THE CHIEF ACCOUNTS OFFICER,,MYSORE vs. ITO, MYSORE

Per Smt. P.MADHAVI DEVI, JM:

These are assessee’s appeals against the common order dated 9/11/2012 of the CIT(A), Mysore, confirming the orders of the Assessing Officer (AO) holding the assessee to be an assessee in default u/s 201 and also levy of interest u/s 201(1A) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] for the assessment years 2007-08 to 2009-10.

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 2 of 16 2. Brief facts of the case are that the assessee is a local authority which is legally entitled to and is entrusted by the Government of Karnataka with the control and management of the municipal or local fund. The day-today administration is governed by the Karnataka Municipality Act and the Commissioner supervises, controls and also manages the financial affairs of the council. The assessee received funds from various sources like Central Government, State Government and other nodal agencies under various programmes and projects meant for welfare of the public.

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 3 of 16 is also liable for interest u/s 201(1A) of the Act. He, accordingly, brought it to tax.

The learned Departmental Representative, however, supported the orders of the authorities below.

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 4 of 16 Urban Development Authority (cited supra) and the Tribunal, after considering the issue at length at paras 7 to 12 of its order has held as under:

“7. We have duly considered the rival contentions and gone through the record carefully. Section 194A and section 196 of the Income Tax Act has a direct bearing on the controversy in hand. Therefore, we deem it appropriate to take note of the relevant clauses of these sections. They read as under: ‘Section 194A [Interest other than "Interest on securities". 194A. Any person, not being an individual or a Hindu paying to a resident any income by way of interest other than income (by way of interest on securities], shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force: ………………xxxxxxxxx…………………….. (3) The provisions of sub-section (1) shall not apply- …………..xxxxxxxxxxxxxxxx…………. (iii) to such income credited or paid to: (a)x.x.x.x.x.x.x.x.x. (b) x.x.x.x.x.x.x.x.x (c).x.x.x.x.x.x.x.x.x. (d).x.x.x.x.x.x.x.x.x (e).x.x.x.x.x.x.x.x.x. (f) such other institution, association or body (or class of institutions, associations or bodies, which the Central Govt. may for reasons to be recorded in writing, notify in this behalf in the Official Gazette. Section 196 Interest or dividend or other sums payable to Government, Reserve Bank or certain corporations. 196. Notwithstanding anything contained in the foregoing provisions of this Chapter, no deduction of tax shall be made by any person from any sums payable to- (i) the Government, or (ii) the Reserve Bank of India, or

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 5 of 16 (iii) a corporation established by or under a Central Act which is, under any law for the time being in force, exempt from income- tax on its income, or (iv) a Mutual Fund specified under clause (23D) of section 10, where such sum is payable to it by way of interest or dividend in respect of any securities or shares owned by it or in which it has full beneficial interest, or any other income accruing or arising to it.] A bare perusal of clause (f) of section 194A indicate that any person, not being an individual or a Hindu paying to a resident any income by way of interest other than income (by way of interest on securities], shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. The assessee is not an individual, therefore, it falls within the category of any person. It has made payment of interest which will come in the ambit of income. It has paid to a resident, thus it fulfills all the conditions of section 194A. We have perused the record and we do not find any merit in the contention of the assessee that the payment made by the assessee does not fall within the ambit of expression “interest” provided in section 2(28) of the Income Tax Act. From perusal of the govt. standing order and other details, it is clear that funds were provided by the govt. through KUIDFC to the assessee and interest thereon was charged. IN earlier years KUIDFC has offered interest income also. Therefore, interest was paid by the assessee. 8. The next question which is posed before is, whether the assessee falls within the ambit of exclusion clauses provided in sub section 3 of section 194A(3)(iii)(f). Perusal of clause (f) extracted (supra) indicate that such institution, associations or body ought to be notified by the Govt. of India in the official gazette.

