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2016 (10) TMI 349 - ITAT COCHIN

2016 (10) TMI 349 - ITAT COCHIN - TMI - Interest on deposit received from banks - CIT(A) confirming the assessment to income of the interest on deposit received from banks out of surplus funds from the defined agency activities on behalf of the Govt. of Kerala in setting up of Vizhinjam International Seaport at Vizhinjam in Thiruvananthapuram - Held that:- The assessee is only an extended arm/wing of the Government set up wholly and exclusively for undertaking certain sub-sovereign functions on .....

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ving own activities not undertaken on 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 .....

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or 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 Per B. P. Jain, AM This appeal of the assessee arises from the order of the Ld. CIT(A), Trivandrum dated 11-12-2015 for the assessment year 2010-11. 2. The assessee has raised as many as five grounds ru .....

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ssee is a domestic company in which the public are substantially interested. The Government of Kerala vide its order dated 09.03.2007 had entrusted the assessee company the task of implementing the International Seaport Project at Vizhinjam and given grants of ₹ 54.74 Cr. upto 31/03/2010 to be utilized for acquisition of land and construction of seaport. As per the Memorandum of Association, the main object of the company is to address all supporting infrastructure requirement for the seap .....

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in turn should necessarily be utilized for acquisition of land and construction of infrastructure facilities. The assessee thus has filed a revised return returning Nil income subsequent to claiming exemption of the entire amount of interest received on bank deposits as a capital receipt being part of capital grants received from the Government of Kerala. The Assessing Officer has not accepted the assessee s interpretation that the interest received on bank deposits was a capital receipt and for .....

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lied 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 int .....

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the Govt. of Kerala like acquisition of land from the public, providing external infrastructure like road, rail, power and water and arrangement of finance for the project by entering into tie up agreements with various financial institutions and banks. Copy of the Government order for setting up the assessee GO (Ms) No.43/04/F&PD dated 23.11.2004 has been already filed with the appeal petition -page No. 38-40. The above GO provides that company will have operational freedom and autonomy for .....

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clear that the assessee is only an extended arm/wing of the Government set up wholly and exclusively for undertaking certain sub-sovereign functions on behalf of the Government of Kerala for the public utility project involving providing support/assistance for setting up a deep sea international seaport and therefore, is not engaged in any business activities involving a profit motive. The company was appointed by the Government as its Nodal agent vide GO (Ms) No.9/07/F&PD dated 09/03/2007 - .....

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.03.2010 an amount of ₹ 54.74 crores by way of grant and ₹ 12 crores by way of equity capital contribution to the assessee company and statement giving details of various Government orders is annexed to Annexure A. The funds received not immediately required for implementation 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.2,79,83,00 .....

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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 ₹ 2,79,83,000/- based on the .....

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s assessable as income from other sources relying on the decisions of Hon. Supreme Court of India in Tutikorin Alkali Chemicals and Fertilizers Ltd. vs. CIT reported in (119) 227 ITR 172 and CIT vs. Bokoro Steels Ltd. reported in 236 ITR 315. The assessee may categorically submit that both these decisions of the Hon ble Apex Court are not applicable to the assessee as it is not at all undertaking or engaged in the construction activities of the international deep sea port but is only carrying ou .....

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e is thus very clear from a cursory reading of the assessment order as stated above. 9. The Ld. CIT(A) has also refused to accept the assessee s claim for exemption of tax of interest income on deposits as being a capital receipt on account of an unfortunate error in understanding or appreciation of the basic facts of the case as could be noted from the details furnished below: The Ld. CIT(A) has held that assessee is not authorized by its Objects clause of Memorandum to make the investment vide .....

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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 menti .....

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ct to the provisions of the Companies Act, 1956. The assessee submitted that the Companies Act, 1956 does not place any ban or embargo on investment of surplus funds, which is left to the sweet will and discretion of the Board of Directors of the assessee company to be run in an autonomous manner. The accounts for the year duly audited by the statutory auditors have been duly verified and authenticated by the Board of Directors as required by the provisions of section 215 of the Companies Act, 1 .....

