2019 (2) TMI 2093 - AT - Income Tax

Accrual of income - interest on FDRs held for and on behalf of Central and State Government - assessee company is a State Government Company and whose entire share capital is being held through Governor of Rajasthan and is working as Nodal Agency for implementation of various Central/State Government Schemes for which funds are provided by Central/State Government - HELD THAT - Assessee has received interest on the FDRs which were made to park various amounts with the bank. There is no dispute that the amount which was put into the fixed deposit was received by the assessee from the Government for the purpose of disbursement of the same in the various schemes/projects sponsored by the Government. Interest earned by the assessee on the fixed deposit of the amount which is received from the Government for disbursement to the various schemes/projects for which the assessee is a Nodal Agency to implement such projects/schemes such interest will not be the income of the assessee. Accordingly following the decisions of Karnataka Urban Infrastructure Development Finance Corporation 2009 (1) TMI 243 - KARNATAKA HIGH COURT as well as Rajasthan Avas Vikas Infrastructure Ltd 2016 (4) TMI 1099 - ITAT JAIPUR we hold that the interest received by the assessee is not assessable to tax but it was received on behalf of the Government and will be forming part of the funds to be disbursed for implementation of various schemes and projects for public welfare. Hence the addition made by the assessee is deleted. This issue is common for both the years therefore it stands adjudicated for assessment years 2013-14 2014-15. Status of the assessee is a Government company - As we have already discussed the facts and memorandum of association wherein the objects of the assessee has been set out. From the objects and purpose of creating the assessee it is clear that the state Government is helping more than 98% shares of the assessee therefore this issue though is only academic in nature however once the Government is holding more than 98% shares then the assessee company is a Government company.

Summary

Issues Involved:
1. Addition of interest on FDRs to total income.
2. Status of the assessee as a Government company.

Issue-wise Detailed Analysis:

1. Addition of Interest on FDRs to Total Income:
The primary issue revolves around the addition of interest income on Fixed Deposit Receipts (FDRs) amounting to Rs. 3,78,34,698/- to the total income of the assessee. The assessee, a State Government Company acting as a Nodal Agency for various Central/State Government schemes, argued that the interest earned on funds kept in FDRs does not constitute its income but forms part of the funds meant for public welfare projects. The funds were parked in bank FDRs during the interim period between receipt and disbursement to various schemes/projects. The assessee contended that the interest earned on these funds is held in a fiduciary capacity and should be allocated to the specific projects or returned to the consolidated funds of the Government.

The Assessing Officer (AO) did not accept this contention and added the interest income to the total income of the assessee, a decision upheld by the CIT(A). The Tribunal, however, noted that the assessee's role as a Nodal Agency involves receiving and disbursing funds as per Government instructions, and the interest earned on these funds should not be treated as the assessee's income. The Tribunal relied on precedents from the Karnataka High Court (CIT & Anr. Vs. Karnataka Urban Infrastructure Development & Finance Corporation) and Gujarat High Court (Gujarat Power Corporation vs. ITO), which held that interest earned on funds received for public welfare projects does not constitute income for the Nodal Agency. Consequently, the Tribunal deleted the addition made by the AO, recognizing that the interest earned forms part of the funds meant for specific government schemes and projects.

2. Status of the Assessee as a Government Company:
The second issue pertains to the status of the assessee as a Government company. The AO erroneously classified the assessee as a commercial concern. However, the Tribunal clarified that the assessee is indeed a Government company, with the State Government holding more than 98% of its shares. The memorandum and articles of association of the assessee explicitly state its non-profit nature and its role in implementing government schemes for public welfare. The Tribunal concluded that the assessee's status as a Government company is evident from its shareholding structure and its objectives, which align with government directives.

Conclusion:
The Tribunal allowed both appeals filed by the assessee, ruling that the interest earned on FDRs does not constitute taxable income for the assessee and reaffirming its status as a Government company. The addition of interest income to the total income was deleted, and the classification of the assessee as a Government company was upheld. The judgment emphasized the fiduciary role of the assessee in handling government funds and the non-profit nature of its operations.