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TMI Blog2016 (10) TMI 349X X X X Extracts X X X X X X X X Extracts X X X X ..... d entrusted the assessee company the task of implementing the International Seaport Project at Vizhinjam and given grants of Rs. 54.74 Cr. upto 31/03/2010 to be utilized for acquisition of land and construction of seaport. As per the Memorandum of Association, the main object of the company is to address all supporting infrastructure requirement for the seaport project as well as other development needs. Out of the grants received from the Government of Kerala, the fund which was not immediately required to implement the assigned task was deposited with banks during the intervening period. The interest received on bank deposits reportedly has not been credited into the profit and loss account of the assessee company but credited to the grant received account contemplating that interest received on bank deposits forms part of Government grant which in turn should necessarily be utilized for acquisition of land and construction of infrastructure facilities. The assessee thus has filed a revised return returning Nil income subsequent to claiming exemption of the entire amount of interest received on bank deposits as a capital receipt being part of capital grants received from the Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Board of Directors was also provided for in the abovementioned GO, with the Chief Minister of Kerala as the Chairman, and other ministers/Senior Government secretaries including the Chief Secretary as its members. 7. From the above details it is clear that the assessee is only an extended arm/wing of the Government set up wholly and exclusively for undertaking certain sub-sovereign functions on behalf of the Government of Kerala for the public utility project involving providing support/assistance for setting up a deep sea international seaport and therefore, is not engaged in any business activities involving a profit motive. The company was appointed by the Government as its Nodal agent vide GO (Ms) No.9/07/F&PD dated 09/03/2007 - Para 7.1 (copy already filed with the appeal petition - page No. 34-37). As per para 5 of this GO, the implementation and operation of the project (port) will be on BOT model with a concession period of 30 years by a private sector developer selected through open and competitive bid process. Para 7.3 of the GO provides that investment of the Government of Kerala and private sector for this PPP joint venture will be made through the assessee co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not at all undertaking or engaged in the construction activities of the international deep sea port but is only carrying out certain defined agency functions on behalf of the Government of Kerala like acquisition of land, providing external infrastructure to facilitate smooth setting up of the port like rail, roads, power and water and also arranging sourcing of funds for the project by way of loans as detailed in the Government orders as stated above. The fact that the Assessing Officer has assessed the interest income on deposits under other sources on a erroneous appreciation/understanding of the facts of the case is thus very clear from a cursory reading of the assessment order as stated above. 9. The Ld. CIT(A) has also refused to accept the assessee's claim for exemption of tax of interest income on deposits as being a capital receipt on account of an unfortunate error in understanding or appreciation of the basic facts of the case as could be noted from the details furnished below: The Ld. CIT(A) has held that assessee is not authorized by its Objects clause of Memorandum to make the investment vide para 28 of clause IIIB the MoA referred to by the authority in para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Earning Deposits to maximize the revenue/funds of the institution since the Directors are acting in fiduciary capacity on behalf of the members of the company (the owners being Government of Kerala in this case) and if the investment of surplus funds is authorized by a specific provision in MoA, the action of the Directors is absolutely in line with the objects clause of the company so long as there is no ban or restriction on such action under the provisions of Companies Act, 1956 which is not there in this case as already stated. The Ld. CIT(A) has also stated that investment activity is not permitted or authorized by the Government and hence such activity cannot be treated as a agency function eligible for exemption from tax as per the decision of the Hon'ble Karnataka High Court in Karnataka Urban Infrastructure Development and Finance Corporation reported in (2009) 315 ITR 301 (Kar.) (copy already filed with the appeal petition - page No.44-46). In Government order GO (MS) No.9/07/F&PD dated 09/03/2007 as stated above, the Government has clearly stated that the company will have operational freedom and autonomy for implementing the project efficiently and effectively. Since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of funds is concerned has never been subjected to the direction of the Govt." The case made out by the Ld. CIT(A) is that there has not been any direction from the Government for investment of surplus funds from out of grants and therefore, the income earned from such investment cannot be said to be earned out of professed objective for which the assessee has been set up. It was also submitted that the findings as above and the conclusion drawn therefrom is entirely fallacious and misplaced in view of the fact that GO(MS) 43/04/F&PD dated 23.11.2004 as stated above, which deals with the functions of the special purpose company incorporated (Vizhinjam International Seaport Ltd). very clearly provides that the company will have operational freedom and autonomy for implementing the projects efficiently and effectively. A copy of the above GO was also filed with the Ld. CIT(A) at the time of hearing of the appeal, which appears to have been not considered. This means that the Govt. has granted absolute autonomy and operational freedom to the Board of Directors of the company to act on all matters for efficient and effective implementation of the project and it cannot be construed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Hon'ble Karnataka High Court and that of the assessee are very similar as both were governmental bodies vested with Public utility objectives and funds received from Government had to be used for specific declared or directed objectives and a gist of the Hon'ble Karnataka High Court is given below:- Name of High Court Citation Ratio of the decision Hon'ble Karnataka High Court CIT vs. Karnataka Urban Infrastructure Development and Finance Corporation (2009) 315 ITR 301 (Karn.). The Hon'ble Court has held that interest received from the deposits of surplus funds in banks, which are to be used in the project in accordance with the scheme is not taxable. It was held therein, that since the assessee was only a nodal agency and not carrying on any business of its own, interest from bank from out of the funds, entrusted to Corporation for implementation of the scheme is not liable to be taxed. It followed its earlier decision in the same case in CIT vs. Karnataka Urban Infrastructure Development and Finance Corporation (2006) 284 ITR 582 (Karn.) In the assessee's case, Govt. orders as stated above clearly stipulated the activities that have to be undertaken by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeal petition - page No.47-48). It followed its earlier decision in the same case in CIT vs. Karnataka Urban Infrastructure Dev. and Finance Corporation (2006) 284 ITR 582 (Karn.). Hon'ble Patna High Court Infrastructure Devel. Authority vs. CIT & ORS (2010) 321 ITR 278 (Patna) It was held that there is merit in the claim of the assessee that interest income over money belonging to the Govt., cannot be subjected to income-tax or TDS by the IT authorities since petitioner was acting as the nodal agency of the State. (copy already filed with the appeal petition - page No.49-51) Hon'ble Income Tax Appellate Tribunal Ahmedabad Gujarat Urban Dev. Co. Ltd. vs. Asst. CIT, Gandhi Nagar Has upheld the view that interest earned from funds received by a nodal agency from the Govt. for investment in infrastructure projects is to be treated as a capital receipt. (copy of the brief extract of the above decision has been already with the appeal petition - page No. 52-56). It may be noted that the Hon'ble Tribunal has followed the ruling of High Court of Gujarat in the case of CIT (II) vs. SAR Infracon Pvt. Ltd. (2014) (3)(TMI 728Guj. HIC) in coming to the above conclusion. Chen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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