2017 (2) TMI 457 - HC - Income Tax

Chargeability of tax upon the interest - Held that - In the Karnataka High Court decision in the case of Karnataka Urban Infrastructure Development and Finance Corporation 2006 (2) TMI 114 - KARNATAKA High Court it has been rightly pointed out by the High Court that once it has been found at the level of Tribunal that the interest was income derived out of funds received from the State Government and thus the interest was not taxable as having the same character, that would be a question of fact. We are in respectful agreement with the view expressed by the Karnataka High Court and thus no substantial question of law arises on the said issue. Incentive subsidy - Held that - It was meant for entrepreneurs and industrialists who had established their units and made certain capital outlay and the assessee was merely required to ensure distribution of subsidies to the industrialists and thus it could not be treated as funds in hand of the assessee as taxable.

Summary

Issues:
1. Characterization of interest earned by BIADA on investment of funds.
2. Taxability of incentive subsidy received by the assessee.
3. Treatment of the assessee as an artificial juridical person.
4. Chargeability of tax on interest amounts.

Analysis:

1. Characterization of Interest Earned:
The case involved a statutory authority, BIADA, earning interest on funds invested. The Assessing Officer initially deemed a portion of the interest as taxable. However, the Commissioner of Income-tax (Appeals) overturned this decision, stating that the interest earned on specific projects funded by the State Government was capital in nature. This characterization was supported by precedents from the Delhi and Karnataka High Courts. The interest was held to be non-taxable, aligning with the capital nature of the funds. The Tribunal upheld this decision, emphasizing the factual aspect of the interest being derived from State Government funds.

2. Taxability of Incentive Subsidy:
Regarding the incentive subsidy received by the assessee, it was clarified that these subsidies were meant for entrepreneurs and industrialists, not for the assessee directly. The assessee acted as a custodian, distributing the subsidies to eligible units as per government schemes. Therefore, the subsidy was not considered a taxable receipt for the assessee. The Tribunal concurred with this interpretation, leading to the deletion of the addition of the subsidy amount.

3. Treatment of the Assessee:
The appellant-Revenue raised a question concerning the treatment of the assessee as an artificial juridical person instead of a local authority. However, the Court found no substantial impact of this characterization on the case. The Court dismissed the alleged substantial question of law related to this issue, as it did not influence the case dynamics between the Revenue and the assessee.

4. Chargeability of Tax on Interest Amounts:
The Court further discussed the chargeability of tax on specific interest amounts earned by BIADA. Referring to the Karnataka High Court decision, it was established that the interest, being derived from State Government funds, retained the character of the principal amount and was not taxable. The Court found no substantial question of law arising on this issue, affirming the non-taxable nature of the interest income.

In conclusion, the High Court dismissed the appeal, stating that no substantial question of law arose in the case. The decisions regarding the characterization of interest earned and the taxability of the incentive subsidy were upheld, emphasizing the capital nature of the funds and the intended beneficiaries of the subsidies.