JCIT, BANGALORE vs. M/S RAJIV GANDHI RURAL HOUSING CORPORATION LTD.,, BANGALORE

O R D E R Per Shri Jason P Boaz, A.M. :

These two appeals by Revenue are directed against the orders of CIT(A)-5, Bangalore for Assessment Years 2007-08 and 2011-12, both dated 29.03.2016. Since common issues are involved, these appeals were heard together and are being disposed off by way of this consolidated order.

Assessment Year 2007-08 2.1 The assessee company, engaged in the business of working as a Nodal Agency to implement the schemes of the government to construct houses, filed its return of income for Assessment Year 2007-08 on 31.10.2007 declaring NIL income and claiming brought forward loss of Rs.11,71,77,914/-. The assessee subsequently filed a revised return on 19.09.2009 declaring NIL income and claiming carry forward loss of Rs.27,13,25,625/-. Assessment proceedings under section 147 of the Income Tax Act, 1961 (in short ‘the Act’) were initiated and notice under section 148 of the Act was issued to the assessee. The assessment was concluded under section 143(3) r.w.s. 147 of the Act vide order dated 31.12.2014, wherein the assessee’s income was determined at Rs.6,71,46,517/-; in view of the following additions / disallowances: -

(i) Guarantee Commission - Rs.5,99,72,854/- (ii) Interest income - Rs.12,43,51,577/- 2.2 For Assessment Year 2011-12, the assess filed its return of income on 30.09.2011 declaring NIL income and claimed carry forward of loss of Rs.2,89,84,324/-. The case was taken up for scrutiny for this Assessment year and the assessment was concluded under section 143(3) of the Act vide order dated 21.03.2014 wherein the assessee’s income was determined at Rs.22,21,66,127/- in view of the following additions / disallowances: -

(1) Interest Income - Rs.25,05,49,350/- (2) Prior Period expenditure - Rs. 5,92,189/- (3) Loss on sale of asset - Rs. 8,912/-

4.1 Assessment Year 2007-08

1. The order of the Commissioner of Income Tax(Appeals) - 5, Bangalore, is opposed to the law and not on the facts and circumstances of the case.

2. Whether on the facts and in the circumstances of the case, the CIT(A) was justified in deleting the addition made by the AO without appreciating that the assessee had debited Guarantee Commission to P & L account as provisional in nature which is not allowable and as the assessee follows mercantile system of accounting, only payments made during the financial year is eligible for deduction. Whether on the facts and in the circumstances of the case, the 3. CIT(A) was justified in deleting the addition made by the AO without' appreciating that the work of the assessee related to the construction of houses to the economically weaker section and so the interest earned on the deposits made with banks has to be treated as income from other sources. Section 56 of the IT Act,1961 mandates taxation of interest from bank deposits and the section does not take into cognizance the purpose for which the interest it put to use. 4. For these and other grounds that may be urged upon, the order of the CIT(A) may be reversed and that assessment order be restored.

4.2 Assessment Year 2011-12

2. Whether on the facts and in the circumstances of the case, the CIT(A) was justified in deleting the addition made by the AO without appreciating that the work of the assessee is related to the construction of houses to the economically weaker section and so the interest earned on the deposits made with banks has to be treated as income from other sources. Section 56 of the IT Act,1961 mandates taxation of interest from bank deposits and the section does not take into cognizance the purpose for which the interest is put to use. 3. For these and other grounds that may be urged upon, the order of the CIT(A) may be reversed and that assessment order be restored. 4. The appellant craves leave to add, alter, amend or delete any other grounds on or before hearing of the appeal.

