assessee and against the respondent/Revenue.”

Following the ratio laid down as above, we hold that the receipts are capital receipts which would go to reduce the cost of the project and inextricably linked with the setting up of the business of the assessee and not chargeable to tax as income from other sources. We hold and direct accordingly.

In the result, appeal of the assessee is allowed.