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Facts
The revenue filed appeals against the CIT(Appeals) orders concerning AY 2017-18 and 2018-19. The appeals involved delays which were condoned. The assessee, a nodal agency for implementing Smart City projects, received grants from the government and earned interest on these funds parked in bank accounts. The revenue contended that this interest income is taxable.
Held
The Tribunal noted that the interest earned on government grants for Smart City projects, as per General Financial Rules, should be remitted back to the government or adjusted against future grants. Consequently, the interest income could not be considered as the assessee's income as it was not at the assessee's disposal. The judgment in Tuticorin Alkali Chemicals was deemed distinguishable as the assessee had no dominion over this income.
Key Issues
Whether interest earned on government grants parked in bank accounts, pending utilization for Smart City projects, is taxable as income of the assessee.
Sections Cited
Sec. 56 of the Income Tax Act
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI KESHAV DUBEY
Per Laxmi Prasad Sahu, Accountant Member These two appeals are filed by the revenue against the separate orders dated 21.07.2023 and 15.07.2023 of the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC], for the AYs 2017-18 & 2018-19 respectively.
There is a delay of 48 days and 54 days respectively in filing these appeals. The revenue has filed affidavit stating that the revenue’s office is situated at Davangere whereas the Pr.CIT’s office is at Bengaluru, more than 250 Kms. away and certain details of the assessee company were required to be collected such as Memorandum of Association, Articles of Association which were not available in the records, which caused delay in filing both the appeals and condonation of delay is requested. After hearing both the parties, it is observed that there are sufficient reasons for the delay and following the judgment of the Hon'ble Apex Court in the case of Collector, Land Acquisition Vs. MST. Katiji and Others (1987) 167 ITR 471, delay in filing both the appeals before the Tribunal is condoned.
Since the issues involved in both the appeals are identical, only change in figures, therefore for the sake of convenience and brevity, we are taking first and the decision of this appeal shall apply mutatis and mutandis to ITA No.858/Bang/2024. The grounds of appeal are as follows:-
“Whether in the facts and circumstances of the case, the Ld. CIT(A) was right in law in not following the settled law of the Hon'ble Apex court in the case of Tuticorin Alkali Chemicals and Fertilizer Ltd, reported in 227 ITR 172 wherein it has been clearly held that if the capital of the company is fruitfully utilized instead of keeping it idle, the income generated will be of revenue nature and not accretion to capital? 2. Whether on the facts and in the circumstances of the case the Ld. CIT(A) was right in law in holding that the company is a nodal agency for the government to implement the infrastructure project relying on an indifferent decision in the case if KUIFDC without appreciating that the assessee company has been incorporated for providing services in lieu of payments, thus profit motive is germane to the project as against the welfare in the case of KUIDFC.”
The brief facts of the case are that the assessee is a company established by the Govt. of India for implementation of Smart City under the Planning commission. During the FY 2016-17 the assessee earned interest income on its deposits of Rs.13,90,47,536 and declared total income of Rs.11,44,890. Subsequently the assessee filed revised return declaring loss of Rs.23,50,104 and claimed refund of Rs.4,92,53,130 and again filed revised return on 26.10.2018 by claiming loss and refund. The case was selected for scrutiny and statutory notices were issued to the assessee. The AO noted that while in the revised return the assessee claimed a loss and refund, however in the original return of income, income was shown at a sum of Rs.13,11,44,889. He further observed that the assessee has received interest on FD of Rs.13,20,64,775 and interest on SB a/c. of Rs.69,82,761 which was not offered to tax as per revised return filed by the assessee. In this regard the assessee was asked to explain. The reply submitted by the assessee was not accepted by the AO and relying on the judgment of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. [1997] 93 Taxman 502 (SC)/[1997] 227 ITR 172 (SC). The assessee was issued show cause notice u/s. 142(1) under which section the interest income is exempt. The assessee submitted that interest income is out of money given by the Govt. of India for the purpose of implementation of Smart City scheme and relied on the judgment in the case of Karnataka Urban Infrastructure Development & Finance Corpn. (2006) 284 ITR 582 (Karn) and (2009) 15 ITR 301 (Karn). The AO also relied on the judgment of CIT v. Shaw Wallace & Co. [1932] 59 LA. 206 and Kedar Narain Singh v. CIT [1938] 6 ITR 157 (All.). Relying on the judgment of the Hon’ble Supreme Court the AO held that interest income of Rs.13,90,47,536 as income u/s. 56 of the Act. The AO also referred to similar cases in the case of Haveri Nimrithi Kendra & Davangere Nimrithi Kendra where similar grant received from Govt and interest received on such grant was offered as income without claiming as exempt income. The AO allowed expenses claimed as per P&L account of Rs.23,00,829 and assessed income at Rs.13,67,46,710. Aggrieved from the above order, the assessee filed appeal before the First Appellate Authority (FAA)