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 6 of 16 According to the Assessing Officer, the notification bearing No.S.O.3489 dated 22.10.1970 provide definition of company, to whom payment can be made with deducted taxes. It should be a company in which all the shares are held (whether singly or taken together) by the Govt. or the RBI or a corporation owned by that Bank. He observed in Paragraph No.5.5 that the benefit of section 194A(3)(iii)(f) would be admissible to an assessee who made payments to a company whose shares are held by the Govt. or held by the RBI or held by the corporation owned by RBI. Thereafter the Assessing Officer took into consideration the shareholding pattern of KUIDFC in Paragraph No.5.6 of the impugned order. The details read as under: “5.6 In the present case, the share holding pattern of the deductee i.e. KUIDFC which was made available during the course of present proceedings read as under: S. Name of share holders No. of No shares 1 Govt. of Karnataka, Bangalore 606476 2 Director of town planning & Member 200000 Secretary, Bangalore 3 Addl. Chief Secretary to Govt. Bangalore 1 4 Addl. Chief Secretary & Principal Secretary, Finance Department, Bangalore 5 Metropolitan Commissioner, BMRDA 1 Bangalore 6 Principal Secretary, UDD, Bangalore 1 7 Secretary to Govt. (M&UDA) Bangalore 1 8 Principal Secretary, Housing Deptt. 1 Bangalore 9 Commissioner, BDA, Bangalore 1 10 Chairman, BWSSB Bangalore 1 11 Chairman, BDA Bangalore 1 12 Secretary to Govt. Finance Deptt. 1 Bangalore 13 Dy. Director, Town Planning BMRDA 1 Bangalore 14 Commissioner, Bangalore Mahanagara 1 Paalike, Bangalore

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 7 of 16

5.7. As could be seen from the above, following shares do not quality to fall under the category of Govt. of Reserve Bank or corporation owned by Reserve Bank: S. Name of share holders No. of No shares 2 Director of town planning & Member 200000 Secretary, Bangalore 5 Metropolitan Commissioner, BMRDA 1 Bangalore 9 Commissioner, BDA, Bangalore 1 10 Chairman, BWSSB Bangalore 1 11 Chairman, BDA Bangalore 1 13 Dy. Director, Town Planning BMRDA 1 Bangalore 14 Commissioner, Bangalore Mahanagara 1 Paalike, Bangalore

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 8 of 16 Proceedings of the Govt. of Karnataka

Sub: Maintenance of Revolving Fund by pooling of resources by the Govt. under externally aided KUDCEM & KUID Projects implemented by KUIDFC on behalf of the Govt. – reg. Read: (1) G.O No.HUD 223 MNX Bangalore dated 16.8.1993 (2) G.O No.UDD 18 BMR 97 Bangalore dated 17.02.1997 (3) G.O No.UDD 2 PRJ 99(P) Bangalore dated 21.12.2000 (4) G.O No.HUD 33 BMR 95 Bangalore dated 30.11.1995 Preamble: Vide G.O read at (1) State Govt. decided to set up Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC) as a company under the Companies Act, 1956 to function as the Nodal Agency (NA) of the State Govt. for implementation of (i) centrally sponsored Mega City Scheme dealing with infrastructural problems of by metroes/mega cities including Bangalore (ii) externally/Govt. assisted schemes for urban areas development and improvement of infrastructural facilities in urban areas and (iii) act as a Funds Manager for the Govt. and intermediary between the Govt. and Urban Local Bodies (Implementing Agencies-IAs) in the funding and implementation of urban development & infrastructural schemes. 2. State Govt. has accorded sanction for implementation of Karnataka Urban Infrastructure Development (KUID) Project with loan from the Asian Development Bank in the cities of Mysore, Tumkur, Ramanagaram & Channapatna vide G.O read at (2) and for implementation of Karnataka Urban Development and Coastal Environment Management (KUDCEM) Project with loan for development of several tows in the coastal districts of Dakshina Kannada, Udipi & Uttara Kannada vide G.O read at (3). 3. Salient features of the guidelines formulated by the Govt. under these projects are (i) creation of a Nodal Agency (NA) to act as Funds Manager on behalf of the Govt. and facilitate flow of assistance under the projects to the implementing Agencies (IAs); (ii) NA will release assistance to IAs under loan & grant components, as per the funding pattern prescribed

