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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No. and Appellant Respondent Assessment Year 935/Bang/2018 The Joint M/s. Karnataka Road Commissioner of Development 2013-14 Income Tax, Corporation Ltd., Circle – 4(1)(1), 1st Floor, 16/J, Bengaluru. Miller Tank Bed Area, Timmaiah Road Cross, Bengaluru – 560 052. PAN: AABCK 2261 R 322/Bang/2017 M/s. Karnataka Road ACIT, Development 2009-10 Circle – 11(5), Corporation Ltd., Bengaluru. Bengaluru – 560 052. PAN: AABCK 2261 R 703 to -do- -do- 706/Bang/2017 2008-09, 2010- 11 to 2012-13
ITA No.703-706,805-808,935,426,322 CO No. 80, 44-48 Asst.Yr: 2009-10 to 2013-14
426/Bang/2017 ACIT, M/s. Karnataka Road Circle – 4(1)(1), Development 2009-10 Bengaluru. Corporation Ltd., Bengaluru – 560 052. PAN: AABCK 2261 R 805 to DCIT, -do- 808/Bang/2017 Circle – 4(1)(1), Bengaluru. 2008-09, 2010- 11 to 2012-13 CO No. and Appellant Respondent Assessment Year 80/Bang/2018 M/s. Karnataka Road The Joint Commissioner Development of Income Tax, (in ITA No. Corporation Ltd., 935/Bang/2018) Circle – 4(1)(1), Bengaluru – 560 052. 2013-14 Bengaluru. PAN: AABCK 2261 R 48/Bang/2018 -do- ACIT, (in ITA Circle – 4(1)(1), No.426/Bang/20 Bengaluru. 17) 44/Bang/2018 -do- DCIT, (in ITA Circle – 4(1)(1), No.805/Bang/20 Bengaluru. 17)
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ITA No.703-706,805-808,935,426,322 CO No. 80, 44-48 Asst.Yr: 2009-10 to 2013-14
45/Bang/2018 -do- -do- (in ITA No.806/Bang/20 17) 46/Bang/2018 -do- DCIT, (in ITA Circle – 4(1)(1), No.807/Bang/20 Bengaluru. 17) 47/Bang/2018 -do- DCIT, (in ITA Circle – 4(1)(1), No.808/Bang/20 Bengaluru. 17)
Appellant by : Shri. B. J. Shetty, CA Respondent by : Shri. Pradeep Kumar, CIT(DR)
Date of hearing : 20.11.2020 Date of Pronouncement : 27.11.2020 O R D E R PER BENCH: Present appeals by assessee as well as revenue and cross objection by assessee in revenue’s appeal has been filed for assessment years 2008-09 to 2013-14, against order dated 30/12/2016 passed by Ld.CIT (A)-4, Bangalore.
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ITA No.703-706,805-808,935,426,322 CO No. 80, 44-48 Asst.Yr: 2009-10 to 2013-14 2. Ld.AR submitted that, assessee is a Government of Karnataka undertaking engaged in infrastructure development projects involving construction of bridges, maintenance of state highways, maintenance of major district roads, construction of roads and other infrastructure projects. Ld.AR at the outset submitted that the entire group of appeals could be segregated issue wise since common issues are involved in these appeals. He has filed a chart consicising the issues involved in the appeals under consideration. For sake of convenience, we tabulate the issues contested and argued by assessee as well as Department against relevant appeal numbers and cross objection numbers vis-a vis assessment years as under: Particulars Assessment years ITA No./CO No. Issue I: Interest 703,704, 705, 706, Filed by assessee for earned on temporary 322/Bang/2018 assessment years deployment of 2008-09 to 2012-13 HUDCO loan funds Issue II: Interest on 805, 808/B/2017 Cross appeals filed grants received from CO No.44 & by revenue and government of 47/B/2018 And assessee for Karnataka set of 935/B/2018, CO No. assessment years against advances 80/B/2018 2008-09, 2012-13 recoverable from 2013-14 contractor’s Issue III: Interest ITA No.806, 807, cross appeals filed by
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earned from 426/B/2017 revenue and assessee mobilisation advance CO No. 45, 46, for assessment year given to contractor’s 48/B/2018 2009-10 to 2011-12. Issue No. IV: Royalty and labour welfare assess disallowed under section 43B
Ld.AR further submitted that, all above referred issues are covered by decisions of coordinate bench of this tribunal in assessee’s own case for preceding assessment years and decisions of Hon’ble Karnataka High Court. He thus prayed for the appeals being disposed off together, as except for the quantum involved in these issues, factual background are identical in all assessment years under consideration. Ld.CIT.DR did not object for these appeals to be disposed off by way of common order. Accordingly, we dispose of all these appeals issue wise, as tabulated hereinabove. 4. Issue No.I These issues have been raised by assessee in its appeals for relevant assessment years more specifically mentioned in the table hereinabove. Ld.AR submitted that, assessee raised identical and common grounds in ITA nos.703, 704, 705, 706, 322/Bang/2018.
