Vildirect: IncomeTax-caselaws-2014-VIL-913-ITAT-AHM

2014-VIL-913-ITAT-AHM

Income Tax Appellate Tribunal AHMEDABAD

ITA No.2549/Ahd/2013

Date: 18.07.2014

GUJARAT STATE POLICE HOUSING CORPORATION LTD

ACIT,

BENCH

MUKUL KUMAR SHRAWAT,J.

JUDGMENT

This is an Appeal filed by the Assessee arising from an order of the ld. CIT(A), Gandhinagar, dated 02.09.2013. The Appellant has raised one issue in respect of an addition pertaining to interest income of Rs. 20,42,86,950/-. However in respect of this single issue, the assessee has raised following grounds:

"1. The order passed u/s.250 on 2-9-2013 for A.Y.2010-11 by C1T(A)-GNR Ahmedabad upholding the addition in respect of interest income of Rs. 20,42,86.950/- made by AO is wholly illegal, unlawful and against the principles of natural justice.

1.2 The Ld. C1T(A) has grievously erred in law and or on facts in not considering fully and properly the submissions made and evidence produced by the appellant with regard to the impugned addition.

2.1. The Ld. CIT(A) has grievously erred in law and on facts in confirming that the interest income of Rs. 20,42,86,950 belonged to the appellant-Corpn.

2.2 That in the facts and circumstances of the case as well as in law, the Ld. CIT(A) ought not to have upheld that the interest income of Rs. 20,42,86,950/- belonged to the appellant-Corpn.

3.1 The Ld.CIT(A) has erred in upholding that the interest income of Rs.20,42,86,950 was chajgeable in the hands of the appellant-Corpn."

2. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) dated 24.12.2012 were that the assessee is in the construction activity for the project of Police Department. On perusal of income and expenditure account, it was noted by the AO that the assessee had shown an income of Rs. 21,30,95,206/- which comprises of mainly an interest income of Rs. 20,42,86,950/- received on ICD. However, as per the statement of income 'Nil' return was shown. The assessee was issued a show cause notice that why the interest was not to be added in the taxable income. The assessee's main reply was that the corporation is a wholly owned government company and a nodal agency for carrying out construction and maintenance for Home Department, Government of Gujarat. It was further explained that any income received such as interest income, tender fees were credited in the respective accounts, but transferred at the end of the year in the project cost by reducing the project cost. The project cost is finally transferred to the government account. It was also explained to AO that the parking of surplus fund was also done as per the directives of the Government; therefore, it was kept with GSFS. There was a standing instruction of Finance Department, Government of Gujarat to invest the surplus fund with GSFC.

3. However, the AO was not convinced and according to him there were systematic investment in FDRs for a long period of two years. The assessee was aware at the time of keeping money in FDR that there was surplus fund available on which interest income could be earned. The AO has also mentioned that there was no option in the "grant account" for interest income, which means that interest was not a part of the grant of the Government. The deposits were kept in the name of the assessee and the interest was collected in the accounts of the assessee. The AO has given following reasons to assess the interest income in the hands of the assessee:

"1) FDRs were kept for a long period of two years in almost all cases i.e. Deposit No.16355 was kept on 5/4/2007 and its maturity date is 30/03/2009. Similarly FDR of 16356 was kept on 05/04/2007 which is having due date of 06/04/2009. Thus FDRs are kept for two years which cannot be termed as parking of surplus funds of unused grants. This money was intented as not to be used for a long period. This is a systematic investment in FDRs. When the FDR were kept it were kept for a long period of two years which means that at the time of keeping FDR it was known that it was a long term surplus funds available with the company.

2) Schedule 2 of printed balance sheet printed on page no. 18 shows status of different grants. There is no addition in the Grant account on account of interest this" means that interest is not a part of grant as it is not included in grant as closing balance of the grant. The relevant Schedule is reproduced on subsequent page.

3) All the deposits are kept in the name of assessee and all credits of interest is received by the assessee.

4) All expenses shown under income & Expenditure account are paid from respective grant account and are not adjusted against income. Hence question of allowing expenses against income does not arise."

3.1 The assessee has placed reliance upon the decision of Hon'ble Karnataka High Court in the case of CIT and Another Vs. Karnataka Urban Infrastructure, 284 ITR 582 (Karnataka).

4. The AO has further noted as follows:

"The assessee received grant which is parked with GSFS, GSFS pays interst and claims interest as expenses. GSFC uses this amount for giving loan to another Government undertaking and received interest on that and shows it as income. The Government undertaking which has taken loan from GSFS claims interest as expenses.

Thus in a process interest expenses are claimed as expenses two times.

