DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 1(1)(1), BANGALORE vs. BANGALORE METRO RAIL CORPORATION LIMITED, BANGALORE

This appeal at the instance of the Revenue is directed against the order of CIT(A)/NFAC dated 12.03.2024 vide DIN & Order No.ITBA/NFAC/S/250/2023-24/1062472890(1) for the assessment year 2010-11 passed u/s 250 r.w.s. 254 of the Income Tax Act, 1961 (in short “The Act”).

The Revenue has raised following grounds of appeal:

This appeal is filed by the revenue belatedly by 3 days and at the outset the ld. D.R. drawn our attention on a letter vide F.No: Con of Delay/DCIT/C-1(1)(1)/2024-25 dated 14/05/2024 requesting for seeking the condonation of delay in filing the appeal before this Tribunal by stating that due to the unintentional and unavoidable reasons i.e. pressing time barring matters, other miscellaneous works and technical issue, the filing of appeal is delayed by 3 days.

Keeping in view of the circumstances, under which the revenue’s appeal was filed belatedly, we condone the short delay of 3 days and admit the appeal for adjudication.

Now brief facts of the case are that the assessee-company M/s. Bangalore Metro Rail Corporation Limited (herein after BMRCL) designated as a “Special Purpose Vehicle” by Govt. of India is engaged in the implementation of rail based Mass Rapid Transport system called Bangalore Metro Rail Project covering a length of 33 kilometers in two corridors. The financing pattern of the project is mix of equity, interest free subordinate debt and Bangalore Metro Rail Corporation Limited, Bangalore Page 3 of 17 senior term debt (including borrowing from Japan Bank International Co-operation). The contribution of Government of India is 25% whereas the contribution of Government of Karnataka is 30% and the Senior term debt is 45%. The commercial operation of Bangalore Metro has not yet commenced. As observed by the Assessing Officer, during the Financial Year 2009-10, the funds received by the assessee-company were invested in Fixed Deposit and Mutual Funds. As a result, the assessee company had earned interest and dividends as follows:

Interest earned on Term Deposit 18,25,27,519 2. Interest from others 4,86,22,824 5.1 Apart from the above, the BMRCL had also received miscellaneous receipts of Rs.5,70,48,926/- in the form of tender fees Rs.1,67,00,413/- & other miscellaneous receipts of Rs.4,03,48,513/-. The assessee filed its return of Income for the Asst. year 2010-11 on 21/09/2010 declaring the NIL Income claiming the same to be Exempt. Thereafter the case was selected for Scrutiny and accordingly the statutory notices U/s 143(2) as well as u/s 142(1) of the Act were issued. During the course of the Assessment Proceeding the ld. A.R. was given an opportunity to explain as to why the income earned on deposits made with financial institutions should not be brought to tax. The AR of the assessee in reply submitted that the assessee being conduit established to implement the project for general public utility had parked the surplus funds available with it in the fixed deposits and mutual funds which resulted in the earning of Interest & dividend but the assessee has filed the NIL Income claiming it to be exempt by relying on the decision of the Jurisdictional High Court in the case of CIT vs. Karnataka Urban Infrastructure Development & Bangalore Metro Rail Corporation Limited, Bangalore Page 4 of 17 Finance Corpn. [2006] 155 Taxmann 228 (Kar.). Further the Assessee Company also explained as under- The entire operations of the assessee in implementation of the project was subject to the conditions as laid down by the Government of India, Ministry of Urban Development , Metro Rail Cell, vide communication dated 11/05/2006. Accordingly the Government of Karnataka among other things was to- 1) Bare the entire cost of the land 2) Ensure the electric power supply to the project on no profit no loss basis 3) Provide for equity contribution and subordinate debt before utilizing senior debt. 4) To facilitate metro raidership as part of integrated traffic rationalization plan to ensure projected raidership.

Interest earned on Term Deposit 18,25,27,519 2. Interest from others 4,86,22,824 3. Miscellaneous receipts 5,70,48,925 Further in the opinion of AO since the income so earned is in the nature of interest income, no expenditure in connection with earning of this interest income are liable to be deducted and accordingly the total income was assessed at Rs.28,81,99,268 and the balance tax payable was determined at Rs.12,22,18,106. The AO had also initiated the penalty proceedings u/s 271(1)(c) of the Act. However, on appeal before the NFAC, the ld. CIT(A)/NFAC has deleted the addition. Aggrieved, the revenue is in appeal before us.

