Income Tax Appellate Tribunal - Bangalore
M/S Karnataka State Agricultural ... vs Assessee on 27 November, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT
AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
ITA No.1078/Bang/2012
Assessment year : 2008-09
M/s. Karnataka State Agricultural Vs. The Assistant Commissioner of
Produce Processing & Export Income Tax,
Corporation Ltd., Circle 11(5),
No.17, Richmond Road, Bangalore.
Bangalore - 560 025.
PAN : AABCK 1918M
APPELLANT RESPONDENT
Appellant by : Smt. R. Prathibha, Advocate
Respondent by : Shri L.V. Bhaskara Reddy, Jt. CIT(DR)
Date of hearing : 27.11.2013
Date of Pronouncement : 20.12.2013
ORDER
Per N.V. Vasudevan, Judicial Member
This appeal by the assessee is against the order dated 02.01.2012 of the CIT(Appeals)-I, Bangalore relating to assessment year 2008-09. ITA No.1078/Bang/2013 Page 2 of 15
2. The assessee is a company fully owned by Government of Karnataka. It is engaged in trading in agricultural produce and is an approved canalizing agent for Bangalore rose onion and niger seeds. In the Budget Speech 2006-07 of Karnataka State Assembly, it was announced that the assessee would be provided a grant of Rs.10 crores for improving and creating infrastructural facilities in various parts of state for improving the export of horticultural produce. The proceedings of the Government of Karnataka is placed at pages 6 to 8 of the paperbook. The relevant part of the proceedings in so far as it is material to the present case is as follows:-
"Government Order No.AHD 88 HPP 2006 Bangalore, dated 23.01.2007 Government is .pleased to sanction new scheme namely, "Support to KAPPEC" (2401-00-800-2-29) during 2006-07.
2. The Director of Horticulture is permitted to release Rs. 10.00 crores (Rupees Ten crores only) to KAPPEC for creation, of infrastructure facilities in various parts of the State for increasing the export of horticultural produce.
3. KAPPEC shall make earnest efforts to get 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. ITA No.1078/Bang/2013 Page 3 of 15
6. No part of the funds shall be utilised by KAPPEC for meeting expenses towards salary and establishment.
7. The KAPPEC shal1 make sure that utilization of funds shall benefit farmers in increasing the export of their horticultural produce for getting better returns.
8. While utilising the funds KAPPEC shall follow KTPP Act and other procedures as required by the Rules.
9. This order issues with the concurrence of Finance Department vide its note No. ... 417 ... 2006 dated 20.01.2007."
3. The grant of Rs.10 crores given by the State Govt. was kept in fixed deposits (FDs) till utilization for the desired projects. The assessee earned interest on such FDs. In the books of accounts, the assessee capitalised the interest received on FDs and added the same to the grants received from the Govt. The following is the accounting treatment given by the assessee in the balance sheet:-
-----------------------------------------------------------------------------------------
As at As at
31.03.2008 31.03.2009
Rs. Rs.
-----------------------------------------------------------------------------------------
"Other Government Grants :
Grant from Government of Karnataka for Creation of Infrastructure facilities Through out the state in a phased manner:
Opening Balance 10,00,00,000 10,00,00,000 Add: Interest earned (including previous Year figure of Rs.917120/-) 1,14,59,442 -
----------------- ----------------
11,14,59,442 10,00,00,000
----------------- -----------------ITA No.1078/Bang/2013
Page 4 of 15
4. In the profit & loss account, the assessee did not disclose the interest income. Schedule-11 to the profit & loss account and other income was as follows:-
-----------------------------------------------------------------------------------------------------
For the Year Rs. Rs.