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 9 of 16 under the relevant projects (iii) loan recoveries from the IAs along with interest and all other earnings out of the project funds would be pooled in a Urban Infrastructure Development Fund (UIDF) by the NA to be utilised for funding similar urban development projects and maintenance of the earlier projects in consultation with the Govt. The objective of formulating the UIDF is to ensure availability of funds, development through an institutional funding mechanism consequently that of the budgetary support that may be made available by the Govt. for such projects from year to year. Creation and maintenance of UIDF is similar to the Mega City Revolving Fund (MCRF) maintained by KUIDFC under the centrally sponsored Mega City Scheme. 4. KUIDFC is………….x x x x x …….eligible projects. 5. As per the project guidelines, funds projected and/or arising/accruing on account of Govt. in the hands of KUIDFC towards (a) loan recoveries from the IAs; (b) interest, dividend, incentive and other revenues on deployment of unutilized Govt. funds under the scheme/projects; (c) interest on the loans given to the IAs;and (d) revenues generated on redeployment of funds at (a), (b) and (c) are to be pooled in the Urban Infrastructure Development Fund (UIDF) under the above two projects. Govt. has an absolute domain on all such funds and they do not constitute income of the KUIDFC. KUIDFC has been maintaining such UIDF and is pooling all the funds as detailed above in the UIDF which is in accordance with the project guidelines and it shall continue to do so. 6………….xxxxxxx………….. 7. In the circumstances, it has been found necessary to isue suitable orders covering the various aspects discussed in the preceding paras. 8. Proposals have been examined. Govt. order No.UDD 67 PRJ 03(2) Bangalore dated 31.03.2003. In the circumstances explained in the preamble, Govt. directs that the KUIDFC shall in confirmity with the KUID and KUDCEM Project guidelines continue the present practice of not treating the following amounts as income in its books. The KUIDFC shall credit them to the Urban Infrastructure Development Fund (UIDF) over which the Govt. has absolute domain, from the first receipt of project funds and accrual of revenues thereon:

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 10 of 16 (a) loan recoveries from the IAs (b) Interest, dividend, incentive and other revenues on deployment of unutilized Govt. funds released under the projects; (c) Interest on the loans given to the IAs: (d) Revenues generated on redeployment of funds as per (a), (b) and (c). Further distinct identify of constituents of the UIDF as mentioned abvoe shall be maintained in the books of KUIDFC. 2. Govt. hereby authorizes Empowered Committee constituted under the KUID Project to evolve and approve regulatins for the UIDF under the KUID and KUDCEM Projects. 3. Govt. accords approval for sanction of Management Fees (MF) to KUIDFC commending from 2002-03 for the services rendered by it on behalf of the Govt. in the implementation of the proejcts and funds management thereunder. However, the quantum or percentage of MF payable has to be worked out separately and KUIDFC may submit a proposal to the Govt. in this regard. 4. This order issues with the concurrence of F.D. vide its U.O note No.FD 1502/03 P.S FD dated 31.3.2003. Sd/- (F.R.Sambargi) Under Secretary to Govt. Urban Development Deptt. Project Monitering Cell”

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 11 of 16 repetition, we would deem it pertinent to make reference of clause (c) of paragraph No.5: “(c) are to be pooled in the Urban Infrastructure Development Fund (UIDF) under the above two projects. Govt. has an absolute domain on all such funds and they do not constitute income of the KUIDFC. KUIDFC has been maintaining such UIDF and is pooling all the funds as detailed above in the UIDF which is in accordance with the project guidelines and it shall continue to do so”.

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 12 of 16 except to meet such charges as the State Government may approve as being :

"(a) expenses or loss of profits arising out of accidents, strikes or circumstances which the management could not have prevented;

(b) expenses on replacement or removal of plant or works other than expenses requisite for normal maintenance or renewal;

(c) compensation payable under any law for the time being in force and for which no other provision is made;

(2) On the purchase of the undertaking, the contingencies reserve, after the deduction of the amounts drawn under sub-para (1) shall be handed over to the purchaser and maintained as such contingencies reserve :

Provided that where the undertaking is purchased by the Board or State Government, the amount of the reserve computed as above shall, after further deduction of the amount of compensation, if any, payable to the employees of the outgoing licensee under any law for the time being in force, be handed over to the Board or the State Government, as the case may be."

The Hon'ble Supreme Court has observed that the statute requires the electricity company to create certain reserves. If its clear profit exceed a reasonable return (clause 2, schedule vi). Again the contingencies reserve is to be created from the existing reserve or from the revenue of the undertaking. This clearly indicate that the moneys which have to be put into the contingency reserve reach the electricity company and are not diverted away from it. It is the electricity company which

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 13 of 16 has to invest the sums appropriated to the contingency reserve. The investment would be in its name and it would be the owner thereon. The restrictions that the investment can be made only in securities mentioned in the Indian Trust and makes no difference to this position. The Hon'ble Supreme Court further observed that on purchase of the undertaking, the contingency reserve has to be handed over to the purchaser and maintained as such is only to make explicit in the reserve is for the purpose of undertaking that is being transferred. Thus there is nothing in the statue to suggest that the amounts standing to its credit cannot be taken into consideration in arriving at the purchase price. The Hon'ble Court had held that the amount credited to the contingency reserve is not diverted by raising of an overriding obligation or title and in determining the profits of the assessee, it must be taken into account.