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For sake of convenience, we reproduce herewith grounds raised by assessee in ITA no.703/Bang/2018 as under:
ITA No.703/Bang/2017 1. The Commissioner of Income Tax (Appeals) - 4, Bangalore, has erred in sustaining the additions and disallowances to the admitted income made by the assessing authority by not deleting such additions and disallowances in total. 2. The assg. authority, has erred in disallowing depreciation of Rs. 11,14,95,562 claimed by the appellant on the bridges, alleging that the appellant is not the owner of the bridges and is not using for the purpose of its business. The assg. authority ought to have considered the fact that the appellant's claim for depreciation is legitimate and is in accordance with the provisions of section 32, since the assets suffers from normal wear and tear due to the usage of such asset by the general public for whose benefit such infrastructure bridges are constructed. Though the appellant is not earning any revenue from the bridges so operated, the appellant is incurring the operational costs for maintenance of the same which will prove that the appellant is the owner of such bridges by virtue of obligation to maintain and remaining in the books of account. 3. The assg. authority ought to have appreciated the objects for which the company has been established by the State Govt. The bridges are constructed out of appellant's investment on work in addition to the grants received from Govt. to cover up the shortfall of the grant amount and the same is capitalized and shown under fixed assets in the books of account. 4. The learned assg. authority has also erred in not considering the fact that the ownership of bridges so constructed are not transferred to the State Govt. and remain in the books and records of the appellant, which establishes that all such bridges form the assets of the appellant company, which should have been considered by the assg. authority. 5. The assg. authority is incorrect in holding that the appellant is not using the bridges for its business without considering the objects for which the company has been established by the State Govt., the activity of which forms the business activity assessed as per the provisions of Section 28, entitling to claim all deductions including depreciation u/s 32. 6. The learned assg. authority, ought to have followed the judgment of The Hon'ble Supreme Court in the case of M/s. Mysore Minerals vs. CIT, wherein it has been held that having the right to use and occupy the property or to enjoy its use in his own right would be the owner of the building through a formal deed of title may not have been executed Page 6 of 32
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and registered as contemplated by the Transfer of Property Act, 1882 and The Registration Act. 7. The assg. authority has erred in making an addition of Rs. 60,28,565 to the admitted income in respect of the interest earned on the fixed deposits made out of borrowed funds from HUDCO, to tax under income from other sources. 8. The assg. authority has erred in not considering the accounting treatment followed by the appellant company in capitalizing the interest paid on borrowings and reducing the interest earned on deposits made out of borrowings from the capital work in progress, resulting in net capitalization of interest. The assg. authority having treated the interest income as income from other sources ought to have allowed deduction u/s 57(iii) of the Income Tax Act, 1961 on account of interest paid to HUDCO on borrowings. For these and such other grounds that may be urged at the time of hearing, the appellant prays that additions and disallowances made by the assg. authority and sustained by the Commissioner of Income Tax (Appeals)-4, be deleted and the Appeal be allowed.
Ld.AR submitted that, except for Grounds 6-8, other grounds stands not pressed by assessee and therefore no arguments are advanced by Ld.AR before us. Accordingly the other grounds being Ground No.2-5 are dismissed as not pressed. Ground No.1, 9 are general in nature and therefore do not require any adjudication. 4.1. He submitted that Grounds 6-8 pertains to Issue no.1 in the table above. 4.2. Brief Facts of Issue no.I are as under: Ld.AR submitted that, assessee availed loans from HUDCO for the purpose of construction of bridges. Amount of loan disbursed by HUDCO, till its utilisation for purpose of construction of bridges, were temporarily invested in fixed deposits. Ld.AR stated that,
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assessee earned interest on short-term deployment of loan funds in bank fixed deposits. It was submitted that interest paid on loans availed from HUDCO was capitalised as cost of the asset and the interest income earned on temporary parking of funds was reduced from the cost of assets. 4.3. Ld.AO disallowed the claim, by including interest income as taxable, being in the nature of interest earned on temporary deployment of HUDCO loan funds. Ld.CIT(A) confirmed the order of Ld.AO. Aggrieved by order of Ld.CIT(A) assessee is in appeal before us now. Relevant grounds raised by assessee in its appeals on Issue I relate to Ground Nos.6-8. Based on submissions made by Ld.AR in the synopsis filed, We restrict adjudication of assessee’s appeals only to Grounds 6-8, which are identically numbered in all appeals for relevant assessment years pertaining referred to in the table hereinabove. Grounds 6-8: 4.4. At the outset, Ld.AR submitted that, identical issue on similar facts was considered by coordinate bench of this Tribunal in preceding assessment years. He has filed before us order dated 04/01/2019 passed in assessee’s own case for assessment year 2005-06 in ITA No.284/be/2011, wherein this issue have been considered and decided.
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4.5. On the contrary, Ld.CIT.DR placed reliance on written submission commonly filed by him for all issues under consideration reproduced herein under: Written Submission In the case of M/s Karnataka Road Development Corporation Ltd., ITA No:703 to 706/Bang/2019 A.Y: 2008-09 to 2012-13/Bang/18 DATE OF HEARING: 05-08-2019 May it please Your Honours In the present case filed by the assessee, the Grounds of Appeal as raised by the assessee has been broadly categorised into the following headings and appeals from A.Y:2008-09 to 2012- 13 are taken together as grounds of appeal are almost similar and D.R.submissions thereon. ………………………………… (2) The Ld.AO has erred in making an addition to the admitted income in respect of the interest earned on the fixed deposits made out of the borrowed funds from HUDCO, to tax under income from other sources. The assessing authority having treated the interest income as income from other sources ought to have allowed deduction u/s 57(iii) of the Income-tax Act, 1961 on account of interest paid to HUDCO on borrowings. Submission: The interest income earned by the appellant on deployment of funds received from HUDCO was not an income earned in the course of carrying out its business. Such income was assessable under the head 'Income from Other Source'. Hence, out of the total addition of interest income made to returned income, addition of interest being earned on temporary deployment of HUDCO loan funds is sustained. I agree with the decision of the Ld.CIT(A) and the same may be upheld. …………………….. Conclusion : In view of the submissions made above, examination of submissions made by the assessee, the order of the Ld.CIT(A), Bangalore is not erroneous and bad in law. The Ld.CIT(A) order may be upheld. Prayer : In the wake of the above submissions, it is humbly prayed to uphold the Ld.CIT(A) order in respect of the above issues and any other order as may please your honours. Respectfully submitted.