-----------------------------------------------------------------------------------------------------
"OTHER INCOME - SCHEDULE 11
Interest on Deposits 1,30,62,373
Less: Interest received
transferred to
respective Government
grants treated as capital
receipt 1,05,43,773 25,18,600"
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5. In the course of assessment proceedings, the AO called upon the assessee to show cause as to why the interest received on Government grants parked in FDs of Rs.1,05,43,773 be not treated as income from 'other sources' and brought to tax. In reply, the assessee pointed out that it was a fully owned Govt. company and therefore was subject to audit by the Auditor Comptroller General of India (AG). The assessee pointed out that AG's office had addressed letters to the statutory auditors of the assessee dated 31.08.2007 relevant for the A.Y. 2007-08 in which they pointed out that the assessee should not show the interest income earned on grant amount deposited in the bank pending utilization and that the same should be capitalised as part of the grant. It has also been pointed out in the aforesaid letter that as per the Accounting Policy-7 of the assessee, grants ITA No.1078/Bang/2013 Page 5 of 15 received are treated as capital grants and shown under 'reserves & surplus'. Therefore there is an overstatement of liability and understatement of reserves & surplus. The assessee also pointed out that the Expert Advisory Committee of ICAI, on a query with regard to treatment of interest accruing on short term deposits made with the banks out of grants-in-aid received from Govt. of India, has opined that the treatment of such interest income would depend on the terms of the agreement under which the grant was given. If the agreement provides that the interest will be used only for the same purpose for which the grant is used, then the same should be added to the grant and accounted in the balance sheet by routing it through the income & expenditure account. If the treatment provides that the interest should be used as general income and not for specific purpose of the grant, then it should be shown as revenue receipt. It was further opined that if the grant is silent, then it would be advisable that such income should be added to the earmarked fund by routing it through the income & expenditure account. The Assessee also pointed out that the Government has threatened to take back the grant if the same is not utilized and that event the Assessee would have to return the grant as well as the interest earned on temporary parking of the grant in fixed deposits.
6. The AO, however, was of the view that the Government order giving the grant was silent on the treatment of interest income. He therefore held that the interest income is revenue in nature and has to be treated as ITA No.1078/Bang/2013 Page 6 of 15 income of the assessee. Accordingly, the interest income in question was brought to tax by the AO.
7. Aggrieved by the order of the AO, the assessee preferred appeal before the CIT(Appeals). Before the CIT(A); the assessee, besides reiterating the stand taken before the AO, further brought to the notice of the CIT(A) that in identical circumstances, the Hon'ble Karnataka High Court in the case of CIT v. Karnataka Urban Infrastructure Development & Finance Corporation (KUIDFC), 284 ITR 582 (Kar), held that interest earned by the Government nodal agency set up for development activities on funds provided by Central Government, but parked in bank for the period of non-utilisation is not income chargeable to tax. The assessee thus pleaded that interest income should not be brought to tax.
8. The CIT(A), however, held that the facts of the assessee's case were different from the facts of the case decided by the Hon'ble Karnataka High court in KUIDFC (supra). According to the CIT(A), KUIDFC was engaged in welfare activities for transforming Bangalore to a mega city, construction & development of flyovers etc. and was not engaged in any activity of earning profit through commercial activity. He was of the view that the assessee in the present case was a company, with the main object of development of quality of agricultural produce and also exports of ITA No.1078/Bang/2013 Page 7 of 15 agricultural produce. He therefore held that the decision of the Hon'ble Karnataka High Court will not be applicable to the case of the assessee.
9. The next aspect considered by the CIT(A) was that though the Government has threatened to take back the grant given to the assessee because of non-utilisation, no such return of grant was made by the assessee. He therefore held that the assessee was the owner of the interest income and it cannot be argued that interest income did not belong to the assessee, but to the Government. The CIT(A) also rejected the argument of the assessee that since the grant was made for capital purposes, interest earned on deployment of such funds should also be capitalised and not treated as revenue receipt. The CIT(A) thereafter referred to the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali & Chemicals Ltd. v. CIT, 227 ITR 172 (SC), CIT v.
Coromondel Cements Ltd., 234 ITR 412 (SC) and CIT v. Bokaro Steel Ltd., 236 ITR 315 (SC) and concluded that the interest income earned on deposits parked temporarily would be income chargeable to tax under the head 'income from other sources'.
10. For all the above reasons, the CIT(A) dismissed the appeal of the assessee.
11. Aggrieved by the order of the CIT(A), the assessee has preferred the present appeal before the Tribunal.
ITA No.1078/Bang/2013Page 8 of 15
12. We have heard the submissions of the ld. counsel for the assessee, who reiterated the stand of the assessee as taken before the CIT(A). Further reliance was placed by the ld. counsel for the assessee on the decision of the Hon'ble Karnataka High Court in the case of CIT v. M/s. India Telephone Industries v. CIT, ITA 739/2009 dated 18.03.2013, wherein the substantial question of law considered by the Hon'ble Karnataka High Court was as to whether grant in aid given by the Government is capital receipt of revenue receipt. In our view, the question in the present case is with regard to interest received on grant in aid pending utilization and therefore the aforesaid decision would not be of any relevance to the present case.