(i) By GSFS and

(ii) By other Government undertaking who takes loan from GSFS.

While Income is offered only in one hand i.e. in hands of

(i) GSFS Thus Government funds are routed through GSFS in such a way that it enables one Government entity to claim interest expenditure and thereby reduce its tax liability without increasing tax liability of another Government entity. Thus entire income received as interest from GSFS remains out of tax net which is required to be added."

5. The AO has given a tabulation of the interest income and thereafter has calculated the interest income at Rs. 20,42,86,950/- as the taxable income in the hands of the assessee. Being aggrieved the matter was carried before the First Appellate Authority.

6. Before learned CIT(A), it was reiterated that the assessee is a Government entity and worked as a nodal agency for implementing various projects. He finds no merit in the explanation of the assessee on account of the following reasons:

"i) The appellant is a separate entity from Government of Gujarat and working as a Nodal Agency for implementing various projects for which various grants are received by the appellant during the year which are parked by the appellant in GSFS and the same were placed in the form of FDRs from 1 month to 15 months in the name of the appellant on which the appellant has earned total interest of Rs. 20,42,86,950/-. On the one hand the corporation is paying interest on borrowings which is being debited as an expenditure and on the other hand the income earned as interest income is not being offered for taxation and transferred to WIP for appropriation under the head Surplus Funds.

ii) It is also a fact that the money is being parked in GSFS on the directives of Government of Gujarat which is also a separate limited entity and taxable under the provisions of Income-tax Act and GSFS has been debiting Rs. 20,42,86,950/- in its balance sheet as a payment made to Gujarat State Police Housing Corporation Ltd and not to Government of Gujarat. Hence, it is a: natural principle under the Income-tax Act that if an amount is debited at one side, it has to be credited on the other side in the same manner. In the case of GSFS, it is claiming the interest as a deduction which is required to be taxed in the hands of Gujarat State Police Housing Corporation Ltd.

(iii) Though Gujarat State Police Housing Corporation Ltd got various directives through various letters of Addl. Secretaries and secretaries are on record on which basis the appellant has acted upon for placing the money as well as utilisation and treatment of surplus money, which are mere directives of the Government of Gujarat but not on the basis of any legislation which is overriding the provisions of Section 56 of IT Act, 1961. The fact is that there is an income of Rs. 20,42,86,950/- as interest earned and brought in the P&L account of the appellant but ultimately transferred to the WIP account on the directions of Government of Gujarat which is not permissible under any provisions of the Income-tax Act."

7. From the side of the assessee, learned AR, Mr. S.N. Devitia has given a synopsis of the case as under:

"The brief facts of the applicant's case are that the applicant is a a wholly- owned Govt. Company and acting as Nodal Agency for carrying out various types of construction, maintenance and repair work for Home Dept., Govt. of Gujarat, At present, its main activity is to monitor the funds and construction of residential/non-residential buildings for police/jail dept. The Central and State Government funds to the appellant for implementing the aforesaid objects. The money so received from the Govt. are parked by the appellant with Gujarat State Financial Services (for short "GSFS) and banks till the same are required for disbursement or expenditure. The buildings so constructed by the appellant corpn., belong to the Govt. and even no charges are recovered by the Corporation for acting as Nodal Agency for these activities. It is working as a Non Profit Organization and the entire income and cost are charged to the concerned projects.

2.1 During the course of asstt. proceedings the AO noticed that the appellant- Corporation had shown interest income of Rs. 20,42,86,950 on ICD placed with GSFS which was not offered to tax but transferred to "work-in- progress/work completed". The appellant vide letter dt. 6-12-2012 explained that the parking of funds was done in accordance with the directives of Govt. and interest income was capital receipt. Refer to GR No.JNV-1099-5233-A dated 31.12.1999 of Finance Dept. of Govt. of Gujarat (P. 6-7 of PB). However, the AO rejected the claim of the appellant mainly on the ground that the entire interest income from GSFS would remain out of tax net and it was a parking of funds in the name of the appellant-corporation so that the said income was chargeable to tax.