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4.6. We have perused submissions advanced by both sides in light of records placed before us. We have also perused order dated 04/01/2019 passed by coordinate bench of this Tribunal in assessee’s own case for assessment year 2005-06 in ITA No.284/Bang/2011, wherein, this issue is considered as by observing as under: “12. We have heard the rival submissions. Before the CIT(Appeals), the Appellant took the plea that the interest earned ought not to be taxed under the head Income from Other Sources and that it should actually be set off against interest paid on loans from HUDCO as these deposits had a cost to it and were not made out of interest free funds. The assessee, without prejudice to this contention, also took an alternate plea that the entire interest paid on loans availed from HUDCO should actually be permitted to be written off as Revenue Expenditure. The CIT(A) in his common order passed for the AYs 2002-03, 2003-04 & 2004-05 rejected the plea of set off against interest payments and upheld the order of the AO on this count. He however allowed the alternate plea of the Appellant that the entire interest payment made to HUDCO on the loans availed from them ought to be allowed as Revenue Expenses.
It may be noted that the Revenue has accepted the order of the CIT(A) and is not agitating the same. It is the assessee’s submission that the ITAT decide this issue based on the given set of facts for the AYs 2002-03, 2003-04 & 2004-05. In respect of AY 2005-06, however, the CIT(A) has dismissed the plea that the interest ought not to be taxed under the head Income from Other Sources by following the order of his predecessor for the AYs 2002-03 to 2004- 05. The CIT(A) has followed the order of his predecessor in this regard. The CIT(A) however is silent on the plea that interest paid on
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loans from HUDCO needs to be allowed as revenue expenditure. Since he states that he agrees with the reasoning of his predecessor while dismissing the ground the order of the predecessor on treating the entire interest paid on loans from HUDCO as Revenue expenses is to be allowed.
The assessee has also pleaded before us that the Tribunal in- the event it does affirm the treatment of interest earned as Income from Other Sources, should allow the alternate plea that the interest paid on loans from HUDCO should be allowed as revenue expenditure as done so by the CIT(Appeals) in the order for the AYs 2002-03 to 2004-05 and which has been accepted by the Revenue. 15. We are of the view the prayer made in the alternative by the Assessee deserves to be allowed as was done in AYs 2002-03 to 2004- 05 by the CIT(A) in the orders for those AYs. We direct the claim of the Assessee, to this extent, should be allowed. Gr.No.4 is thus treated as partly accepted.” 4.6.1. Admittedly, there is no difference in factual background in respect of this issue for years under consideration as well as the preceding assessment years the orders of which has been placed before us. There are no contrary evidences placed before us by Ld.CIT.DR in order to deviate from consistent view taken by coordinate bench of this Tribunal on this issue in preceding years. Respectfully following the same, we allow alternate claim raised by Ld.AR. We thus direct entire interest paid on loans from HUDCO as revenue expenditure. Accordingly these grounds stands partly allowed as indicated hereinabove. Page 11 of 32
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In the result assessee’s appeal in ITA No. 703,704, 705, 706, 322/Bang/2018 for assessment years 2008-09 to 2012-13 stands partly allowed. 5. Issue II: There is only one issues raised by revenue in its appeals for relevant assessment years, more specifically mentioned in the table hereinabove. Ld.AR submitted that, revenue raised identical and common grounds in 805, 808/B/2017 CO No. 44 & 47/B/2018 and 935/B/2018, CO No. 80/B/2018.
5.1. For sake of convenience, we reproduce herewith grounds raised by revenue in ITA no.805/Bang/2017 as under:
ITA No.805/Bang/2017 1. The Order of the Ld. CIT (A), in so far as it is prejudicial to the interest of the Revenue, is opposed to law and the fact and circumstances of the case. 2. On facts of the case, the Ld. CIT (A) has failed to appreciate that the assessee has reduced the capital expenditure incurred in the form of interest on loan with the interest income offered under the head income from other source. 3. On the facts of the case, the Ld CIT(A) ought to have appreciated that the assessee has taken loan for the purpose of construction of bridges which are under construction and any expenditure in the form of interest on loan for this purpose has to be capitalized and not eligible for set off against the interest income. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. The appellant craves leave to add, alter, amend and / or delete any of the grounds that may be urged.
