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TMI Blog2024 (10) TMI 644X X X X Extracts X X X X X X X X Extracts X X X X ..... red that it falls within the term State . We are in agreement with the same to hold the assessee to be a State, being an instrumentality / agent of the State, thereby resulting in its interest income earned on fixed deposits not chargeable to tax. Further, we note that clause (2) of Article 289 provides an exception and authorises the Union to impose a tax in respect of the income derived by the Government of a State from trade or business carried out by it or on its behalf. In this respect, it is undisputed fact that ld. Assessing Officer has himself assessed the interest income on fixed deposits under the head income from other sources . The said interest income thus, cannot be said to be derived from trade or business carried out by the assessee. Accordingly, clause(2) of the Article 289 is inapplicable. Since the assessee is held to be a State, or a surrogate of the State or an agent, performing the functions of the State and /or on behalf of the State of Maharashtra, whereby its income is not chargeable to tax within the meaning of clause(1) of the Article 289, all the other grounds of appeal raised by it in Form no.36 including the revised one and other additional grounds are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellate order of ITAT. 3) That Assessing Officer has in view of the facts and circumstances of the case, erred in not allowing interest on borrowed funds against the interest on FD with banks u/s 57 of The Income Tax Act, 1961. 4) That in view of the facts and circumstances of the case, the AO/CIT(A) has erred on facts and in law in restricting the allowance at Rs 1,72,15,048 as against the correct amount of Rs. 8,87,83,570/- claimed by the Assessee. 5) That without prejudice, the AO/CIT(A) has erred in law and in fact in not allowing deduction of interest paid, in case the interest on FDRs is being treated as Income from Other Sources. 6) That the AO/CIT (A) has erred in facts and in law in holding that the Assessee failed to prove nexus between the borrowed fund and fixed deposit. Assessing Officer has failed to appreciate that aforesaid investment of fixed deposits have been made out of the funds borrowed from banks. 7) That observation and findings of the learned Assessing Officer are incorrect and are based on surmises and conjectures and cannot be justified by any material on record. 8) That on the facts and in the circumstances of the case, the AO has erred in l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, the principle of 'Proportionate Theory' ought to have been applied by apportioning the 'interest expense on borrowed funds' towards *interest income on Fixed deposits' based on the proportion of the 'investment in fixed deposits' to the 'Total Assets sourced from common pool of funds'. D. Additional Ground of Appeal under Rule 11 of ITAT Rules, vide letter dated 27.05.2024 4) On facts and circumstances of the case, the addition of interest income of Rs. 10,56,49,189/- earned on Fixed Deposit ought to have not been made as the assessee is a State by itself or a surrogate of the State or an agent, performing the functions of the State and/or on behalf of the State of Maharashtra within the meaning of Article 12 r.w. clause (1) of Article 289 of the Constitution of India and that the said interest income is not derived from any trade or business carried on by the assessee. 2.2. From the above, we note that grounds of appeal, in the appeal by Revenue essentially relate to fulfilling the conditions to Rule 46A of the Income Tax Rules, 1962, thereby denying the ld. Assessing Officer for the reasonable opportunity of examining the same. 2.3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round no.4, under Rule 11 of the ITAT Rules. While raising this additional ground, assessee has submitted that it has received orders for various years in its own case, passed by the Co-ordinate Bench wherein it is affirmed that assessee is a State by itself or a surrogate of the State or an agent, performing the functions of the State and/or on behalf of the State of Maharashtra within the meaning of Article 12 of the Constitution of India read with clause(1) of Article 289. Therefore, the assessee contends that the interest income earned by it on fixed deposits which has been added under the head "income from other sources" and not derived from any trade or business carried out by the assessee, cannot be added in the hands of the assessee. It is contended by the assessee that it is a legal ground which goes to the root of the matter and no fresh investigation is required in respect of the same. Assessee relies on the decision of the Hon'ble Supreme Court in the case of National Thermal Power Company Ltd. (1998) 229 ITR 383(SC) and Jute Corporation of India (1991) 187 ITR 688(SC), wherein it is held that legal grounds can be raised at any stage of the proceedings. Before we take u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is in appeal before the Tribunal. 5. In the back drop of the above stated facts and contesting on the additional ground no.4 referred above, claim of the assessee for its nontaxability is on the strength of the Article 289 of the Constitution of India, since its activities are akin to that of the State or any agent of the State. It was submitted that this ground was not raised before the authorities below, but the plea of the assessee can be appreciated on the strength of the statute under which it has been set up by the State legislature which does not require any long-drawn investigation of fresh facts. By this ground, assessee has made a point that it must be considered as State or an agent of the State so as to fall within the prescription of Article 289(1) of the Constitution of India, for which examination of the statute under which it is constituted is to be examined along with the objective and the activities undertaken by it. 5.1. In the course of hearing, reliance was placed on the decision of Co-ordinate Bench of ITAT, Mumbai in assessee's own case in ITA No.3682/Mum/2017 for AY 2012-13, dated 15.03.2024 which in turn placed reliance on another decision in assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. (3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of Government." 