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COMMISSIONER OF INCOME-TAX AND ANOTHER Versus KARNATAKA STATE AGRICULTURAL PRODUCE PROCESSING AND EXPORT CORPORATION LTD.

Interest earned on grants made by the State Government kept in fixed deposits pending utilization - whether should be treated as additional grant of the scheme or a revenue receipt exigible to tax under the head 'Income from other sources'? - Held that:- The very purpose of granting ₹ 10 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 utili .....

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in KUIDC case [2006 (2) TMI 114 - KARNATAKA High Court ] has held that the interest earned on these grants is not an income, which we do not find fault with. - Decided in favour of assessee. - I. T. A. No. 202 of 2014. - Dated:- 10-4-2015 - VINEET SARAN and MRS. S. SUJATHA, JJ. K. V. Aravind, Advocate, for the appellant. Smt. Jinita Chatterjee, Advocate, for S. Parthasarathi, Advocate, for the respondent. JUDGMENT The judgment of the court was delivered by 1. Mrs. S. Sujatha J.-The Revenue has .....

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ompany fully owned by the Government of Karnataka engaged in trading in agricultural produce and is an approved channelising agent for Bangalore in respect of rose, onion and niger seeds. The Government of Karnataka sanctioned ₹ 10 crores for improvement of infrastructure in order to encourage the farmers for development of horticultural sector and to promote export. The relevant part of the proceedings of the said Government order dated January 23, 2007, issued by the Government of Karnat .....

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et matching contribution from Government of India through its agencies/schemes such as ASIDE, National Horticulture Mission for the purpose. 4. KAPPEC shall prepare viable and implementable schemes and obtain approval from the KAPPEC Board. The approved schemes will be submitted to the Department of Horticulture. 5. KAPPEC shall submit progress reports on physical and financial achievements to the director of Horticulture every month, which will reviewed in the monthly MMR meetings. 6. No part o .....

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grant of ₹ 10 crores given by the State Government was kept fixed deposits by the assessee-company till utilisation for the desired projects. The interest earned on such fixed deposits was treated as income by the Assessing Officer and was brought to tax under the head "Income from other sources". The assessee preferred an appeal before the Commissioner of Income-tax (Appeals), who dismissed the appeal against which appeal was preferred by the assessee before the Tribunal and th .....

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] 227 ITR 172 (SC) and argued that the proceedings of the Government of Karnataka by which a sum of ₹ 10 crores was granted to the assessee did not contain any condition with respect to the utilisation of interest. The assessee being a company engaged in trading of agricultural produce is not entitled to the benefit of interest earned from the fixed deposits to get it capitalised and made an attempt to distinguish the judgment of CIT v. Karnataka Urban Infrastructure Development and Financ .....

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es 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 November 12, 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 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 Infrastruct .....

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g 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 ₹ 10 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 certai .....

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o 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 January 23, 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 .....

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ation 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 spe cialised 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 b .....

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guidelines ; the whole of the fund belongs to the State Exchequer and the assessee has to chan nelise 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 .....

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ot 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 .....

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e (supra), the apex court has held that (page 182 of 227 ITR) : "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 obli gation to utilise this interest income to reduce its liability to pay inter est to its creditors. It can reinvest the interest income in land or share, it can purchase securities, it can buy house property, it can also set up another line of business, it may even pay dividends out of this .....

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s case (supra) has held that in Tuticorin Alkali 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 r .....

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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 and 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 be .....

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rcumstances 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 utilised 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 January 23, 2007, by which the grant of ₹ 10 crores is made by the Government of Karnataka it is clear that "in view of the Na .....

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