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2021 (11) TMI 638 - HC - Income TaxIncome from the nature of interest received by the assessee in DRDO/ISRO accounts (for short FD A/cs ) - taxability of interest on deposits out of funds provided by the DRDO/ISRO, both Government of India Departments, for specific projects - case of the assessee on the interest earned from FD A/cs as non-computable income - assessee is a 100% subsidiary of BrahMos Aerospace Thiruvananthapuram Limited (BATL), and Indo- Russia Joint Venture Company in which DRDO under the Ministry of Defence, Government of India holds 50.50% shares and NPO Mashinostroyenia a State Enterprise of Russian Federation holding 49.50% - Whether Appellate Tribunal is right in holding that the interest received from banks on deposits of surplus funds received by the Appellant from DRDO/ISRO, both Government of India Departments, for setting up specific projects on their behalf and returned to the DRDONSRO is to be assessed in the hands of the Appellant? HELD THAT - In the case on hand, there is no deflection, for, right through the funds transferred belong to DRDO/ISRO, and, as a corollary, interest earned belongs to DRDO/ISRO. The Fixed Deposits are opened in the name of assessee, the Banks are correct in effecting TDS and issuing TDS certificate to the assessee. The assessee once establishing no tax liability on this component, the TDS is referred to be made over to DRDO/ISRO. In the armchair of revenue, the above aspects sound atypical to taxation. The Government Departments, since are not under obligation to pay income tax, the funds merely because are in the hands of the assessee and earn interest, the reasoning whichever way it is stated is not convincing to tax the interest income in assessee s return and the Revenue looked at the transactions from the kaleidoscope of the letter of Income Tax Department but without appreciating the spirit of documents which have bearing on the adjudication of the issue. It is appropriate to observe that an assessee is under obligation to pay tax on its real income or income derived from one source or the other by the assessee, but not on every receipt recognized in the books of the assessee. The circumstances in Vizhinjam International Seaport 2016 (10) TMI 349 - ITAT COCHIN are similar to the case on hand and there is inconsistency in approach by the Tribunal in the findings recorded in similar circumstances. The deliberation and the resultant view we are taking in this judgment are peculiar and particular to the fact situation of the case on hand. The computability of interest-income or any other source of income is specific to the particular case dealt with by the Court/Tribunal/Revenue. In the instant case, the objection of Revenue is not that the funds are parked by a true owner liable to tax, but parked with the assessee and thereby the obligation of tax is avoided through such an understanding. The burden in such a claim is very heavy on the assessee to establish that the income is non-computable income of assessee. Reverting to case on hand, the assessee, DRDO/ISRO are either Government Departments or Government Companies. The burden is discharged by the assessee to not go by recognition of entries in books of account, but appreciate all the circumstances while treating whether the interest is computable or non-computable income of the assessee. Hence, in the circumstances of the case, the interest income for the Assessment Year 2009-10 is non-computable income of assessee. The contrary findings recorded by the orders under appeal are illegal and unavailable. Hence, liable to be set aside and is set aside accordingly. Decided in favour of assessee.
Issues Involved:
1. Taxability of interest received from Fixed Deposits (FD A/cs) on funds provided by DRDO/ISRO. 2. Whether the interest income should be assessed in the hands of the appellant. 3. Applicability of overriding title concept. 4. Consistency of the Tribunal's approach in similar cases. Issue-wise Detailed Analysis: 1. Taxability of Interest Received from Fixed Deposits (FD A/cs) on Funds Provided by DRDO/ISRO: The appellant, BrahMos Aerospace Thiruvananthapuram Ltd, received funds from DRDO and ISRO, which were deposited in Fixed Deposit Accounts (FD A/cs). The interest earned on these deposits was the subject of dispute. The appellant argued that the funds and the interest earned belonged to the respective government departments (DRDO/ISRO) and not to the appellant. The appellant maintained separate accounts for these funds and returned the unspent amount along with the interest to the respective departments. The Assessing Officer, Commissioner of Income Tax, and the Income Tax Appellate Tribunal (ITAT) held that the interest income was taxable in the hands of the appellant, as the interest was shown as income in the appellant's books and tax was deducted at source (TDS). 2. Whether the Interest Income Should be Assessed in the Hands of the Appellant: The appellant contended that the interest income did not belong to it and should not be assessed as its income. The funds were provided by DRDO/ISRO for specific projects, and the appellant acted as a custodian of these funds. The appellant cited the decision in *Commissioner of Income Tax v. Karnataka Urban Infrastructure Development and Finance Corporation (2006) 284 ITR 582*, where it was held that interest earned on government funds kept for specific purposes could not be treated as the income of the assessee. The appellant also referred to similar decisions in *Commissioner of Income Tax v. Delhi State Industrial Development (2007) 295 ITR 419 (Del)* and *Infrastructure Development Authority v. Commissioner of Income Tax (TDS) (2010) 321 ITR 278 (Patna)*. 3. Applicability of Overriding Title Concept: The Tribunal considered the concept of overriding title but concluded that there was no diversion of income by overriding title in favor of DRDO/ISRO. The Tribunal noted that the interest received by the appellant was shown as income in its books and TDS was claimed by the appellant. The Tribunal held that if the interest income belonged to DRDO/ISRO, it should have been directly credited to their accounts. The appellant argued that the concept of overriding title was inapplicable as the funds and the interest earned belonged to the government departments throughout, and the appellant was merely a custodian. 4. Consistency of the Tribunal's Approach in Similar Cases: The appellant pointed out the inconsistency in the Tribunal's approach by referring to the decision in *Vizhinjam International Seaport Ltd v. The Income Tax Officer, Ward 2(4), Trivandrum Order dated 15.06.2016 in ITA No.07/Coch/2016*, where the Tribunal held that interest earned on government funds kept for specific purposes was not taxable as the income of the assessee. The appellant argued that the Tribunal should have followed a similar approach in the present case. Judgment: The High Court examined the MoUs between DRDO/ISRO and the appellant, which indicated that the appellant was a custodian of the funds for specific projects. The court noted that the funds and the interest earned belonged to the respective government departments and not to the appellant. The court held that the interest income was non-computable income of the appellant and should not be taxed in its hands. The court set aside the orders of the Assessing Officer, Commissioner of Income Tax, and the Tribunal, and allowed the appeals in favor of the appellant. Conclusion: The High Court allowed the appeals, holding that the interest income earned on funds provided by DRDO/ISRO for specific projects was not taxable in the hands of the appellant. The court emphasized the importance of considering the substance of the transactions and the role of the appellant as a custodian of the funds, rather than merely relying on the entries in the books of account. The court also highlighted the inconsistency in the Tribunal's approach in similar cases and reiterated the principle that income should be taxed based on its real nature and ownership.
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