13. The ld. counsel for the assessee also placed reliance on the decision of the ITAT Ahmedabad Bench in the case of Sar Infracon Pvt. Ltd. v. ITO, ITA No.1079 & 1080/Ahd/2010 for A.YL. 2005-06 & 2006-07, order dated 15.02.2013. The question before the Tribunal in the aforesaid case was with regard to interest earned on the Central grant given by the Central Govt. The Tribunal in the aforesaid decision referred to the decision of the Hon'ble Gujarat High Court in the case of Gujarat Municipal Finance Board v. DCIT, 221 ITR 317 (Guj) wherein it was held that interest received in respect of grant in aid cannot be treated as income of the assessee in view of the specific directive of the Government that interest earned will be treated as part of grant in aid. The ITA No.1078/Bang/2013 Page 9 of 15 Tribunal ultimately held following the decision of the Gujarat High Court that interest income received on grant in aid parked in FD pending utilization is not chargeable to tax.
14. The ld. DR relied on the order of the CIT(A).
15. The ld. counsel for the assessee has also filed before us an application to admit the following documents as additional evidence:-
Sl. Particulars Page Nos.
No.
1 Copy of the letter dated 12.11.2013 1 - 2
received from Government of Karnataka
2 Copy of the letter dated 18.06.2013 filed
before Government of Karnataka 3-6
3 Copy of Eight Meeting of State Level 7 - 19
Sanctioning Committee on Rashtriya
Vikas Yojana dated 16.03.2012
16. In the application filed for admitting additional evidence, it has been submitted that these documents transpired after the conclusion of the proceedings before the CIT(A). It has further been submitted that the above documents clearly show that the Government of Karnataka had specifically directed that interest earned on deposits of grand in aid pending utilization should be treated as additional grant of the scheme and not treated as income of the company. We are of the view that the documents filed by way of additional evidence are necessary for rendering a decision ITA No.1078/Bang/2013 Page 10 of 15 on the issue before the Tribunal and therefore the same are admitted as additional evidence.
17. It is seen from the additional documents that Government of Karnataka has informed the assessee vide letter dated 12.11.2013 and 18.06.2013 that interest earned on Government grants should also be spent for the purpose for which the grant is given. Reference has been made in this letter to the proceedings of the 8th Meeting of the State Level Sanction Committee of Rashtriya Krishi Vikas Yojana held on 16.03.2012. In the aforesaid proceedings, the Committee considered the utilization of interest on unspent grants and directed that such interest should also be spent for the purpose for which the grants were given. The ld. counsel for the assessee thus submitted that the aforesaid documents clearly show that the interest received on temporary parking of grant in aid pending utilization cannot be treated as income, but has to be treated as part of grant in aid.
18. The ld. DR, however, submitted that these letters emanated after the grant in aid was granted by the Government of Karnataka and will therefore have no effect. According to him, the proceedings of Government of Karnataka by which a sum of Rs.10 crores was granted did not contain any such condition and the aforesaid correspondence cannot alter the conditions under which the original grant in aid was given. ITA No.1078/Bang/2013 Page 11 of 15
19. We have considered the rival submissions. It is no doubt true that as per original proceedings viz., Government Order dated 23.01.2007 whereby a sum of Rs.10 crores was to be granted to the assessee as grant in aid for creation of infrastructural facilities in various parts of the state for increasing the export of horticultural produce, there was no condition that interest earned on the parking of grant in aid should also be treated as part of grant in aid or spent only for the purpose for which the grant in aid was given. Nevertheless, from the additional evidence, it becomes clear that the Government is of the view that such interest should also be treated as part of grant in aid. In that view of the matter, we are of the view that the opinion of Expert Advisory Committee of ICAI that the aforesaid amount should be capitalised and not treated as income will be applicable.