“08. We heard the rival submissions. In respect of the issues on guarantee commission, the assessee took us through the statement showing details of Government Guarantee Commission, from f y 2008-09 to fy 2015-16 in its paper book, explained various columns viz the opening balance, Guarantee Commission for the year, Guarantee Commission paid and the balance outstanding in each f y etc , submitted that in f ys 2008-09 & 2015-16, it has paid Rs. 20 crores & 40.26 crores and the balance outstanding as at the end of FY 2015-16, is just Rs.24.49 crores of Guarantee Commission only and reiterated the same plea taken before the CIT (A). The relevant portion of the CIT (A) order is extracted as under: “7. The second ground of appeal is with regard disallowing the liability of Rs.6,40,57,610/- towards balance of guarantee commission payable to the State Govt. of Karnataka, assuming the same as unpaid statutory liability, misinterpreting the provisions of sec. 43(B). 8.0 The appellant submitted that the AO disallowed the expenditure towards Guarantee Commission of Rs.6,40,57,610 payable to the Government of Karnataka on the basis of contractual obligation between the Company and the Government of Karnataka represented by His Excellency, the Governor of Karnataka. From a plain reading of Section 43B, it is clear that Guarantee commission payable to a Government not explicitly covered and the AO has considered Guarantee commission payable to Govt. of Karnataka as a statutory liability on the basis that such commission is payable to the Government of Karnataka. 8.2. Section 5 of The Karnataka Ceiling on Government Guarantees Act, 1999, provides that the Government shall charge a minimum of one percent as guarantee commission which shall not be waived under any circumstances. The Guarantee commission payable to the Government of Karnataka (GOK) is based on the terms of the Guarantee agreement between the appellant and the GOK) The Guarantee agreement is a commercial contract between the appellant and the GOK and the fact that one of the parties to the agreement is a Government is only incidental. A parallel view may be drawn to the case of CIT Vs. Warna Sahakari Karkhana Limited (2001) 119 Taxmann 422, 253 ITR 226, the Bombay High Court held that audit fee payable to the Government is not duty, cess or tax payable to the Government as understood under Section 43B of the Act. The audit fees was levied vide Rule 74 of the Maharashtra Co-operative Societies Rules, 1961. The Bombay High Court observed - As held by the Apex Court in the case of Amarchand Chakraborty v. The Collector of Excise, Government of Tripura, 1972 AIR 1863, there is no generic difference between a tax and a fee, though broadly a tax is a compulsory extraction as part of a common burden without promise of any specific advantages to the Classes of tax payers whereas fee is payment for services rendered, benefit provided or privileges conferred. Reliance is also placed on the appellant's own case for AY 2006-07 with 2(4)/C1T(A)-III/Bang/08-09 dt 25 March 2014). 9.0 1 have gone through the arguments of the appellant in the written submission, and alto gone through the assessment order passed by the Assessing Officer. The Assessing Officer has taken the view that Income Tax Act, 1961 does not recognize any liability on provision basis. Since, a guarantee commission payable to the Government of Karnataka has not been actually paid in accordance with section 43(B) of the Income Tax Act, 1961 Since, the appellant has not met its statutory obligation of paying the commission to the GOK in accordance with the terms and condition of the agreement the same was not allowed as deduction from total income of the appellant. During the appellate proceedings, the authorized representative has brought to the notice the terms and condition agreement between the appellant and the GOK and it was found that the Guarantee agreement is a commercial contract between the appellant and the GOK. Further, it is seen from the provisions u/s.43(B) that the guarantee commission payable to the GOK is not covered under such provision. Since, guarantee commission is not a statutory obligation of the appellant to pay to the Govt. Of Karnataka unlike other payments such as cess, tax, duty, fee etc. Further, it is found that the Guarantee commission is a consideration payable by the appellant for a service rendered by the GOK and not in the nature of a tax, duty, fee or cess which is a compulsory extraction as part of a common burden without promise of any specific advantages to the classes of tax payers. 9.1 It Is further found that appellant has also got relief in this ground by my predecessor vide its order dated 21/08/2014 for the A. Y 2009-10, in which it was held that: In this regard AO has stated that the amount which is debited to the Profit & Loss account is provisional in nature and therefore added back the amount. In the submissions before me appellant has stated that the" liability is an amount payable to the Karnataka Government on the basis of a contractual obligation. Appellant has stated that the company is an implementing agency for housing programs for economically weaker section as per the. guidelines issued by the Karnataka Government. The required funds are released by the Government through budgetary provisions. The Government of Karnataka also stands guarantee for loans availed from Financial Institutions. As per the loan agreement the appellant has to pay the guarantee Commission to Government of Karnataka at the rate of 1% of the outstanding principal and interest calculated on a monthly basis. As per the Guarantee Act, 1961 the guarantee commission cannot be waived under any circumstances. There is no case for disallowing the amount u/s.43(B) as the guarantee commission is not in the nature of cess or duty or This issue has been decided by me in CIT, C- 12(4)/CIT(A)41/Bang/08-09 dt. 25.03.2014 for A. Y. 2006- 07, wherein it has been held that; "It is thus emerges that the loans guaranteed by the State Government For which commission is paid is wholly and exclusively for the purpose of business and would qualified for deduction u/s.37 of the Income Tax Act, 1961. As it is evident that the liability is an ascertained liability and is payable on the basis of contradiction obligation here is no case for disallowing the amount either as an unascertained liability or under provision of section 438." As the facts and circumstances are identical for this year as well, these grounds are allowed. 9.2 In view of the above arguments of the assessee and also following the decision of my predecessor in the assessee's own case, this ground is allowed."

