2022 (1) TMI 653 - HC - Income Tax

Characterization of income - unutilized funds of the project - government funds are deployed for an ultimate use in setting up of an infrastructure project - capital or revenue receipt - income generated out of earlier release of State Government to BMRCL before the commencement of BMRCL project - release as equity would be made to BMRCL only after adjusting this income - HELD THAT - As income generated out of earlier release of State Government for its project would have to be converted into State s equity towards the project and the same cannot be counted as income of BMRCL. Thus there is no profit motive as the entire fund entrusted and the interest accrued therefrom has to be utilized only for the purpose of scheme. Thus it has to be capitalized and cannot be considered as revenue receipts. We confirm the order impugned passed by the Tribunal answering the substantial questions of law in favour of the assessee

Issues Involved:
1. Whether the Tribunal was correct in not following the settled law of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizer Ltd.
2. Whether the Tribunal is correct in holding that the company is a nodal agency for the government to implement the infrastructure project.

Issue-wise Detailed Analysis:

Issue 1: Non-adherence to Tuticorin Alkali Chemicals and Fertilizer Ltd. Judgment
The Revenue challenged the Tribunal's decision, arguing that the Tribunal failed to follow the principles set by the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. In that case, the Supreme Court held that if the capital of a company is fruitfully utilized instead of keeping it idle, the income generated will be of revenue nature and liable to tax. The Revenue contended that the assessee's surplus funds, invested in fixed deposits and mutual funds, generated interest and dividends, which should be considered taxable revenue income as per the Tuticorin Alkali judgment.

Issue 2: Assessee as a Nodal Agency
The Tribunal held that the assessee is a nodal agency for the government, implementing the infrastructure project without a profit motive. The Revenue argued against this, stating that the assessee is a joint venture between the Government of Karnataka and Government of India, aimed at providing transport facilities and earning income from ticket sales. Therefore, the profit motive is inherent in the project.

Detailed Analysis:

Background of the Case:
The assessee, a wholly-owned undertaking of the Government of Karnataka, was established to implement the Bangalore Metro Rail Project. During the assessment years 2007-08 and 2008-09, the assessee received funds not immediately required for the project and invested them in fixed deposits and mutual funds, earning interest and dividends. The Assessing Officer taxed this income, which was contested by the assessee, leading to appeals and the Tribunal's decision in favor of the assessee.

Revenue's Argument:
The Revenue's counsel argued that the Tribunal erred by not following the Tuticorin Alkali Chemicals and Fertilizers Ltd. judgment, which mandates that income generated from surplus funds should be taxed as revenue income. The counsel emphasized that the assessee's investments should be considered revenue-generating activities, thus taxable.

Assessee's Argument:
The assessee's counsel contended that the assessee is a Special Purpose Vehicle (SPV) acting as a nodal agency for the government, implementing a public utility project without engaging in profit-making activities. The counsel argued that the interest earned on unutilized funds should be treated as capital receipts, not revenue income, as the funds were invested per government directives.

Tribunal's Findings:
The Tribunal relied on previous judgments, including those in the cases of KUIDFC and Karnataka State Agricultural Produce Processing and Export Corporation Ltd., which held that interest earned on unutilized funds for government projects should not be treated as revenue income. The Tribunal found that the assessee's role as a nodal agency meant that the funds and interest earned were meant for the project's implementation, not for profit.

Government Order:
A Government Order dated 25.03.2008 supported the assessee's stance, stating that the income generated from state-released funds before the project's commencement should be converted into the state's equity towards the project and not counted as the assessee's income.

Judgment:
The High Court upheld the Tribunal's decision, confirming that the interest earned on unutilized funds invested as per government directives should be capitalized and not treated as revenue income. The court found no profit motive in the assessee's activities, reinforcing that the funds and accrued interest were meant solely for the project's implementation. The appeals were dismissed, and the substantial questions of law were answered in favor of the assessee and against the Revenue.

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