The ld. FAA allowed the appeal of the assessee by observing as under:-
“Decision: The AO had made the additions for the following reasons: • The appellant is incorporated as a company under the Companies Act. • The interest income is revenue in nature and any deduction, if any, should have been claimed as per the provisions of the income tax act. However, the appellant did not claim any deduction • Ratio in Tuticorin Alkali Chemicals of the Apex Court and the Kedar Narain Singh vs CIT is applicable to the facts of the case. On the contrary, the appellant made out a clear case as to why these decisions are not applicable in its own case for the assesses in those cases had a business purpose and reiterated that the appellant is a nodal and implementing agency with no business purposes. It drew attention to the plethora of legal precedents squarely applicable to the facts of its case. The AO failed to make out a case as to why the ratio in the jurisdictional High Court cases relied upon by the appellant during assessment are distinguishable. In view of the factual matrix attendant to the appellant's case coupled with numerous decisions rendered by various judicial forums and the honorable jurisdictional High Court, the addition is not warranted for the ratio set out in the relied upon precedents. The AO is directed to delete the addition. In consequence thereof, the other grounds do not survive for adjudication.”
Aggrieved, the revenue is in appeal before the ITAT.
The ld. DR relied on the order of the AO and submitted that the assessee is a company registered under the Companies Act and interest income earned on its FDs and SB A/c is taxable u/s 56 of the Act and there is no any provision in the Act for granting exemption to the assessee and the decision relied by the AO in the case of Tuticorin Alkali Chemicals and Fertilizer Ltd. (supra) is squarely applicable in the present facts of the case. There is no doubt that the assessee is a nodal agency of Central Govt. and State Govt. for developing Smart City and receiving grants from the Govt. from time to time and the idle funds were kept in the Bank and the assessee has earned interest on such fund. Therefore, the interest is taxable as income from other sources u/s. 56. The ld. CIT(Appeals) has gone on different footing, therefore he requested that the order of the AO should be upheld.
On the other hand, the ld. AR has filed written submissions which reads as under:-
“2. The issue in this appeal relates to the taxability of the interest earned the Respondent: assessee on funds parked in the bank account pending utilisation of the same for the smart city project for which grants were given by the Central as well as State Government of Karnataka.
In course of hearing of the appeals before the Hon'ble Bench on 16/04/2024, the Hon'ble Bench had raised a query relation to the manner of utilisation of interest earned for both the assessment years. Under the instructions from the above respondent assessee, the following factual position relating to the interest earned by the Respondent assessee is being submitted as directed by the Hon’ble Bench.
Briefly, it is relevant to point out that the respondent assessee is a nodal agency established by the Government of India for implementation of Smart City Scheme. The respondent assessee receives grants from the Central and State Government for implementation of Smart City Scheme. The grants so received are parked in the bank account of the respondent until the time the same is used for the purposes of the smart city project. Interest on the deposits accrues and has been received for both these assessment years. The interest earned by the respondent assessee on the aforementioned funds for the years under appeal are as under:” AY Interest 2017-18 Rs. 13,90,47,536/- 2018-19 Rs. 16,65,00,533/-
It is submitted that from the financial year relevant to the assessment year 2017-18, the Respondent assessee is subject to the General Financial Rules, 2017 issued by the Ministry of Finance effective from 11/02/2017. The relevant extracts of the General Financial Rules, 2017 are placed at Page 01 of these submissions. It is submitted that the Grants received by the respondent from the Central Government are covered by Chapter IX : Grants-In-Aid and Loans of the General Financial Rules, 2017 [see Page 02 to 13 of these submissions].