9. We are of the view that CIT (A) has rightly found that the guarantee agreement is a commercial contract between the appellant and the GOK, the guarantee commission is a consideration payable by the assessee for a service rendered by the GOK and it is not in the nature of a tax, duty, fee or cess, which is a compulsory extraction as part of a common burden without promise of any specific advantages to the classes of tax payers . Since, guarantee commission is not a statutory obligation of the assessee to pay to the Govt. of Karnataka, it is not covered under section 43(B). Thus, we do not find any reason to interfere with the CIT (A) on his findings and hence the Revenue's appeals fail on this ground for both ays.”

6.1.2 Respectfully following the decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case for Assessment Years 2008-09 and 2012-13 in and 204/Bang/2016 dated 18.03.2017, we concur with the view expressed therein that guarantee agreement is a commercial contract between the assessee and the Government of Karnataka and the guarantee commission is a consideration payable by the assessee for service rendered by the Government of Karnataka. Since the guarantee commission is not a statutory obligation of the assessee to pay the Government of Karnataka, it is not covered under section 43B of the Act; as has been contended by the Assessing Officer (AO). In this view of the matter, we find no reason to interfere with the findings of the learned CIT(A) on this issue. Consequently, ground No.2 of Revenue’s appeal for Assessment Year 2007-08 is dismissed.

7.2.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement cited in this regard. We find that, as submitted by the learned AR for the assessee, this issue of exigibility to tax on interest earned by the assessee on bank deposits is squarely covered by the decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case for Assessment Years 2008-09 and 2012-13. In its order in and 204/Bang/2016 and C.O. Nos. 55 and 56/Bang/2016 dated 08.03.2017, the Co- ordinate Bench has considered this issue of the treatment of interest earned on deposits with Banks and at para 10 thereof, following the decision of an earlier Co- ordinate Bench in the assessee’s own case for Assessment Years 2009-10 and 2010- 11 (in ITA Nos.1472 and 1473/Bang/2014 dated 24.07.2015), has held as under:-

“10. In respect of the issues on interest income , the relevant portion of this Tribunal's decision in & 1473/ Bang/2014 in the assessee's case for ays 2009-10 & 2010-11 dt 24.7.2015 is extracted as under:

"06. We have perused the orders and heard the rival contentions. It is an admitted position that assessee was only a nodal agency for implementing housing programmes for economically weaker sections of the society. It was formed by Government of Karnataka. Funds were transferred to it by the Government. Whole of the funds were to be used for the purpose of housing programmes. This being so, interest accruing on such funds only went to enhance the funds available with the assessee for the programmes. Funds were always that of the Government and assessee had no lee-way but to utilise the funds as capital contribution received from the Government. Observation of the Hon'ble jurisdictional High Court in the case of CIT v. Karnataka Urban Infrastructure Development and Finance Corporation (supra) reproduced by CIT (A) at para 6 of his order is once again extracted by us hereunder : 5. The material on record shows that the very purpose of constitution of the assessee was to act as a nodal agency for implementation of the 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 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 the Centrally sponsored scheme of infra structural development for the mega city of Bangalore. Funds of one wing of the Government are distributed to the other wing of the Government for public purpose as per the guidelines issued. The monies so received, till they are utilised, are 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 the 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 the 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 the mega city scheme.

7. We are of the opinion that CIT (A) had rightly followed the judgment of Hon'ble jurisdictional High Court in deleting the additions. We do not find any reason to interfere.”

7.2.2 Respectfully following the decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case for Assessment Years 2008-09 and 2012-13 in and 204/Bang/2016 dated 18.03.2017, we are of the opinion that the CIT(A) has correctly followed the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Karnataka Urban Infrastructure Development and Finance Corporation (2009) 315 ITR 301 (Kar.) in deleting the additions made by the AO in respect of the interest earned on deposits with Banks, pertaining to the funds received from Central and State Governments attributable to Fund Account only and utilized by the assessee as a Nodal Agency in accordance with the directions for utilization of the fund for the given purpose of providing finances for implementing housing programme for the economically weaker sections of society. Consequently, ground No.3 for Assessment Year 2007-08 and ground No.2 for Assessment Year 2011-12, raised by Revenue on this issue, are dismissed.

Order pronounced in the open court on this 3rd day of April, 2019.