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Ld.AR submitted that cross objection raised by assessee is in support of view taken by Ld.CIT(A). He submitted that, issue in these revenue appeals are summarized as Issue No.II in the table herein above. 5.2. Issue no.II: Interest on grants received from Government of Karnataka set of against advances recoverable from contractor’s. At the outset Ld.AR submitted that, only issue raised by revenue in respective appeals are for relevant assessment year stab related hereinabove is regarding the set of being allowed by Ld.CIT (A) against the interest income. It has been submitted that in the cross objection filed by assessee is in support of the view taken by Ld.CIT(A) on this issue. 5.3. Brief facts for Issue II are as under: It has been recorded by authorities below that assessee has received funds for projects other than package bridge projects received from street government. As the nodal agency, assessee is carrying out certain works other than the package bridge projects for and on behalf of state government. Assessee is acting as an agent to carry out works for which the state government is releasing specific grants for such work. It has been observed by Ld.CIT(A) that by way of annual budget allocation, grants are released by state Government to assessee by way of ‘grant-in-aid bills’, and interest is earned by assessee out of deployment of such grant fund in FD when such grant funds are not in use. Interest on such fund
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also belongs to the Government of Karnataka and not to the assessee. Ld.AO disallowed the claim of assessee by following decision of Hon’ble Supreme Court in case of Tuticorin alkali and fertilisers Ltd. vs. CIT reported in (1997) 2 to 7 ITR 172. 5.3.1. Ld.CIT(A) observed that, assessee filed working of such interest income relating to projects other than package bridge projects and that the interest earned on deployment of grant funds in FD’s and are creation to such grant and not income in the hands of assessee. 5.4. Against this view, of Ld.CIT(A), revenue is in appeal before us now. Ld.CIT.DR relied on written submission filed by him which has been reproduced hereinabove. 5.5. At the outset, Ld.AR submitted that this issue stands squarely covered by decisions of Hon’ble Karnataka High Court in case of CIT vs Karnataka Urban Infrastructure Development and Finance Corporation reported in (2006) 284 ITR 582 and (2009) 351 ITR 301 and CIT vs Karnataka State Agricultural Produce Processing and Export Corporation Ltd., reported in (2015) 377 ITR 496 and Karnataka Municipal Data Society reported in (2016) 389 ITR 441. 5.5.1. He submitted that, contention of revenue that, interest on loans borrowed to be capitalised are not eligible for set off, is contrary to the facts of the case. Ld.AR submitted that, interest received on temporary deposits made out specific grants as a nodal agency/custodian in accordance with accounting standards
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consistently followed. He also submitted that, method followed by assessee does not make any difference insofar as treating the interest income as capital receipt since the same is reduced from the capital works which otherwise amounts to treating the same as a creation to fund account. Ld.AR emphasised that, accounting treatment followed by assessee has also been referred to by Hon’ble Karnataka High Court in case of CIT vs. Karnataka Urban Infrastructure Development and Finance Corporation and CIT vs. Karnataka State Agricultural Produce Processing and Export Corporation Ltd (supra). 5.6. On the contrary, Ld.CIT.DR filed writes submission as under:
Written Submission In the case of M/s Karnataka Road Development Corporation Ltd., ITA No:935/Bang/20198 A.Y: 2013-14 & C0.80/Bang/18 DATE OF HEARING: 05-12-2019 May it please Your Honours In the present case filed by the department, the Grounds of Appeal as raised by the revenue has been broadly categorised into the following headings and C.O.by the assessee and its gounds D.R.submissions thereon. (1) On the facts of the case, the Ld.CIT(A) has failed to appreciate that the assessee has earned income on the grants received from the Govt. of Karnataka which has been netted out of advance recoverable after being charged to tax and that netting out of interest in the advances recoverable is an application of interest hence chargeable to tax. Submission: The Ld.CIT(A) perused the reasons assigned by the Ld.AO for bringing interest income of Rs.5.96 crores as income of the corporation, appellants' contention and court decision relied upon by the appellant. The assessee corporation has been carrying out certain works like, road works and bridges other than package bridges. Funds for these works other than package bridges are received from State Government by way of Annual budget allocation and by way of Page 15 of 32
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grant in aid bills. These are specific grants to the Corporation which is acting only as Nodal agency. An interest on deployment of such specific grants funds not in use would form part of accretion to such grants and cannot be construed as direct income of the Corporation. Such specific grant funds are liabilities of the Corporation to the extent not utilised and in case of expenditure in excess of such grant funds same are in the nature of receivable from Government of Karnataka. This is the stated practice followed by the corporation as per audited financials from year to year. The CIT(A) further relied on the Ld.CIT(A) order of the appellant for A.Y:2012-13, which is favourable to the appellant, and held that the addition made by the Ld.AO on above, was deleted, The Ld.AO discussed the issue in detail in his assessment order and concluded that the assessee has generated income from interest by making deposits out of the government grants for works. The netting out of the interest in the advance recoverable is an application of interest and hence chargeable to tax. I agree with the decision of the Ld.AO on the issue and the same may be upheld and the order of the Ld.CIT(A) on the issue may be dismissed. Cross Objection of the Assessee. 2. The Ld.AO has ignored to follow the decision of Hon'ble Karnataka High Court in the case of CIT vs Karnataka Urban Infrastructure Development & Finance Corporation (KUIDFC) and another case law Karnataka State Agricultural Produce Processing & Export Corporation vs ACIT (2013) in ITA No.1078/Bang/2012 ( Hon'ble ITAT 'B' Bench ) which is squarely applicable to the appellant case based on the facts, accounting policy followed by the appellant and the Accounting Standard-12 prescribed by Institute of Chartered Accountants of India. …………………………………… Conclusion : In view of the submissions made above, examination of submissions made by the revenue, the order of the Ld.CIT(A), Bangalore is erroneous and bad in law. The Ld.CIT(A) order may be dismissed and the cross objection of the assessee may be rejected. Prayer : In the wake of the above submissions, it is humbly prayed to dismiss the CIT(A) order in respect of the above issue and any other order as may please your honours. Respectfully submitted.