6.1. From the above, we note that Article 289 exempts state income or property from taxation. On plain reading of above article, it is clear that Union can (i) itself impose or authorize to impose (ii) any tax to such extent, as parliament may by law provide (iii) in respect of a trade or business of any kind carried on or on behalf of Government of a state. Further, Article 289 (2), which is the exception to 289(1), it is important to note that parliament by law provide to tax the property or income in relation to only trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. 7. Further, a bare perusal of Article 12 of the Cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... body or organisation falls within the criteria as laid down by the Hon'ble Apex Court, it can be considered that it falls within the term "State". 8. With the above understanding, we look at the status and structure/set up of the assessee. The assessee, Maharashtra Airport Development Company Limited ('MADC') was constituted as a company under the Companies Act, 1956 in the year 2002 by the Government of Maharashtra ('GoM') as a special purpose company to develop Multimodal International Hub Airport at Nagpur ('MIHAN') and aviation infrastructure in the State of Maharashtra to provide the regional air connectivity and operationalizing certain government schemes. MADC is governed under the Maharashtra Regional and Town Planning Act, 1966 (for short, "MRTP Act") and as per section 160 of MRTP Act, assessee shall be dissolved once the purpose of the GoM is achieved and from such date, all properties, funds and dues vested in MADC shall vest in or be realisable by the State Government. 8.1. The main objects of MADC as per clause III (A) of the Memorandum of Association is to design, plan. construct, erect, build, remodel, repair, execute, develop, ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are owned and controlled by Government of Maharashtra; that the entire management and functional control of the assessee company is that of Chief Minister of Government of Maharashtra and all other board persons are senior officers of the State Government of Maharashtra; that grant-in-aid was received by the assessee company from Government of Maharashtra in order to carry out statutory functions and its activities are for the development of the state in general and for the benefit and welfare of the general public in particular; that it is also not in dispute that the assessee company is appointed by the State Government as a special planning authority under section 40(IB) of the Maharashtra Regional Town Planning (MRTP) Act, 1966; that it is also not in dispute that the assessee company being a special planning authority is required to carry out the work of development and disposing of land in the notified area as an agent of the state. 24. In the backdrop of the aforesaid undisputed facts, we are of the considered view that the assessee company being a wholly owned company of the State of Maharashtra to carry out/execute the work of development of land acquisition, deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e State Government, and thereupon, such corporation or company shall, in relation to such area, be declared by the State Government by notification in the Official Gazette, to be the New Town Development Authority for that area." viii) that the co-ordinate Bench of the Tribunal in case of City and Industrial Development Corporation of Maharashtra Ltd. vs. ACIT (2012) 25 taxmann.com 333 (Mum.) while deciding the identical issue in case of City and Industrial Development Corporation (CIDCO) which is also a subsidiary company under the control and supervision of State Government into business of construction of residential and commercial structures as well as development of infrastructure in towns and any development project completed by the CIDCO was held to be an agent of the state government. And as such its income cannot be assessed as business income in the hands of the CIDCO. ix) that like CIDCO the assessee company is also wholly owned company of State of Maharashtra which is into land acquisition, development of airports, repair and maintenance of airports and as such receiving of grant-in-aid from Government of Maharashtra by the assessee company being an agent of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue that when the assessee company itself is paying taxes on its business income the grant-in-aid received by the assessee on which profit is to be earned is also business income is not sustainable in view of what has been discussed in the preceding paras. xv) that even Article 289(1) of the Constitution of India itself says about the income from trade etc. but the grant-in- aid received by the assessee company from State of Maharashtra for the purpose of land acquisition, development of airports, repair and maintenance of airports is not a trade activity, hence not taxable to the income tax. 9.1. Thus, from the perusal of the above, we note that it has been held that the assessee is an agent of the State of Maharashtra, amenable to immunity as per Article 289(1) of the Constitution of India. 9.2. We also take note of the decision of Co-ordinate Bench of ITAT in the case of Maharashtra Labour Welfare Board vs. DCIT in ITA No.137/Mum/2023 dated 25.09.2023, wherein the assessee was held as a State, within the meaning of Article 289 of the Constitution of India, being an instrumentality or an agency of the State and thereby the interest earned on the FDRs was held to be exempt. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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