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he revenue/funds of the institution since the Directors are acting in fiduciary capacity on behalf of the members of the company (the owners being Government of Kerala in this case) and if the investment of surplus funds is authorized by a specific provision in MoA, the action of the Directors is absolutely in line with the objects clause of the company so long as there is no ban or restriction on such action under the provisions of Companies Act, 1956 which is not there in this case as already .....

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stated above, the Government has clearly stated that the company will have operational freedom and autonomy for implementing the project efficiently and effectively. Since idle parking of large funds would not be a efficient way of implementing the project, investment of surplus funds not immediately required for the project activities is to be regarded as acting as per autonomy and operational freedom as provided in the GO. Further specific authorization for investment is simply not called for .....

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(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 .....

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to tax as income from other sources in the hands of the appellant. No specific direction from the Govt. of Kerala while giving grants that the surplus funds not immediately required for the implementation of the project can temporarily be deposited with banks and interest earned thereon would form a part of the grant, has ever been made. The entire conduct of the appellant right from the receiving the grant to the disbursement and parking of funds shows that it has acted on its own and not on b .....

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d the conclusion drawn therefrom is entirely fallacious and misplaced in view of the fact that GO(MS) 43/04/F&PD dated 23.11.2004 as stated above, which deals with the functions of the special purpose company incorporated (Vizhinjam International Seaport Ltd). very clearly provides that the company will have operational freedom and autonomy for implementing the projects efficiently and effectively. A copy of the above GO was also filed with the Ld. CIT(A) at the time of hearing of the appeal .....

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e same and the Board of Directors will be accountable to answer to 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 bea .....

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ons 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 facts and hence the order of the Ld. CIT(A) was prayed to be reversed and interest income to be held as not taxable being a capital receipt forming part of grant funds. Also it was submitted that the Ld. CIT(A), Thiruvananthapuram has passe .....

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ITR 301 (Kar.). Copy of the order is placed on record at PB pgs. 92-96. The facts of the case in Karnataka Urban Infrastructure and Finance Development Corporation dealt with by the Hon ble Karnataka High Court and that of the assessee are very similar as both were governmental bodies vested with Public utility objectives and funds received from Government had to be used for specific declared or directed objectives and a gist of the Hon ble Karnataka High Court is given below:- Name of High Cou .....

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ntrusted to Corporation for implementation of the scheme is not liable to be taxed. It followed its earlier decision in the same case in CIT vs. Karnataka Urban Infrastructure Development and Finance Corporation (2006) 284 ITR 582 (Karn.) In the assessee s case, Govt. orders as stated above clearly stipulated the activities that have to be undertaken by the assessee and neither the grant nor the interest can be used for any purpose. The Ld. CIT(A) has hypothetically visualized that assessee is h .....

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o 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 .....

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that it is acting only as the agent of Government for the implementation of Navi Mumbai Project and therefore, is not liable tax on the amount received. (copy already filed with the appeal petition - page No.41-43) Hon ble Delhi High Court CIT vs. Delhi State Industrial Development (2007) 295 ITR 419 (Delhi) The Hon ble Court has held that interest received from the deposits of surplus funds in banks, which are to be used in the project in accordance with the scheme is not taxable. It was held t .....

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IT & ORS (2010) 321 ITR 278 (Patna) It was held that there is merit in the claim of the assessee that interest income over money belonging to the Govt., cannot be subjected to income-tax or TDS by the IT authorities since petitioner was acting as the nodal agency of the State. (copy already filed with the appeal petition - page No.49-51) Hon ble Income Tax Appellate Tribunal Ahmedabad Gujarat Urban Dev. Co. Ltd. vs. Asst. CIT, Gandhi Nagar Has upheld the view that interest earned from funds .....

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