In the case of CIT vs. Sunil J. Kinarewala, the facts are, the assessee is a partner in the partnership firm known as "Kinariwala R.J.K. Industries, Ahmedabad". He was having 10 per cent shares therein. On 27th Dec., 1973, he created a trust namely "Sunil Jeevan Lal Kinariwala Trust". By a deed of settlement assigning 50 per cent out of his 10 per cent right title and interest (excluding capital as a partner in the firm and a sum of Rs. 5,000 out of his capital in the firm) in favour of the said trust. There are three beneficiaries of the trust, namely, assessee’s brother’s wife, assessee’s niece and the assessee’s mother. In asst. yr. 1974-75, he claimed that as 50 per cent of the income attributable to his share from the firm stood transferred to the trust resulting in diversion of income at source, the same could not be included in his total income for the purpose of his assessment. The ITO rejected the claim on the ground that it was a case of application of income and not

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 14 of 16 diversion of income at source; he also found that s. 60 of the Act was attracted as only income without a transfer of assets was settled. The Revenue took the matter in appeal before the learned first appellate authority who allowed the appeal of the assessee and the Tribunal reversed the order of the AAC. Hon’ble High Court relying on the judgments of Hon’ble Supreme Court in the cases of CIT vs. Bagyalakshmi & Co. (1965) 55 ITR 660 (SC) and Murlidhar Himatsingka & Anr. vs. CIT (1966) 62 ITR 323 (SC) held that on assignment of 50 per cent share of the assessee in the firm, it became the income of the trust by overriding title and it could not be added in the total income of the assessee. Hon’ble Supreme Court reversed the order of the Hon’ble High Court and restored that of the AO. Hon’ble Court has observed that there is a clear distinction between a case where a partner of a firm assigns his share in favour of a third person and a case where a partner constitutes a sub- partnership with his share in the main partnership. The observations of the Hon’ble Supreme Court on pp. 17 and 18 are worth to note in this connection :

"It is apt to notice that there is a clear distinction between a case where a partner of a firm assigns his share in favour of a third person and a case where a partner constitutes a sub-partnership with his share in the main partnership.

Whereas in the former case, in view of s. 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership except, of course, to receive that part of the profits of the firm referable to the assignment and to the assets in the event of dissolution of the firm, but in the latter case, the sub-partnership acquires a special interest in the main partnership. The case on hand cannot be treated as one of a sub-

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 15 of 16 partnership, though in view of s. 29(1) of the Indian Partnership Act, the trust, as an assignee, becomes entitled to receive the assigned share in the profits from the firm not as a sub-partner because no sub-partnership came into existence but as an assignee of the share of income of the assigner-partner.

In this view of the matter, it is unnecessary to consider the alternative contention based on s. 60 of the Act.

For the aforementioned reasons, we are of the view that the order under challenge cannot be sustained. It is, accordingly, set aside. Consequently, the share of the income of the assessee assigned in favour of the trust has to be included in the total income of the assessee. The questions are, accordingly, answered in favour of the Revenue and against the assessee."

If we examine the order of the Govt. extracted (Supra), in the light of these two decisions of the Supreme Court, then it would indicate that the title over the interest income at the time of generation from the assessee rest with the Govt. and not KUIDFC. Thus, the interest in practical was paid to the Govt. and section 196 provide that notwithstanding anything contained in the foregoing provisions of this Chapter, no deduction of taxes shall be made by any person from any sum payable to the Govt. The assessee was not required to deduct the TDS on the payments made to the Govt. Considering all these aspects, we are of the view that the Assessing Officer has erred in treating the assessee in default. Consequently the demand raised by the Assessing Officer by virtue of order passed u/s 201 and the interest charged u/s 201(1A) is deleted and the orders are quashed.”

ITA Nos.188 to 190/Bang/2013 Chief Accounts Officer, Mysore City Corporation. Page 16 of 16 7. Since the facts and circumstances of the case before us are similar, we see no reason to take a different stand. Therefore, respectfully following the decision of the co-ordinate bench in similar set of facts, we set aside the orders of the CIT(A) and the AO.

Pronounced in the open court on 31st March, 2015.

sd/- sd/- (Abraham P George) (Smt. P.Madhavi Devi) ACCOUNTANT MEMBER JUDICIAL MEMBER eksrinivasulu Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order

Assistant Registrar Income-tax Appellate Tribunal Bangalore