20. We are also of the view that the decision of the Hon'ble Karnataka High Court in the case of KUIDFC (supra) will be squarely applicable to the facts of the present case. The question before the Hon'ble Karnataka High Court in the case of CIT Vs. Karnataka Urban Infrastructure Development & Finance Corpn. 284 ITR 582 (Karn) was as to whether Interest earned by Governmental nodal agency set up for development activities on funds provided by Central Government but parked in banks for the period of non-utilisation is income chargeable to tax. The Hon'ble High Court answered the question in the negative. The facts of the case before the Court were that M/s Karnataka Urban ITA No.1078/Bang/2013 Page 12 of 15 Infrastructure Development and Financial Corporation (for short hereinafter referred to as 'the assessee') was a fully Karnataka State Government owned company. It was appointed as a nodal agency for the implementation of the mega-city scheme worked out by the Planning Commission of Ministry of Urban and Employment for development of urban infrastructure to Bangalore city. The Central Government has provided the money to the assessee for implementing the said scheme. The money so received from the Government of India was parked by the assessee in various bank deposits during the unutilised period. The interest earned during the year on these deposits were transferred to the mega-city scheme account directly with an appropriate disclosure in the notes to the accounts. The assessee has been involved in other projects of development of infrastructure apart from the activity as a nodal agency for the implementation of the mega-city scheme undertaken by the Government of India. The interest earned and received by the assessee out of the amount which it had received from the Central and State Governments and deposited in various banks, was treated as an income of the assessee and the AO brought the aforesaid amounts to tax. The Tribunal held that the assessee was merely a trustee of funds entrusted to carry out the objects of the Government while implementing the scheme. The assessee in fact acted as an agent of the Governments of both the Central and the State for implementing the scheme of the Government. This being the factual position, the lower authorities committed serious ITA No.1078/Bang/2013 Page 13 of 15 error in treating the interest as income of the assessee and bringing the same to tax. On further appeal by the Revenue to the High Court, the Hon'ble High Court held:
"The material on record shows that the very purpose of constitution of the assessee was to act as a nodal agency for implementation of 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 specialised 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 boards, municipal corporations, etc. The objective is to create and maintain a fund for the development of infrastructural assets on a continuing basis and therefore, the assessee is a nodal agency formed/created by the Government of Karnataka as per the guidelines; there is no profit motive as the entire fund entrusted and the interest accrued therefrom on deposits in bank though in the name of the assessee has to be applied only for the purpose of welfare of the nation/States as provided in the guidelines; the whole of the fund belongs to the State Exchequer and the assessee has to channelise them to the objects of centrally sponsored scheme of infrastructural development for mega-city of Bangalore. Funds of one wing of the Government is distributed to the other wing of the Government for public purpose as per the guidelines issued. The monies so received, till it is utilised, is parked in a bank. The finding recorded by the Tribunal clearly shows that the entire money in question is received for implementation of the scheme which is for a public purpose and the said scheme is implemented as per the guidelines of the Central Government and therefore, the assessee is only acting as a nodal agency of Central Government for implementation of these projects. It is not the case of the Revenue that the assessee was carrying on any business or activities of its own while implementing the scheme in question. The unutilised money, during which the project could not 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 ITA No.1078/Bang/2013 Page 14 of 15 scheme. Therefore, in computing the total income of the assessee for any previous year the interest accrued on 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 mega-city scheme. Therefore, there is no error in the conclusion reached by the Tribunal that there was no income earned by way of interest by the assessee and setting aside the order of AO which is affirmed by the first appellate authority. The finding given by the Tribunal is purely a question of fact. No substantial question of law is involved in this appeal and therefore, this appeal is liable to be dismissed at the stage of admission itself."
21. We are of the view that the aforesaid decision of the Hon'ble Karnataka High Court will clear apply to the facts of the present case. The CIT(A) has not followed the aforesaid decision on the basis that KUIDFC was engaged in welfare activities to transform Bangalore to a mega city, whereas the assessee was engaged in trading of agricultural produce. In our view, this distinction sought to be made out by the CIT(A) cannot be accepted. The assessee as well as KUIDFC are engaged in welfare activity wholly owned by State Government. KUIDFC is also a company. The assessee is also engaged in welfare activity and formed for the purpose of helping the agricultural produce and procession of export. Therefore the ratio laid down by the Hon'ble Karnataka High Court in the case of KUIDFC (supra) will clearly apply to the facts of the present case also. In that view of the matter, we hold that the interest income in question cannot be brought to tax as income of the assessee. The appeal of the assessee is accordingly allowed.
ITA No.1078/Bang/2013Page 15 of 15
22. In the result, the appeal by the assessee is allowed.
Pronounced in the open court on this 20th day of December, 2013.
Sd/- Sd/-
( N. BARATHVAJA SANKAR ) ( N.V. VASUDEVAN )
Vice President Judicial Member
Bangalore,
Dated, the 20th December, 2013.
/D S/
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Senior Private Secretary
ITAT, Bangalore.