5.7. We have perused submissions advanced by both sides in light of records placed before us.
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We have also referred to the decisions by Hon’ble Karnataka High Court referred by Ld.AR hereinabove. Hon’ble Karnataka High Court in case of CIT vs Karnataka State Agricultural Produce Processing and Export Corporation Ltd., reported in (2015) 377 ITR 496 has considered all the preceding orders by Hon’ble Court in respect of identical issue as under:
“2. The only question involved in this appeal is, "Whether the interest earned on grants made by the State Government kept in fixed deposits pending utilization should be treated as additional grant of the scheme or a revenue receipt exigible to tax under the head "income from other sources"? …………… 5. We have heard the learned counsel Sri K V Aravind, appearing for the revenue as well as Ms. Jinita Chatterjee appearing for the respondent- assessee. 6. Though the matter is listed for admission, with the consent of the parties the matter is taken for final disposal. 7. The learned counsel Sri K V Aravind placed reliance on the Judgment of the Apex Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT[1997] 227 ITR 172/93 Taxman 502 and argued that the proceedings of Government of Karnataka by which a sum of Rs. 10.00 crores was granted to the assessee did not contain any condition with respect to the utilization of interest. The assessee being a company engaged in trading of agriculturalproduce is not entitled to the benefit of interest earned from the fixed deposits to get it capitalized and made an attempt to distinguish the judgment of CIT v. Karnataka Urban Infrastructure Development & Finance Corpn. [2006] 284 ITR 582/155 Taxman 228 (Kar). 8. Learned counsel appearing for the assessee Ms. Jinita Chatterjee contended that the Government of Karnataka, while granting Rs. 10.00 crores for improvement of infrastructure to promote agriculturalexports, has categorically specified that the said grant shall be used for creation of infrastructure facilities in various parts of the State for increasing the export of horticultural produce and the assessee shall prepare viable and implementable schemes and obtain approval from KAPPEC Board and the said approved schemes will be submitted to the Department of Horticulture. Further, she relied on the letter dated 12.11.2013 in support of her contention that the Government has considered the interest earned on the grant released by the Government should be treated as additional Page 17 of 32
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grants of the scheme for which the grant is originally released. The learned counsel placed reliance on the Judgment of this Court in Karnataka Urban Infrastructure Development Finance Corpn's case (supra), Indian Oil Panipat Power Consortium Ltd. v. ITO [2009] 315 ITR 255/181 Taxman 249 (Delhi), CIT v. Karnataka Power Corpn. [2001] 247 ITR 268/[2000] 112 Taxman 629 (SC), CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315/102 Taxman 94 (SC) to contend that the grant amount received from the Government of Karnataka, temporarily kept in fixed deposits till the utilization period has to be treated as the amount capitalized and is not an income to bring in within the tax net under the Act. 9. After hearing the rival contentions and perusing the material on record, we have noticed that the assessee-company is a Government owned company. In order to facilitate infrastructure facilities in various parts of the State of Karnataka, for increasing the export of horticultural produce, a sum of Rs. 10.00 crores was granted to the assessee. Before the utilisation of this grant amount, it was temporarily kept in fixed deposits and the interest was earned on the said amount. The assessee has placed certain additional evidence before the Tribunal to establish that the Government of Karnataka had specifically directed that interest earned on fixed deposits of grants pending utilisation should be treated as additional grant of the scheme and not to be treated as "income of the company". No liberty was provided to the company to make use of that the interest earned on the said amount kept in fixed deposits. Though the assessee-company is engaged in trading in agriculturalproduce, it has no power to make use of the said grant made by the Government of Karnataka other than for a particular scheme i.e., the said amount cannot be diverted for any other purpose other than for which it was sanctioned as per the Government Order dated 23.1.2007. Thus, the emphasis made by the revenue that the assessee-company being engaged in trading activities cannot be considered as a nodal agency of the State Government and the interest earned on the grants by the assessee-company has to be treated as income is not acceptable in view of the specific directions issued by the State Government regarding the utilization of the amount granted and on the interest accrued thereon. 10. The Tribunal relied on the Judgment of this Court in the case of Karnataka Urban Infrastructure Development Finance Corpn.'s case (KUIDC) (supra) wherein it is held that: "The material on record shows that the very purpose of constitution of the assessee was to act as a nodal agency for implementation of mega-city scheme worked out by the Planning Commission. Both the Central and the State Governments are expected to provide requisite finances for implementation of the said project. The funds from the Central and State Governments will flow directly to the specialised institutions/nodal agencies as grant and the nodal agency will constitute a Page 18 of 32