2.2 Being aggrieved, the appellant preferred appeal before the CIT(A) who confirmed the impugned addition for the identical reason and also distinguished the case law relied upon by the appellant. 2.3 The appellant is now in appeal before the Hon. Tribunal and contends that the impugned addition is wholly unjustified both on facts and in law as under:-

(i) Firstly, the perusal of the G.R. dated 1.9.1988 of Govt. of Gujarat (See P, 1-2 of PB) shows that it was established to act as a Nodal Agency for implementation of the works of Police Housing, Both Central & State Govt. were to provide requisite finance for implementation of the said project. Since the objective to create the corporation was to have an autonomous body for the works of police housing, the funds were placed at its disposal and utilized for construction maintenance and repairs of the residential and non- Gujarat State Police Housing Corp. Ltd. Vs. ACIT, GNR Circle, Gandhinagar For A.Y. 2010-11 residential buildings of Police and Jail department. Thus, it was established for non-profit motive and the interest income on ICD with GSFS though in the name of corporation was to be applied only for the said purpose. The whole of the funds belonged to the State Exchequer and the appellant was only to channelize them for the objects of Police Housing. The money so received till they were utilized, were to be parked with GSFS as per the order dated 31.12.1999. Therefore, the interest income earned from ICD with GSFS did not belong to the appellant corporation but to the Government. It was holding the funds received from Government including the interest income earned from parking with GSFS in Trust and there was an overriding obligation to hold and utilize for Police Housing on behalf of the State Government. The interest income did not reach to the appellant as its own income so as to be chargeable in its hands, It may be stated that insofar as the buildings so constructed by the appellant, it has now been settled position that the same do not belong to the appellant-Corporation as held in its own case for A.Y.I996- 97 in Tax Appeal No. 1103 of 2009 by decision dated 1.3.2011 of Hon. Gujarat High Court. (P. 23-25).

(ii) Secondly, the appellant Corporation has consistently followed the practice of accounting the funds received from Government and Others as current liability in the Balance Sheet and the construction work as current assets and not as fixed assets. Even, the chart enclosed herewith showing the application of interest income earned during the year also proves that the said funds have been utilized towards construction work as works completed or work-in- progress which has been shown in balance sheet. The note appended by way of accounting practice to the audited balance sheet, proves that the appellant is carrying on activities on no-profit no-loss basis and the funds are transferred / utilized for earmarked activities/purposes. This practice is being followed since inception and it has been accepted by department so that following the Rule of Consistency, the interest income ought not to have been held as belonging to the appellant Corporation and chargeable in its hands,

(iii) Thirdly, the contention of AO that the funds were parked for long term and in its name is also not tenable because the unutilized funds have to be parked as per the directives of the State Government. The perusal of the chart of interest income (P. 4-5 of PB) shows that the deposits were placed with maturing at regular intervals and in case in case of need, the same have also been withdrawn prematurely. The entire conduct of the appellant corporation right from receiving the funds to the disbursement and parking these funds shows that it has not acted as its own funds but on behalf of the Govt. and subject to the directives of the Govt.

Moreover, the contention of both the lower authorities that the GSFS would claim expenditure and income would be non-taxable with appellant is not tenable because it is now well-settled that in order to find out whether the receipt is capital or revenue, one has to see what it is in the hands of receiver and not its nature in the hands of the payer. The nature of receipts is determined entirely buy its character in the hands of receiver and the source has no bearing on this question. (Refer to CIT Vs. Kamal Behari Lal Singha) [82 ITR 460] (SC).

(iv) Fourthly, the case law relied upon by the appellant before the CIT(A) has been distinguished on incorrect reasoning. Say for example, the decision in the case of Karnataka Urban Infrastructure Development & Fin. Corpn. (284 ITR 582) has been distinguished stating that there was no such Mega City Scheme launched by the State Govt. Similarly, the decision in the case of Gujarat Power Corpn. (354 ITR 201) has been distinguished by stating that there was specific stipulation for utilization of money, however, CIT(A) has escaped the fact the funds were placed at the disposal of appellant- corporation for specific purpose and they were so utilized. Hence, the impugned addition should be deleted."

8. We have heard both the sides. We have been informed that for A.Y. 1996-97 an appeal was filed by the Revenue Department before Hon'ble ITAT. Hon'ble ITAT 'B' Bench Ahmedabad in ITA No.2219/Ahd/2008 vide an order dated 30th September, 2008 has taken a view in respect of income from house property that there was no justification for the impugned addition on the notional rental value of the flats constructed by the assessee. It was also held by the Respected Co- ordinate Bench that there was no consistency of approach by the Revenue Department. The deletion by learned CIT(A) was therefore upheld.

