TMI Blog2016 (10) TMI 349X X X X Extracts X X X X X X X X Extracts X X X X ..... magination. This is so as the assessee’s only objective was to undertake smooth and efficient rendering of agency services entrusted by the Government and hence treating interest income as separate income or own income of the assessee not earned or received for implementation of the project is only a coloured and misdirected application of mind by the Ld. CIT(A) as there is no such own income or own activity All the receipts and income are on behalf of the GoK for implementation of the project. The following decisions of other High Courts in similar or identical situations and also of various Income Tax Appellate Tribunals passed relying on the above decision of Hon’ble Karnataka High Court in Karnataka Urban Infrastructure Development and Finance Corporation reported in (2009 (1) TMI 243 - KARNATAKA HIGH COURT )also fortify and strengthen the assessee’s case for exemption of income tax on interest income earned from investment of surplus funds. - Decided in favour of assessee. - ITA No. 07/Coch/2016 - - - Dated:- 15-6-2016 - Shri B P Jain, AM And George George. K, JM Assessee By Shri C.Pankajakshan C. Govind, CA Revenue By Shri Shantam Bose, CIT(DR) ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (227 ITR 172), CIT vs. Bokaro Steel Limited (236 ITR 315) and Challapalli Sugars Ltd. vs. CIT (98 ITR 167). The Ld. CIT(A) confirmed the action of the Assessing Officer. 4. Aggrieved, the assessee is in appeal before us. The Ld. Counsel for the assessee relied upon the submissions made before the Ld. CIT(A). 5. The Ld. DR relied upon the orders of both the authorities below. 6. We have heard the rival submissions and perused the facts of the case. The only issue in this appeal is whether the ld. CIT(A) was in order in confirming the assessment to income of interest received from surplus funds invested out of Funds provided by Government of Kerala exclusively for carrying out nodal agency functions in connection with setting up of the deep sea international port. The development of Vizhinjam as an international container transshipment terminal is set to change the face of state of Kerala and even the entire south India and the public utility value/significance of the project is very high and widely acclaimed. It was submitted that the assessee was set up as a Special Purpose Vehicle, incorporated under the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplementation of the project was invested in deposits with Nationalized Banks from time to time purely for augmenting/maximizing the resources of the assessee company and interest income of ₹ 2,63,66,732 (Rs.2,79,83,000 was assessed in the order based on entries in 26AS which includes amounts already offered to tax in preceding year) was earned on deposits made during the financial year 2009-10 relevant to assessment year 2010-11. Copy of the audited account of the assessee for the financial year 2009-10 is annexed to Annexure B from which it may be noted that interest received on deposits amounting to ₹ 2,63,66,732 has been credited to form part of grant from Government of Kerala under Capital Reserves in Schedule B Resources and Surplus. As per audited accounts, the assessee did not have any other income from its activities excepting a meagre amount of ₹ 438/- shown under Other Income. The assessee filed the return of income for year declaring Nil income claiming that interest received on deposits is a capital receipt forming part of grant funds received from Government of Kerala. 8. The Assessing Officer assessed the interest income on deposits of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out security upon such terms as may be though proper and to guarantee the performance of contracts by such person, firm or company and also to invest and deal with the money of the Company not immediately required in such manner at the discretion of the Board of Directors, subject to the provisions of the Companies Act, 1956 . Copy of the Memorandum of Association of the company has been already filed with the appeal petition page No.85-91. The ld. CIT(A) has held that para 28 of MoA as above does not authorize or provide for investment of surplus funds of the company and it could be noted that the portion in the above mentioned para of MoA highlighted in bold italics above have been omitted by the Ld. CIT(A) by an inadvertent error while reproducing the contents in the text of the appellate order as above, on account of which the conclusion arrived at therefrom was contrary to the actual provisions of the MoA. The portion highlighted in bold italics actually authorizes and permits investment on surplus funds not immediately required for the purposes of the business at the discretion of the Board of Directors subject to the provisions of the Companies Act, 1956. The assessee subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment is simply not called for or warranted. In para 3.3.1 of the order, the Ld. CIT(A) has stated that it could be made out from the above that it has never been the intention of the Govt. of Kerala to let the appellant company to deposit surplus funds in banks and to earn interest thereon so as to credit the same to the Grant a/c but to address all infrastructure and development needs and that the appellant company was not incorporated to earn interest from surplus funds and this activity is very much against the clause III(B )(25) (26) of MoA . 