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revolving fund with the help of Central and State shares out of which finance could be provided to various agencies such as water, sewerage boards, municipal corporations, etc. The objective is to create and maintain a fund for the development of infrastructural assets on a continuing basis and, therefore, the assessee is a nodal agency formed/created by the Government of Karnataka as per the guidelines; there is no profit motive as the entire fund entrusted and the interest accrued therefrom on deposits in bank though in the name of the assessee has to be applied only for the purpose of welfare of the nation/States as provided in the guidelines; the whole Of the fund belongs to the State Exchequer and the assessee has to channelise them to the objects of centrally sponsored scheme of infrastructure development for mega-city of Bangalore. Funds of one wing of the Government is distributed to the other wing of the Government for public purpose as per the guidelines issued. The monies so received, till it is utilised, is parked in a bank. The finding recorded by the Tribunal clearly shows that the entire money in question is received for implementation of the scheme which is for a public purpose and the said scheme is implemented as per the guidelines of the Central Government and, therefore, the assessee is only acting as a nodal agency of Central Government for implementation of these projects. It is not the case of the Revenue that the assessee was carrying on any business or activities of its own while implementing the scheme in question. The unutilised money, during which the project could not be fully implemented, is deposited in a bank to earn interest. That interest earned is also again utilised for the implementation of the mega-city scheme which is also permitted under the scheme. Therefore, in computing the total income of the assessee for any previous year the interest accrued on bank deposits cannot be treated as an income of the assessee as the interest is earned out of the money given by the Government of India for the purpose of implementation of mega-city scheme. Therefore, we do not find any error in the conclusion reached by the Tribunal that there was no income earned by way of interest by the assessee and setting aside the order of AO which is affirmed by the first appellate authority. The finding given by the Tribunal is purely a question of fact. We do not find any substantial question of law involved in this appeal and therefore, this appeal is liable to be dismissed at the stage of admission itself." 11. In Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra), the Apex Court has held that: "There is another aspect of this matter. The company, in this case, is at liberty to use the interest income as it likes. It is under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It can re-invest the interest income in land or share, it can purchase securities, it can buy house property, it can also set up another
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line of business, it may even pay dividends out of this income to its shareholders". 12. In the case of Karnataka Power Corpn. (supra), the Apex Court following the Judgment of Bokaro Steel Ltd's case (supra) has held that "interest receipts and hire charges from contractors are in the nature of capital receipts". 13. In the case of Bongaigaon Refinary & Petrochemicals Ltd., v. CIT[2001] 251 ITR 329/119 Taxman 488 the Apex Court considering the decision in Tuticorin Alkali Chemicals Ltd.'s case (supra) and Bokaro Steel Ltd.'s case (supra) has held that in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case, the question related was with the interest earned by the Company during its formative period by investments while in Bokaro Steel Ltd.'s case (supra), it is so confined and did not apply where the receipts were directly connected with or were incidental to the work of construction of the assessee's plant. Accordingly, applying the law enunciated in Bokaro Steel Limited case allowed the appeal. 14. 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 10.00 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. 15. As explained by the Apex Court, in Bongaigaon Refinary & Petrochemicals Ltd.'s case, (supra), in Tuticorin's case, the investment in deposits was made by the Company during its formative period by investments and in Bokaro Steels Ltd.'s case (supra) the inextricable 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 on the grants and the original grant made by the State Government to set up a project is established as in Bokaro Steel case. 16. 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 23.01.2007 by Page 20 of 32
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which the grant of Rs.10.00 crores is made by the Government of Karnataka it is clear that "in view of the National Horticultural Machine program 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 lack 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. 17. Hence, the very purpose of granting Rs. 10.00 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 channelize 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.” 5.7.1. It is an admitted fact that assessee received Grant for Government of Karnataka for carrying out construction activities. It is also not disputed that assessee was a nodal agent for Govenrment of Karnataka. And that assessee had parked the Grants so received in FD till such monies were utilized, against which interest was earned. Hon’ble Karnataka High Court on identicatl facts has held that such interest income earned was inextricably linked with the business activity of assessee. Revenue has not brought before us any evidence to establish that these
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grants were used for any other purpose other than for construction activities on behalf of Government of Karnataka.
5.7.2. Admittedly, there is no difference in factual background in respect of this issue for years under consideration as well as facts considered by Hon’ble High Court in case of CIT vs Karnataka State Agricultural Produce Processing and Export Corporation Ltd.(supra). There are no factual differences brought out by Ld.CIT.DR in the present case. Therefore, respectfully following the view taken by Hon’ble High Court in case of CIT vs Karnataka State Agricultural Produce Processing and Export Corporation Ltd.(supra), we do not find any reason to interfear with the view taken by Ld.CIT(A).
Accordingly grounds raised by revenue stands dismissed.
In the result revenue’s appeal in ITA No.805, 808, 935/Bang/2017 for assessment years 2008-09, 2012-13 2013- 14 stands dismissed. 5.7.2. As we have dismissed the revenue’s appeal, corresponding cross objections filed by assessee becomes infructuous. In the result assessee’s CO No.44, 47, 80/Bang/2018 stands dismissed as infructuous. 6. Issues III & IV: Ld.AR submitted that Issues III & IV are common in ITA No.426, 806, 807/Bang/2017 filed by revenue, pertaining to assessment years 2009-10 to 2011-12.