It is submitted that in accordance with Rule 230[8] of the General Financial Rules, 2017 the interests or other earnings against Grants in aid released to the respondent has to be mandatorily remitted to the Consolidated Fund of India immediately after finalization of the accounts. Rule 230[8] of the General Financial Rules, 2017 is reproduced below: “Rule 230 (8) All interests or other earnings against Grants in aid or advances (other than reimbursement) released to any Grantee institution should be mandatorily remitted to the Consolidated Fund of India immediately after finalisation of the accounts. Such advances should not be allowed to be adjusted against future releases."
The Respondent assessee has prepared a Statement [placed at Page 14 of these submissions] showing year wise receipt of grants received from Government of India and Government of Karnataka, the amount spent, the balance unspent, the interest earned thereon for assessment years 2015-16 to AY 2023-24. In the said statement, the Respondent has shown the payment / adjustment of interest against future grants.
It is submitted that in terms of the aforesaid Rule 230[8] of the General Financial Rules, 2017, the Respondent assessee has also remitted the Interest to the Government of India and Government of Karnataka based on the extent of grant received to which the interest relates, immediately after finalization of the accounts. In support of the same, the Respondent assessee is producing the following documents showing the refund made as under: [a] Copy of covering letter dated 17/06/2022 in which a sum of Rs. 27,47,69,041/- was remitted vide ch.No.235712 dated 17/06/2022 [copy placed at Page 15 to 18 of these submissions]; [b] Copy of covering letter dated 25/03/2022 in which a sum of Rs.2,21,67,774/- was remitted vide ch.No.097051 dated 25/05/2023 [copy placed at Page 19 to 21 of these submissions]; [c] Copy of covering letter dated 20/10/2023 in which a sum of Rs.8,91,73,152/- was remitted vide NEFT/RTGS dated 20/10/2023 [copy placed at page 22 of these submissions]; [d] Copy of covering letter dated 20/10/2023 in which a sum of Rs.3,22,12,416/- was remitted vide ch.No.243927 dated 20/10/2023 [copy placed at Page 23 of these submissions]; [e] Copy of covering letter dated 10/10/2023 in which a sum of Rs.38,49,263/- was remitted vide NEFT/RTGS dated 10/10/2023 [copy placed at Page 24 to 27 of these submissions]; 9. It is also relevant to point out here that vide order dated 11/11/2021 [copy placed at Page 28 to 34 of these submissions], the Government of Karnataka has adjusted the accrued interest against the contribution by the Government of Karnataka pending to be released towards the smart city mission. In other words, the interest on the deposits has been ultimately used or applied for the smart city project being implemented by the Respondent assessee either by way of adjustment against future grants or by repaying the same to the Consolidated Fund of India.
Thus, it is submitted that the interest earned by the respondent during the assessment year 2017-18 and 2018-19 has been utilized in the manner explained above and cannot be considered to form a part of the income of the respondent assessee.
Apart from the aforesaid query, the Hon'ble Bench had also enquired about the status of assessment for the subsequent assessment years. It is submitted that the income reported by the respondent has been accepted u/s 143[1] of the Act for the assessment years 2019-20 to 2022-23. The details of the same are tabulated below for ease of reference:
Copy placed at AY Date of Intimation passed u/s 143[1] 2019-20 04/06/2020 Page 35 to 43 of the submissions 2021-22 28/06/2022 Page 44 to 50 of the submissions 02/03/2023 Page 51 to 57 of the 2022-23 submissions
Under the aforesaid circumstances, it is requested that the appeals filed by the Department may kindly be dismissed for the advancement of substantial cause of justice. 9. The ld. AR also filed a paperbook containing pages 1 to 284 and the index of the documents are as under:-
SL. PARTICULAR S PAGES FILED/ NO. FROM TO AVAILABLE BEFORE AO/CIT[A] ASST.YEAR 2017 - 18 1. Copy of the Memorandum and Articles of 01 91 AO Association of the respondent.
Copy of the acknowledgement for having 92 111 AO & CIT[A] filed the original return of income 30/10/2017 along with the computation of total income, financials and Audit report in Form No.3CA and 3CD.