The ld. D.R. submitted that the CIT(A)/ NFAC is not justified in placing the reliance upon the Judgement of Hon’ble High Court of Karnataka rendered in assessee’s own case in c/w 118/2015. Further the ld. DR vehemently submitted that in the present case profit motive is germane as the Assessee will provide the transport facility & earn income by way of sale of tickets. Further the assessee company in the earlier years had offered the Interest income for Taxation. Lastly the DR submitted that the ld. CIT(A)/NFAC is not justified in not following the settled law of Hon’ble Supreme Court in the case of M/S. Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT reported in 227 ITR 122.

The ld. A.R. supported the order of CIT(A)/NFAC and requested for confirming the same by dismissing the appeal of revenue as the issues raised are squarely covered by Hon’ble ITAT, Bangalore in assessee’s own case in ITA No.1263/Bang/2015 for the Asst. year 2009-10 as well as ITA No.1048/Bang/2019 for the Asst. year 2011-12 as well as Jurisdictional High Court of Karnataka in assessee’s own case reported in 441 ITR 113 (Karnataka) [23/11/2021] for the Asst. year 2007-08 & 2008-09.

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

Keeping in mind the aforesaid principles, we shall consider the claim of the assessee in the present case. Admittedly the advice was given by the counsel who appeared on behalf of the assessee before the Tribunal for Assessment Years 2007-08 and 2008-09. The decision of the Tribunal was rendered on 31.10.2014. The appeal was filed by the Revenue before Hon’ble High Court in the year 2015 against the order of Tribunal dated 31.10.2014. A final call could be taken only later based on the professional advise of the later Counsel. Moreover, the assessee has also been pursuing claim for exemption of income during construction period from the Government. Hence, we find that there has been no willful neglect on the part of the assessee. In such matters the advice of the professional would be the point of time at which the assessee would begin to explore the option of exhausting all legal remedies. We are also of the view that by condonation of delay there is no loss to the revenue as legitimate taxes payable in accordance with law alone would be collected. We therefore accept the reason given for condonation of delay in filing the appeal. The delay in filing the appeal is accordingly condoned.

As far as the merits of the appeal of the assessee is concerned, we find that in respect of interest income, the Hon’ble Karnataka High Court in its order dated 23.11.2021 in ITA Nos.117 and 118/2015 in assessee’s own case for Assessment Years 2007-08 and 2008-09 held that identical interest income is not taxable for the following reasons:

The co-ordinate bench of this Court in the case of KUIDFC [(2009) 315 ITR 301], supra, has held thus:-

In the case of Karnataka State Agricultural Produce Processing and Export Corporation Ltd., supra, the co-ordinate bench of this Court (where one of us the Hon'ble SSJ was a member) following the judgments in the case of KUIDFC [(2006) 284 ITR 582], Tuticorin Alkali Chemicals and Fertilizers Ltd., supra, as well as Bongaigaor Refinery and Petrochemicals Ltd., vs. Commissioner of Income-tax reported in (2001) 251 ITR 329 (SC) and Commissioner of Inconte-tax vs. Jokaro Steel Ltd., reported in (1999) 236, ITR 315 (SC), has held thus:-

As could be seen from the Government Order dated 25.03.2008 now placed on record, it is ex-facie apparent that the unutilized funds of the project, before the commencement of the functional operation of the project, was invested by the assessee in fixed deposits and mutual funds as per the directions of the Government. It is apt to refer to the said Government Order, the relevant portion of which reads thus:- "The income generated out of earlier release of State Government to BMRC1., before the commencement of BMRCL, project would have to Bangalore Metro Rail Corporation Limited, Bangalore Page 14 of 17 be converted into State's equity towards the project and therefore cannot be counted as income of BMRCL. Further release as equity would be made to BMRCL only after adjusting this income."

In the light of the judgments referred to above vis-à-vis the Government Order dated 25.03.2008, it is clear that the income generated out of earlier release of State Government for its project would have to be converted into State's equity towards the project and the same cannot be counted as income of BMRCL. Thus, there is no profit motive as the entire fund entrusted and the interest accrued therefrom has to be utilized only for the purpose of scheme. Thus, it has to be capitalized and cannot be considered as revenue receipts.

