2023 (4) TMI 388 - AT - Income Tax

Income tax liability - tax on income of a State - government body or government agency - assessee is performing sovereign function of the Government or not? - whether assessee is a state within the meaning of Article 12 of the Constitution and consequently exempt from Union tax as per Article 289 of the Constitution? - assessee is a joint venture of Government of India and Government of Karnataka is a Special Purpose Vehicle entrusted with the responsibility of implementation of Bangalore Metro Rail Project - contention of the assessee that it is an agent/instrumentality of the state and hence in view of the Article 289 of the Constitution of India, the Income Tax Act, 1961 is not applicable to the assessee. HELD THAT - In this case, the assessee has been incorporated under Companies Act for the purpose of operation and maintenance and to regulate the working of Metro Railway in and around Bangalore so as to meet the Urban Transport requirement in Bangalore, thereby assessee carrying on the activity of railway transport of passengers and this is an independent corporation managed by a Board of Directors. The assessee corporation was enjoying monopoly i.e it was the only organisation involved in transport of passengers through rail in and around Bangalore. The assessee has been carrying on the transport of the passengers through rail in and around Bangalore by charging for tickets. The ticket price has been fixed by the corporation not at cost to cost price and it has been fixed with an element of profit. The assessee is not functioning under the policy of no profit and no loss. On the other, it is a profit oriented organisation and no profit no loss has not been the policy of the corporation and the assessee also a monopoly corporation in this field. In our opinion, the activity of transporting the passengers through rail in and around Bangalore to be considered as a business activity and the activity carried on by the assessee is nowhere different from that one carried on by private entrepreneurs and it is always by business activity of the assessee company with profit motive. In our view, the control or directions issued by the State Government would not change the character of business activity . We are of the view that activity carried out by the assessee should be examined independently and the fact that assessee is being regulated by the State Government would not make any difference. In our view, ownership of the Corporation and activities of the Corporation are two different aspects and the ownership cannot be considered or taken into account to determine the character or nature of the activities carried on by the Corporation. Capital required by the assessee company have been contributed by the Central Government as well as the State Government of Karnataka as such it is a wing of the State Government - This argument holds no merits. The assessee being separate personality of its own, incorporated under Companies Act for carrying on the business activity and the profit or loss arising there from are the profit and loss of the Corporation itself. The income derived from the Corporation from the business activities cannot be said to be income of the Karnataka State Government under Article 289.Being so, we do not find any merit in this ground of appeal and same is dismissed in all assessee s appeals. Nature of receipt - Taxation of reimbursement of state tax - revenue receipt or capital receipt - contention of the ld. D.R. is that it is a refund of sale tax to be treated as a revenue receipt - HELD THAT - The character of the receipt has to be considered for taxing the same. If the receipt is given to recoup revenue expenditure it will take the same colour and will be deemed to be a revenue receipt in the hands of the assessee. It is the purpose for which it is given that is material and is the determining factor if the receipt was given to meet the capital cost of the assessee company that receipt to be considered as capital receipt and cannot be taxed. In other words, if the receipt has been given to meet the actual expenses of the assessee corporation in the revenue field, the same to be considered as a revenue receipt and to be taxed. These facts to be examined by the AO in all these years and if he finds the receipt is to meet the capital cost of the assessee company as per the sanction letter of the State Government, the same shall not be brought to tax. On the other if the receipt has been received by the assessee to meet the revenue expenditure or reimbursement of revenue expenditure, the charge to the P L account same to be considered as revenue receipt. Accordingly, this issue is remitted to the file of AO for fresh consideration in all these assessment years. This ground of appeals allowed for statistical purposes. Disallowance in respect of gift and donation given to third parties - AO noted that the assessee had claimed as expenditure under the head donations and gifts but the same was not added back in the computation - HELD THAT - The main thrust is that the expenditure should have been incurred wholly and exclusively for the purpose of business or profession and it should not be capital expenditure or personal expenditure of the assessee. If the condition laid down above is not satisfied, the expenditure cannot be allowed. Before us, ld. A.R. submitted that the above expenditure incurred for the purpose of business in view of the commercial expediency - we find that the above expenditure is not incurred wholly and exclusively for the purpose of business specifically donation to Red Cross Society and Japan Relief Fund nowhere contributed to the business of assessee. It is just like a donation or in the nature of gift, which cannot be allowed u/s 37. However, we make it clear that if the assessee produce necessary details to claim exemption u/s 80G of the Act, the same may be examined and exemption u/s 80G may be granted after verifying the relevant details from the receipt issued by the respective party. This ground allowed for statistical purposes Disallowance of Forward Contract from time to time - AO noted that the assessee claimed expenditure towards forward contract premium and held that the same constitutes capital expenditure and not revenue expenditure - main contention of the ld. A.R. is that this forward contract is relating to acquisition of capital asset - HELD THAT - In our opinion, forward contract entered into for the purpose of payment of capital liability with reference to acquisition of asset outside India, then such amount will be governed under section 43A of the Act. However, if the contract entered into for the purpose of capital liability with reference to the acquisition of capital asset within India, that loss is a capital loss. We remit this issue to the file of AO to decide afresh in the ratio laid down in the case of Sutlez Cottton Mills Ltd. 1978 (9) TMI 1 - SUPREME COURT - The issue is remitted back to the file of AO for fresh consideration in assessment year 2013-14 2014-15. Taxing of the interest wrongly offered as revenue receipt - HELD THAT - In this case, the claim of the assessee is that interest amount received during the year is not taxable and was erroneously offered to tax and placed reliance on the earlier decision of the Tribunal wherein observed that the interest income earned pre-commencement period not taxable. However, in the present assessment year 2012-13, the business of the assessee has already commenced and it is in the expansion stage and the interest earned from surplus funds after commencement cannot be considered as not taxable though it was received for expansion of the project. Accordingly, this ground of assessee is rejected in AY 2012- 13. Addition representing the interest on term deposits which the assessee did not offer for taxation - HELD THAT - CIT(A) allowed the claim of the assessee that interest income is not taxable by placing reliance on the earlier order of the Tribunal 2014 (10) TMI 1054 - ITAT BANGALORE and same has been confirmed by Karnataka High Court 2022 (1) TMI 653 - KARNATAKA HIGH COURT The income generated through above impugned interest should be converted into state s equity towards the project. If it fails so same to be considered as income of the BMRCL. Accordingly, the issue is remitted to the file of AO to decide the issue in the light of judgement of Hon ble Karnataka High Court cited (supra). The ground of appeal of the revenue is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Whether the assessee is a state within the meaning of Article 12 of the Constitution and consequently exempt from Union tax as per Article 289 of the Constitution.
2. Taxation of reimbursement of state tax revenue receipt instead of treating it as capital receipt.
3. Disallowance in respect of gift and donation given to third parties.
4. Disallowance of Forward Contract from time to time.
5. Taxing of the interest wrongly offered as revenue receipt.