Copy of the First Revised return of income 112 126 AO & CIT[A] Filed on 30/03/2018 along with the computation of total income and Audit report in Form 3CA and 3CD.
Copy of the Second Revised return of 127 138 AO & CIT[A] Income filed on 26/10/2018 along with the computation of total income and financials.
Copy of the Notice U/s 142[1] of the Act 139 140 AO dated 17/07/2019.
Copy of the reply dated 07/08/2019 141 143 AO response to the above notice.
Copy of the Notice u/s 142[1] of the Act 144 145 AO dated 30/07/2019 8. Copy of the reply dated 07/08/2019 along 146 170 AO with the annexures in response to the above notice u/s. 142(1) of the Act.
Copy of the Notice U/s 142[1] of the Act 171 172 AO dated 21/08/2019.
Copy of the letter dated 27/09/2019 issued 173 175 AO by the learned Assistant Commissioner of Income-tax, Circle - 1[1], Davangere.
Copy of the reply dated 19/11/2019 in 176 178 AO response to the above letter.
Copy of the Written Submissions dated 179 185 CIT[A] 06/06/2022 filed before the learned CIT[A], National Faceless Appeal Centre, Delhi.
Copy of the decision of the Hon'ble ITAT, 186 207 CIT[A] Bangalore Bench, Bangalore in dated 19/04/2022 in the case of M/s. BANGALORE METRO RAIL CORPORATION LTD, BENGALURU.
Copy of the decision of the Hon'ble High 208 216 CIT[A] Court of Karnataka in ITA NO.117/2015 c/w ITA No.118/2015 dated 23/11/2020 in the case of M/s. BANGALORE METRO RAIL CORPORATION, BENGALURU.
Copy of the decision of the Hon'ble High 217 218 CIT[A] Court of Karnataka, in the case of M/s. KARNATAKA URBAN INFRA- STRUCTURE DEVELOPMENT AND FINANCE CORPORATION reported in 284 ITR 582.
Copy of the decision of the Hon'ble High 219 220 CIT[A] Court of Karnataka in the case of M/s. KARNATAKA URBAN INFRA- STRUCTURE DEVELOPMENT AND FINANCE CORPORATION reported in 315 ITR 301.
Copy of the decision of the Hon'ble High 221 224 CIT[A] Court of Karnataka in the case of M/s. KARNATAKA STATE AGRICUTLURAL PRODUCE PROCESSING AND EXPORT CORPORATION LTD reported in 377 ITR 496. ASST.YEAR 2018 – 19 18. Copy of the acknowledgement for 225 245 AO Et CIT[A] having filed the return of income on 27/10/2018 along with the computation of total income, financials and Audit report in Form 3CA and 3CD of the Act.
Copy of the Notice U/s 142[1] of the Act 246 248 AO dated 07/01/2021 20. Copy of the reply dated 14/01/2021 in 249 252 AO response to the above notice u/s. 142[1] of the Act
Copy of the Notice u s 142[1] of the Act 253 254 AO dated 25/01/2021.
Copy of the reply dated 28/01/2021 along 255 263 AO with the following enclosures in response to the above notice u/s 142[1] of the Act. 22[a] Copy of the letter dated 17/09/2016 of 264 275 AO fund release by KUIDFC to Smart City Project Fund and A&OE fund photo copies of the ledger account extracts 22[b] Copy of Form 26AS for the assessment 276 277 AO year 2018-19. 22[c] Copy of the Computation of total income 278 278 AO for the assessment year 2018-19. 23. Copy of the Written Submissions dated 279 284 CIT[A] 25/05/2022 filed before the learned CIT[A], National Faceless Appeal Centre, Delhi. 10. The ld. AR during the course of hearing referred to page 14 of PB in which details of grant received, utilisation of the grant and interest received on such deposits and details of the remittances are given. He also referred to page 28 of PB.