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6.1. At the outset, Ld.CIT.DR has submitted that, appeal No.426/B/2017 has been filed with delay of 48 days. It has been submitted that the delay in filing the present appeal was unintentional and caused due to technical difficulties of obtaining the scrutiny report order. He thus prayed for condonation of delay. Ld.AR did not raise any serious objection against condoning the delay so cost. 6.1.1. We are therefore considering the present circumstances and submissions made by both sides condoned the delay of 48 days in filing the present appeal by revenue. 6.2. Ld.AR submitted that, revenue raised identical and common grounds in all these appeals for relevant assessment years more specifically mentioned in the table hereinabove. For sake of convenience, we reproduce herewith grounds raised by revenue in ITA no.426/Bang/2017 as under: ITA No.426/Bang/2017 The Order of the Ld. CIT (A), in so far as it is prejudicial to the interest of the Revenue, is opposed to law and the fact and circumstances of the case. 1. On facts of the case, the Ld.CIT (A) is not correct in allowing the appeal of the assessee on the ground that the final payment to be received by the assessee includes the interest element which is likely to be earned by the assessee on the mobilization advance kept in short term deposit. 3. On the facts of the case, the Ld.CIT(A) has failed to appreciate that the assessee has earned income on short term deposits made out of mobilization advance which is nothing but income from other sources. 4. On the facts of the case, the Ld.CIT(A) ought to have appreciated that the interest paid to the HUDCO or other agency is part of capital work in progress and need no to be debited in the account till the completion of the project. 5. On the facts of the case, the Ld.CIT(A) is not correct in holding that the Royalty payment and the Labour Welfare Cess paid by the assessee to the Govt. of Karnataka is capital in nature. Page 23 of 32
ITA No.703-706,805-808,935,426,322 CO No. 80, 44-48 Asst.Yr: 2009-10 to 2013-14 6. On the facts of the case, the Ld.CIT(A) has failed to appreciate that the Royalty payment and Labour Welfare Cess is revenue in nature and allowable to the assessee on the basis of actual payment s per the provisions of section 43B of the Act. 7. On the facts of the case, the Ld.CIT(A) ought to have appreciated that the Royalty payment to the Govt. of Karnataka is nothing but the fee / cess charge by the Govt. for the use of fixed asset of the State eg., land for the construction of roads and bridges. 8. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 9. The appellant craves leave to add, alter, amend and / or delete any of the grounds that may be urged.
Issue III: 6.3. Brief facts of considering Issue III are as under: Assessee deducted proportionate interest earned on temporary deployment of HUDCO loan funds and interest earned on mobilisation advances out of capital work in progress of bridges during the years under consideration. 6.3.1. Ld.AO added the said amount by holding that assessee has deposited spare funds arising from mobilisation advance received in fixed deposits Ld.AO noted that assessee has proportionately netted the interest and set off while accounting the capitalised cost of bridges as capital work in progress. Ld.AO was of the opinion that assessee cannot set of the interest income earned against the interest payable on loans borrowed for construction of the bridges. He was of the opinion that the entire interest which is being paid on the loans is to be capitalised. Reference was drawn to the decision
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of Hon’ble Supreme Court in case of Tuticorin Alkali and Chemicals Ltd., (supra). 6.3.2. Aggrieved by order of Ld.AO, assessee preferred appeal before Ld.CIT(A). 6.3.3. Based on submissions made by assessee, Ld.CIT(A) observed that, interest income earned from mobilisation advances given to mobilise men and material for the contract,, and that such advance comes with the conditionality of interest. Ld.CIT(A) noted that in the final payout or the principal along with the interest is adjusted from the sum payable to the contractor. Ld.CIT(A) noted that such mobilisation advances are part of normal contract will agreement in infrastructure projects and there is no involvement of a third-party. Ld.CIT(A) observed that the advance represents a part of contract sum given to the contractor at an interest and under these agreements interest earned by assessee retains the intrinsic character of business receipts earned in the course of its business activities. Ld.CIT(A) noted that assessee engaged contractor for constructing bridges and therefore any interest earned from mobilisation advance would go to reduce the capital work in progress of the bridges. 6.3.4. Ld.CIT(A), observed that, assessee could not have received mobilisation advance being the person executing projects through contractor. On the contrary, Ld.CIT(A) recorded that, assessee advanced mobilisation advances to contractor’s and earned interest thereon. He has thus negated the observation of Ld.AO that
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assessee had deposited spare funds arising out of loan received from HUDCO. Ld.CIT(A) thus allowed the interest earned from mobilisation advances as not taxable in the hands of assessee. 6.4. Aggrieved by view taken by Ld.CIT(A) revenue is in appeal before us now. 6.5. Ld.CIT.DR placed reliance on the written submission filed by him it is been reproduced hereinabove. 6.6. On the contrary, Ld.AR submitted that, giving mobilisation advance is an industrial practice at the time of commencement of the work. He submitted that mobilisation advances given to mobilise men and material for the contract and as per the terms of the contract mobilisation advances required to be deducted during the various stages of project completion. Interest on mobilisation advances charged as per the agreed contract will terms and interest received on mobilisation advance are not out of fixed deposits with bank but only an adjustment carried out at the time of settling the running bills submitted by the contractor’s. He submitted that the interest on mobilisation advances shown as abetment in the capital cost of work in progress even at the time of capitalising those capital work in progress into fixed assets what was capitalised was only the net amount and not the gross amount. In support of his contention he placed reliance on the observation of Hon’able Supreme Court in case of CIT vs Bokaro steel Ltd reported in (1999) 236 ITR 315.
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6.7. We have perused submissions advanced by both sides in light of records placed before us.