Summary:

Issue 1: State Status and Tax Exemption under Article 289
The assessee, Bangalore Metro Rail Corporation Limited, argued that it is a state within the meaning of Article 12 of the Constitution and thus exempt from Union taxation under Article 289. The Tribunal noted that the assessee is a joint venture of the Government of India and the Government of Karnataka, created under the Metro Railways Act for implementing the Bangalore Metro Rail Project. The assessee contended that it functions as an instrumentality of the state, with its activities governed by the Metro Railways Act, and fares fixed by a committee appointed by the central government. The Tribunal, however, held that the assessee is a separate legal entity and not immune from Union taxation as it is engaged in business activities with a profit motive, similar to other government-owned corporations. The Tribunal relied on the Supreme Court's decision in Andhra Pradesh State Road Transport Corporation Vs. ITO, which held that income derived by a corporation from its trading activities cannot be claimed as the income of the state under Article 289.

Issue 2: Taxation of Reimbursement of State Tax Revenue Receipt
The assessee received Rs. 50 crores from the Government of Karnataka as a subordinate loan for funding the Metro Rail Project and argued that it should be treated as a capital receipt. The Tribunal noted that if the amount was granted to meet the capital cost of the assessee, it should be considered a capital receipt and not taxed. However, if it was granted to meet revenue expenditure, it should be treated as a revenue receipt and taxed accordingly. The issue was remitted to the AO for fresh consideration to determine the nature of the receipt.

Issue 3: Disallowance in Respect of Gift and Donation
The assessee claimed deductions for donations and gifts, including Rs. 1 crore to the Japan Relief Fund and Rs. 50,000 to an educational trust. The Tribunal held that the donation to the Japan Relief Fund cannot be claimed as business promotion expenses and should be disallowed. However, the Tribunal allowed the assessee to claim deduction under section 80G of the Act for donations to the educational trust, subject to verification of necessary details by the AO.

Issue 4: Disallowance of Forward Contract
The assessee claimed expenditure towards forward contract premium, which the AO disallowed as capital expenditure. The Tribunal noted that if the forward contract related to the acquisition of capital assets, it should be treated as a capital loss. The issue was remitted to the AO to decide afresh based on the Supreme Court's decision in Sutlej Cotton Mills Ltd. vs. CIT.

Issue 5: Taxing of Interest Wrongly Offered as Revenue Receipt
The assessee claimed that interest income earned during the pre-commencement period should not be taxed, relying on the Tribunal's earlier decision in its favor. The Tribunal, however, held that since the business had commenced, the interest earned from surplus funds should be considered taxable. The Tribunal rejected the assessee's claim for exemption in AY 2012-13.

Revenue's Appeal:
The AO added Rs. 20,21,69,745/- as interest on term deposits not offered for taxation. The CIT(A) allowed the assessee's claim, holding that incidental receipts during the construction period should reduce the value of capital assets. The Tribunal remitted the issue to the AO to decide in light of the Karnataka High Court's decision, ensuring the income generated is converted into the state's equity towards the project.

Conclusion:
All the appeals of the assessee and the revenue's appeal were partly allowed for statistical purposes, with specific issues remitted to the AO for fresh consideration.