Considering the rival submissions, we note that assessee has been formed for implementation of the Smart City Scheme by the Central Govt. as well as State Govt of Karnataka. Grants are parked in the bank account until the same is used for the designated purpose of Smart City project and interest on such deposits in the case of Central Govt. funds is immediately returned to the Central Govt. as per Rule 230(8) of GFR, 2017 and interest is remitted to the State Govt. based on the extent of grant received to which the interest relates immediately after finalization of the accounts. On going through the documents, we note that there is no category of income to the assessee because the interest receive on Central fund is adjusted to the Consolidated Fund of India and interest received on State Govt. fund is adjusted in the subsequent grant. Hence the judgment in the case of Tuticorin Alkali Chemicals and Fertilizer Ltd. (supra) relied on by the ld. DR is distinguishable and not applicable in the case on hand, since interest income earned on FD and SB A/c. has not accrued in the hands of the assessee. A similar issue has been decided by the coordinate Bench of Hyderabad in the case of Hyderabad Pharma Infrastructure & Technologies Ltd. v. ADIT(Intl. Taxn.) reported in (2014[ 45 taxmann.com 339 in which it has been held as under:-
“10. We have heard the submissions of the parties and perused the materials on record. So far as the factual aspect of the issue is concerned, it is not disputed by either of the parties that the grant received from the Central Government, which was not immediately utilized was kept in short term deposits in the banks and interest income was earned on such deposits. In fact, as it would appear from the materials on record, the assessee itself was treating such interest income as its business income and claimed deduction under S.80IA of the Act on such income. However, the fact remains that the Central Government in the Ministry of Commerce and Industry, through its Department of Industrial Policy and Promotion, had issued a letter dated 5th December, 2011 to all the SPVs implementing the IIUS projects, giving certain instructions. Clause 7 of the said letter reads as under:— "(vii) Amount of interest earned actually so far on the central grant released to the SPV. The SPV shall not utilize the interest earned on the grant so released it for any purpose. The interest earned shall be indicated in the UC which can either be adjusted in next release or to be refunded to Government of India after grants-in-aid sanctioned is utilized." A plain reading of the aforesaid clause would make it clear that the Government has given a clear instruction and that interest on short term deposits either has to be refunded back to the government or to be adjusted against the future grants to be released for implementing the project. In other words, the amount to the extent of interest earned on fixed deposits will be reduced from the grants. Therefore, in real sense, the interest on short term deposits partake the character of grants, unless it is refunded back to the Government. In either case, interest earned on short term deposits cannot be said to have accrued as income to the assessee. The instruction issued by the government in the aforesaid letter also makes it mandatory that he SPV 'shall not' utilize the interest earned on the grant for any purpose. In the foresaid view of the matter, interest earned on short term deposits cannot be treated as income of the assessee, when the assessee in strict sense of the term has no dominion over such income. It is not the case of the Department that the Central Grant received is also income of the assessee. Therefore, if the interest income is adjusted against future grant, it partakes the character of the grant itself and cannot be treated as income of the assessee. However, these factual aspects need to be verified to ascertain whether the interest has not later been refunded back to the Government or has been adjusted against any future grant released to the assessee. In these facts and circumstances, we are inclined to remit the issue back to the file of the Assessing Officer for proper verification and fresh decision. We do so accordingly and direct the Assessing Officer to verify whether the interest earned on short term deposits has been refunded to the Government or has been adjusted against any future grant released to the assessee, and decide the issue accordingly, in accordance with law and after giving reasonable opportunity of hearing to the assessee. However, we make it clear that since the assessee has voluntarily filed a return admitting income, the Assessing Officer while deciding issue and computing the income must bear it in mind that in no case, the assessed income stands determined below the returned income. Assessee's grounds on this issue are thus allowed for statistical purposes.”
Respectfully following the above judgment, we are sending back this issue to the AO for carrying out verification in the light of the above judgment and the AO has to ascertain whether the interest income has been remitted back either to the Central Govt. and/or State Govt according to the interest received on the fund following the necessary guidelines. He has also to ascertain that the assessee has not received any benefit as revenue in nature on such interest income. After verifying if it is found that the entire interest income has been remitted back to the Central Govt. / State Govt., then there should be no addition on both the interest income earned on its deposits (FD and SB A/c).
In the result, both the appeals of the revenue are partly allowed for statistical purposes.
Pronounced in the open court on this 21st day of October, 2024.
Sd/- Sd/- ( KESHAV DUBEY) (LAXMI PRASAD SAHU ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 21st October, 2024.