8.1 Now before us, an order of Hon'ble Gujarat High Court pronounced in the case of Sar Infracon Pvt. Ltd. (Tax Appeal No.828 of 2013) wherein vide an order dated 30th of October, 2013 the view taken is as under:

"5.1 It appears that the assessee received grant from the Central Government to the tune of Rs. 16.70 Crores and a sum of Rs. 5.56 Crores as contribution/grant from GHB. The assessee did not utilize the said grant, however, deposited the said sum in the Bank of India as fixed deposit and earned interest of Rs. 1,25,44,938/-. It appears that the Bank of India deducted TDS of Rs. 25,59,075/- on the said interest amount. The assessee claimed refund of Rs. 25,59,075/-, being the TDS deducted on the aforesaid amount of Rs. 1,25,44,938/- treating it as income, which prompted the Assessing Officer to initiate proceedings and issuance of notice under section 148 of the Act. The Assessing Officer has treated the aforesaid amount of Rs. 1,25,44,938/-received by the assessee by way of interest on the fixed deposit of Rs. 16.70 crores as well as on contribution received from GHB as income of the assessee and made addition of Rs. 1,25,44,938/- in the income of the assessee. The said order came to be confirmed by the CIT [A]. On appeal, the Tribunal by impugned order has directed to delete the addition of Rs. 1,25,44,938/- by holding that considering the letter issued by the Central Government releasing the grant and more particularly considering the condition that, the interest earned on the central grant already released would form part of the central grant limit of Rs. 50 Crores and considering the decisions of this Court in the case of Gujarat Municipal Finance Board v. Deputy Commissioner of Income-Tax [Assessment] [Supra] and in case of Gujarat Power Corporation Limited v. Income Tax Officer [Supra], the Tribunal has held that the aforesaid amount of Rs. 1,25,44,938/- earned by the assessee as interest on the fixed deposit of Rs. 16.70 Crores and Rs. 5.56 Crores received as contribution from Gujarat Hira Bourse cannot be said to be its income. Considering the condition imposed by the1Central Government, while releasing the grant in favour of the assessee, when the interest earned on the Central grant already released was required to be forming part of the Central grant, the learned Tribunal has rightly held that the interest earned on Rs. 16.70 Crores and contribution/grant received from GHB cannot be said to be the income of the assessee. As such, the issue involved in the present Tax Appeal is directly covered by the decisions of this Court in case of Gujarat Municipal Finance Board v. Deputy Commissioner of Income-Tax [Assessment] {Supra} and in case of Gujarat Power Corporation Limited v. Income Tax Officer [Supra].

6. Shri Manav Mehta, learned advocate appearing for the appellant-Revenue has as such tried to distinguish the facts by submitting that in the present case, the assessee itself claimed refund of the TDS deducted by treating the amount of interest as income, and therefore, the Tribunal has committed an error in not treating the amount of interest earned on the grant as income of the assessee. The aforesaid contention has no substance. What is important is whether the interest earned on the Central Government grant is to be treated as the income earned or not, and not what the assessee claimed. As stated hereinabove, in the letter of the Central Government releasing the grant, which provides a condition that the interest earned on the central grant already released would form part of the central grant limit of Rs. 50 Crores, the amount of Rs. 1,25,44,938/- being interest earned on the fixed deposit of Rs. 16.70 crores which was the grant received by the assessee from the Central Government cannot be said to be its income and the aforesaid sum, as per the condition of release of grant, the interest earned on the Central Government grant ie., Rs. 1,25,44,938/- in the present case is to be included as a part of the grant received from the Central Government.

7. Under the circumstances, as such, no error has been committed by the Tribunal in deleting the addition of Rs. 1,25,44,938/- made by the Assessing Officer, treating it as the income of the assessee."

8.2 There is one more order of the Hon'ble Gujarat High Court pronounced in the case of CIT Vs. Gujarat State Disaster Management Authority, order dated 18th July, 2011, wherein the view expressed was as under:

"As far as issue no.2 is concerned, the Tribunal has largely depended on judgment of Gujarat High Court in the case of Gujarat Municipal Finance Board (supra). As in the case of grant, it has held that the interest derives by investing the grant temporarily for interest is also not taxable. It did not confirm with the view of CIT(Appeals) that the assessee treated the grants given by the State Government as its income and therefore the interest earned by temporary investment of the grants cannot be exempted by holding that ratio in the said judgment is that any grant-in-aid cannot be considered as income and merely because the grant is treated as income by the assessee in its books, the interest does not become taxable."

8.3 Respectfully following these two decisions of the Jurisdictional High Court, we hereby hold that in a situation when the assessee had received the grant from the Government of Gujarat as a nodal agency for constructing the houses for the Police Department and received interest on the temporary parking of funds on the instruction of the Government, therefore, the interest so earned being part of the grant should not be taxed as income in the hands of the assessee. The alleged interest income was earned with an overriding charge that the same should not be the income of the assessee but part of the grant. Hence, we hereby reverse the view of learned CIT(A) and allow this ground of the assessee.

9. In the result, the Appeal of the Assessee is allowed.

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