11. It was submitted that para (25) and (26) of clause III(B) of MoA only provides that grants received from the Government shall not be used to carry on banking business as defined in Banking Regulation Act, 1949 which is not at all applicable in the case of the assessee as no banking business is involved in investment of surplus funds with banks, this being only an incidental activity in the usual and normal course of business done by all companies and institutions. 12. It has been further stated in para 3.4.c of the appellate order that In a situation where the appellant had received grant from the Govt. and received intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the adverse comments in their Directors report as provided in section 272 (2A) of the Companies Act, 1956. Further, in para 3.4 (c) of the order, the Ld. CIT(A) has stated that the GO dated 30.03.2019, the Government has directed that the Government has disbursed equity contribution to the project that the funds shall be drawn and kept in non interest bearing account with Treasury Savings Bank (TSB) and investment in interest bearing deposits is not permitted by the Government. It is the usual practice with the Government to direct to park funds in Government Treasury Account, which clearly indicates that this is specific trust money for special purpose objective and hence interest income earned by investment of surplus funds should be clearly treated as forming part of Government funds i.e., as trust money for special public utility purpose. 13. It was submitted that the findings of the Ld. CIT(A) as above and conclusions drawn therefore suffers from the inherent defect of being very myopic and narrow minded and needs to be set aside. The compelling legal precedents as discussed below strongly support the case of the assessee on account of absolute parity and similarity of fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of the Government unrelated to project which is only a illusory figment of imagination. This is so as the assessee s only objective was to undertake smooth and efficient rendering of agency services entrusted by the Government and hence treating interest income as separate income or own income of the assessee not earned or received for implementation of the project is only a coloured and misdirected application of mind by the Ld. CIT(A) as there is no such own income or own activity All the receipts and income are on behalf of the GoK for implementation of the project 14. The following decisions of other High Courts in similar or identical situations and also of various Income Tax Appellate Tribunals passed relying on the above decision of Hon ble Karnataka High Court also fortify and strengthen the assessee s case for exemption of income tax on interest income earned from investment of surplus funds. The concise gist/ratio of the decisions in each case is furnished against each:- Name of High Court/ITAT Citation Ratio of decision Hon ble Bombay High Court City and Industrial Developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014) (3)(TMI 728Guj. HIC) in coming to the above conclusion. Chennai Bench of the Hon. ITAT Tamil Nadu Urban Finance and Infrastructure Dev. Corpn., 33 Taxmann.com 612 Interest earned on funds invested by a nodal agency out of grants received from Govt. is a capital receipt and not assessable to tax. (copy already filed with the appeal petition page No.69- 74). Ahmedabad Bench of the Hon. ITAT Gujarat State Police Housing Corpn. vs. Asst. Commissioner of Income Tax, Gandhi Nagar. In the judgment delivered on 18th July, 2014 (I.T.A. No. 2549/AHD/2013 for AY 2010-11) has also upheld the above view that interest on deposits earned by a nodal agency out of funds provided by the Govt. for the projects is not assessable to tax. (copy already filed with the appeal petition page No. 75- 83). Chandigarh- A Bench of the Hon. ITAT Haryana Rural Dev. Authority vs. DCIT in I.T.A. No.742/CHD/2012 For AY 2008-09 in the judgment delivered on 22.01.2014 upheld the above view holding that such interest income earned by a nodal agency is no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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