We have referred to the decision relied by Ld.AR by Hon’ble Supreme Court. We note that, Hon’ble Court on identical issue has observed as under: “……………… For the assessment year 1972-73, a consolidated reference was made at the instance of the revenue as well as the assessee and the following questions were referred : "(1) Whether, on the facts and in the circumstances of the case, the receipts arising from the letting out of the quarters to the outsiders, such as employees of the contractors engaged in the construction of the plant can be treated as the income of the assessee and/or, in any event, should be adjusted against the cost of construction so as to reduce such cost ? (2) Whether, on the facts and in the circumstances of the case, the receipts from the letting out of the properties to the outsiders, such as employees of the contractors engaged in the construction of the plant are to be assessed as income from property under section 22 of the Income-tax Act, 1961, or the said income should be assessed under section 28 of the Income-tax Act, 1961, as business income or in any event, under section 56 of the Income-tax Act, 1961, as income from other sources ? (3) Whether, on the facts and in the circumstances of the case, the receipts arising from the letting out of the quarters to the outsiders, such as employees of the contractors engaged in the construction of the plant, can be treated as the income of the assessee and/or, in any event, should be adjusted against the cost of construction so as to reduce such cost ? (4) Whether, on the facts and in the circumstances of the case, the interest received from the bank on short-term deposits is liable to be assessed as the income of the assessee or such interest should reduce the cost of construction of the assessee and, therefore, would not constitute the income of the assessee ?" ………………. 5. We will take the first three heads under which the assessee has received certain amounts. These are the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee. Secondly, hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and thirdly, interest from advances
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made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrange- ments and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee has provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractors for the assessee's construction work. The receipts in this connection also go to compensate the assessee for the wear and tear of the machinery. The advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source.” 6.7.1. There is no dispute that interest on advances made to contractors by assessee is not in connection with construction activities. Admittedly, these advances have been made by assessee to contractors for facilitating the work of construction. We note that the facts before Hon’ble Supreme Court in one of the issue are on identical nature of advance made by assessee there. Assessee in the present case has advanced money to the contractor’s thereby avoiding a third-party involvement. Against such advances, assessee has earned interest. Such interest along with advance was
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reduced in capital work in progress and final bill of payment made to contractors. 6.7.2. Hon’ble Supreme Court has observed that such kind of arrangement facilitates the contractor’s towards the work of construction on behalf of assessee and therefore any interest earned from such advances cannot be held as revenue receipts in the hands of assessee. Respectfully following the above view by Hon’ble Supreme Court we do not find any infirmity in the view taken by Ld.CIT(A) and the same is upheld.
Accordingly Grounds 1, 4 identically raised by revenue in these appeals stands dismissed.
Issue No. IV: Royalty and labour welfare assess disallowed under section 43B. Ground 5-7 deals with this issue in the appeal filed by revenue considered herein. 7.1. Brief facts for Issue no.IV are as under: In the written submission filed by assessee, it has been submitted that, royalties are in connection with deduction made on contractor’s bills, who carried out the construction of bridges and other infrastructure and assessee was required to remit the same to the Government of Karnataka. He submitted that these are related to capital fixed assets. In respect of labour welfare cess, Ld.AR submitted that they are also related to capital works fixed assets and not in respect of employee benefits. It has been submitted that Page 29 of 32
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such royalty and labour welfare cess was not debited to profit and loss account. Ld.AR thus submitted that, section 43B does not apply to such royalty payments, which are not passed through profit and loss account. Ld.AO disallowed the same as such payment has not been made by assessee to the government of Karnataka. 7.2. Ld.CIT (A) however deleted the addition by holding that these were not considered by assessee in the profit and loss account and therefore did not form part of any deduction claimed as expenses. Aggrieved by view taken by Ld.CIT(A), revenue is in appeal before us now. 7.3. Ld.CIT.DR submitted that such payments unless actually paid cannot be allowed under section 43B of the Act he relied on the view taken by Ld.AO. 7.4. Ld.AR alternatively submitted that, in the event payments are added back, it must be allowed in the assessment year when the amount has been deposited with the Government. Ld.AR submitted that payments have been subsequently made and the assessment years are also before this bench for consideration. He thus trade for the issue to be remanded back to Ld.AO for verification. 7.5. We have perused submissions advanced by both sides in light of records placed before us. Section 43B contemplates that, the payment must be real, substantial and effective and so long as this condition is satisfied, there can be no objection to allowing the same, without insisting
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that the amount has to be paid in cash or cheque or any other mode, i.e., in a physical sense. In our opinion, phrase, ‘actually paid”, has been used in this section, only to emphasize that, the payment should be real and a payment in point of fact and not something which is a pretence or a fiction. In the present facts of the case assessee has collected certain payments by in the form of royalties from the contractor’s however did not deposit it. In case of labour welfare cess the same has been deposited beyond the due date in certain years. 7.5.1. We find force in the alternative argument advanced by Ld.AR. We are therefore remanding the issue back to Ld.AO. Ld.AO shall call for all necessary details and information is in order to verify the contentions/submissions of assessee. Assessee shall file all requisite information in support of its claim of having paid the statutory dues to the Government of Karnataka. Ld.AO shall then consider the claim of assessee to the extent of actual payment made in the relevant assessment year. Accordingly these grounds are allowed for statistical purposes. 7.6. Ground No. 8-9 are general in nature and therefore do not require adjudication. In the result appeal filed by revenue in ITA No.426, 807/Bang/2017 stands partly allowed. 7.7. The only issue raised by assessee in cross objection is supporting the view taken by Ld.CIT(A) on Issue No.III which has been dealt with herein above in para 6.7 to 6.7.2. As we have
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already dismissed grounds raised by revenue on this issue, cross objection raised by assessee becomes infructuous. Accordingly the cross objections raised by assessee being CO No.45, 46, 48/Bang/2018 stands dismissed as infructuous. In the result appeals filed by assessee and revenue and cross objections filed by assessee stands disposed off as indicated herein above. Order pronounced in open court on 27th Nov, 2020.
Sd/- Sd/- (Candra Poojari) (Beena Pillai) Accountant Member Judicial Member Bangalore, Dated, 27th Nov, 2020. / vms /
Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file
By order Asst. Registrar, ITAT, Bangalore.
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