For the reasons aforesaid, we confirm the order impugned passed by the Tribunal answering the substantial questions of law in favour of the assessee and against the Revenue.” 20. The decision rendered as above in assessee’s own case is that interest income cannot be considered as income and has to be capitalized. Respectfully following the same, we hold that interest income in question brought to tax by the AO has to be held as not taxable and the addition made in this regard is directed to be deleted. 21. As far as other income being tender fees and miscellaneous income is concerned, we find the Hon’ble Madras High Court in the case of M/s. Indian Power Projects Ltd., Vs. DCIT TCA No.543 of 2007 judgment dated 27.04.2015 dealt with identical issue arising in the case of an assessee which is a public sector undertaking such as the assessee and held as follows: “5. The short issue that arise for consideration in this appeal is "Whether on the admitted facts, the receipt of amount on the sale of tender documents should be treated as income from other sources or as capital receipt?". 6. For better appreciation of the case on hand, the reasoning of the Tribunal, as found in para-3 of its order, is extracted hereinbelow "3. We have considered the rival submissions made by both the sides and perused the materials available on record. It is an admitted position that the receipt by way of sale of tender documents is pre commencement receipt. There is no strong denial of the above fact. When it is pre commencement receipt the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd., cited supra, is directly on the point at issue. The decision of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd., on which the Commissioner (Appeals) relied on, is distinguishable as the decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd., has directly dealt with the pre commencement expense and receipts. We are of the view that the order of the Assessing Officer bringing the receipt as income from other sources is perfectly justified and the deletion of the Bangalore Metro Rail Corporation Limited, Bangalore Page 15 of 17 same by the Commissioner (Appeals) is not in accordance with law. We therefore set aside the order of the Commissioner (Appeals) and restore that of the Assessing Officer."

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

In the case of Bokaro Steel (supra), the Supreme Court found that the activities of the assessee was in connection with three receipts, viz., 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; 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 finally the interest from advance made to the contractors by the assessee for the purpose of facilitating the work of construction of its plant undertaken by the assessee. The activities of the assessee in connection with all these three receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. 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 hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. While considering this issue, the Supreme Court had occasion to take into consideration the judgment of the Delhi High Court in the case of ACIT - Vs - Indian Drugs & Pharmaceuticals (1983 (141) ITR 134 (Del.)) and endorsed the view of the Bangalore Metro Rail Corporation Limited, Bangalore Page 16 of 17 Delhi High Court and, finally it was held that the receipts were capital receipts and not income of the assessee from any independent source. The relevant portion of the decision of the Supreme Court is extracted hereinbelow for better appreciation :- "In the case of Addl. CIT v. Indian Drugs and Pharmaceuticals Ltd. (1983 (141) ITR 134), the Delhi High Court considered a case where the work of construction of the factory of the assessee was in progress and production had not commenced. Receipts from sale of tender forms and supply of water and electricity to the contractors engaged in construction as also receipts on account of sale of stones, boulders, grass and trees were held to be receipts not from independent sources but were considered as inextricably linked with the process of setting up of business. These were directly related to the capital structure of business and were held to be capital in nature. We agree with this view taken by the Delhi High Court."

A reading of the order of the CIT (Appeals) as also the Tribunal would reveal that the CIT (Appeals) has relied on the decision of the Supreme Court in Bokaro Steel case (supra), more particularly, para6, which has been extracted above, to come to the conclusion that in the case on hand, the receipt by way of sale of tender documents, even at the pre-commencement stage is inextricably linked to the process of setting up of business and, is therefore, capital in nature. Similar was the view of the Delhi High Court in the case of Indian Drugs & Pharmaceuticals (supra), which view has been endorsed by the Supreme Court.

However, a reading of the order of the Tribunal would reveal that there can be no iota of doubt that the Tribunal failed to appreciate the finding of the Delhi High Court, in similar set of facts, which was ultimately endorsed by the Supreme Court that the receipts which are inextricably linked to the process of setting up of business could not be construed in any other manner other than in the nature of capital receipt.

The Tribunal fell in error in merely stating that the decision in Bokaro Steel case (supra) is distinguishable from Tuticorin Alkali Chemicals & Fertilizers case (supra), without even understanding the scope of the decision in Bokaro Steel case (supra). The admitted fact in this case is that the amount received by the appellant/assessee in sale of tender documents at the pre-commencement stage is in relation to the establishment of the unit and, therefore, it could be clearly stated that it is intrinsically connected with the purpose of setting up of the unit. This Court is in agreement with the view expressed by the Supreme Court in Bokaro Steel case (supra), which has affirmed the view of the Delhi High Court in Indian Drugs & Pharmaceuticals case (supra) and is of the considered view that the said decision is squarely applicable to the facts of the present case. Accordingly, the first substantial question of law is answered in favour of the appellant/assessee and against the respondent/Revenue.”

Keeping in view of the above decision of this Tribunal as well as of the Hon’ble High Court of Karnataka in assessee’s own case on the similar facts & issues, which are binding precedent, we find no infringe in the Order of the ld. CIT(A) and accordingly we sustain the order the ld.CIT(A).

In the result, appeal of the Revenue is dismissed.

The Applicant 2. The Respondent 3. The CIT 4. The DR, ITAT, Bangalore. 5 Guard file By order Asst. Registrar, ITAT, Bangalore.