BRAHMOS AEROSPACE THIRUVANANTHAPURAM LTD., V. THE ASSISTANT COMMISSIONER OF INCOME TAX

ITA/17/2018

AI Insights

The case involves BrahMos Aerospace Thiruvananthapuram Ltd, a subsidiary of BrahMos Aerospace, which appealed against the orders of the Income Tax Appellate Tribunal, Cochin Bench, concerning the taxability of interest income earned from Fixed Deposit accounts. These deposits were made from funds transferred by DRDO and ISRO for specific projects. The primary legal question was whether the interest income from these deposits should be considered as income of the assessee for tax purposes. The court examined the nature of the funds, the agreements (MoUs) between the assessee and the government departments, and the handling of the funds and interest by the assessee.

• Counselvise Citation: [2021] 140 COUNSELVISE.COM (IT) 752582 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 27-08-2021
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax v. Karnataka Urban Infrastructure Development and Finance Corporation, Commissioner of Income Tax v. Delhi State Industrial Development, Infrastructure Development Authority v. Commissioner of Income Tax (TDS), Vizhinjam International Seaport Ltd v. The Income Tax Officer, Ward 2(4), Trivandrum
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: CHRISTOPHER ABRAHAM; K M V PANDALAI
• Assessee Lawyers: JOSEPH MARKOSE; V MARKOS; ABRAHAM MARKOS; P G ABRAHAM; HARAN GEORGE; ISAAC THOMAS; RACHEL ABRAHAM
• Keywords: DRDO; Income tax appeal; Interest income; ISRO; Fixed Deposit Accounts; Custodian of Funds
• Section: 147; 148; 260A

Judgement Text

"“C.R.” IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM FRIDAY, THE 27TH DAY OF AUGUST 2021 / 5TH BHADRA, 1943 ITA NO. 15 OF 2018 AGAINST THE ORDER IN ITA 100/2016 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: BRAHMOS AEROSPACE THIRUVANANTHAPURAM LTD AIRPORT ROAD, CHACKAI BEACH P.O., THIRUVANANTHAPURAM - 695 007, [PAN:AABCK 2217K], REPRESENTED BY ITS MANAGING DIRECTOR, MR. RAMAN PRABHATH. BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.P.G.CHANDAPILLAI ABRAHAM SRI.HARAN THOMAS GEORGE SRI.ISAAC THOMAS SMT.RACHEL ABRAHAM RESPONDENT/S: THE ASSITANT COMMISSIONER OF INCOME TAX CIRCLE-1 (S), THIRUVANANTHAPURAM - 695 014. BY ADVS. SRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT SRI.K.M.V.PANDALAI, INCOME TAX DEPARTMENT THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 27.08.2021, ALONG WITH ITA.16/2018, 17/2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A. No.15, 16 & 17/2018 -2- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM FRIDAY, THE 27TH DAY OF AUGUST 2021 / 5TH BHADRA, 1943 ITA NO. 16 OF 2018 AGAINST THE ORDER IN ITA 102/2016 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: BRAHMOS AEROSPACE THIRUVANANTHAPURAM LTD AIRPORT ROAD, CHACKAI BEACH P.O., THIRUVANANTHAPURAM - 695007, (PAN:AABCK 2217K), REPRESENTED BY ITS MANAGING DIRECTOR, MR. RAMAN PRABHATH. BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.P.G.CHANDAPILLAI ABRAHAM SRI.HARAN THOMAS GEORGE SRI.ISAAC THOMAS SMT.RACHEL ABRAHAM RESPONDENT/S: THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE -(1), THIRUVANANTHAPURAM - 695014. I.T.A. No.15, 16 & 17/2018 -3- BY ADVS. SRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT SRI.K.M.V.PANDALAI, INCOME TAX DEPARTMENT THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 27.08.2021, ALONG WITH ITA.15/2018 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A. No.15, 16 & 17/2018 -4- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM FRIDAY, THE 27TH DAY OF AUGUST 2021 / 5TH BHADRA, 1943 ITA NO. 17 OF 2018 AGAINST THE ORDER IN ITA 101/2016 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: BRAHMOS AEROSPACE THIRUVANANTHAPURAM LTD., AIRPORT ROAD, CHACKAI BEACH PO, THIRUVANANTHAPURAM-695007. (PAN:AABCK 2217K), REPRESENTED BY ITS MANAGING DIRECTOR,MR. RAMAN PRABHATH. BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.P.G.CHANDAPILLAI ABRAHAM SRI.HARAN THOMAS GEORGE SRI.ISAAC THOMAS SMT.RACHEL ABRAHAM RESPONDENT/S: THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-1(1), THIRUVANANTHAPURAM.695014. OTHER PRESENT: I.T.A. No.15, 16 & 17/2018 -5- SC CHRISTOPHER ABRAHAM THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 27.08.2021, ALONG WITH ITA.15/2018 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A. No.15, 16 & 17/2018 -6- J U D G M E N T [ITA Nos.15/2018, 16/2018, 17/2018] S.V. Bhatti, J. Heard learned Senior Counsel Mr Joseph Markos and learned Standing Counsel Mr Christopher Abraham for parties. 2. BrahMos Aerospace Thiruvananthapuram Ltd, Thiruvananthapuram/Assessee is the appellant. The Assistant Commissioner of Income Tax, Circle-1(1), Thiruvananthapuram/Revenue is the respondent in the subject three appeals. 2.1 The appeals are at the instance of the assessee under Section 260A of the Income Tax Act, 1961 (for short, 'the Act'), being aggrieved by the rejection of its claim on the income from the nature of interest received by the assessee in DRDO/ISRO I.T.A. No.15, 16 & 17/2018 -7- accounts (for short ‘FD A/cs’). The details of the Assessment Years etc are stated in the following tabular form: Sl. No. Assessment Year & Date of Assessment Order Order of Commissioner of Income Tax Income Tax Appellate Tribunal ITA No. 1 2009-10; 30.03.2014 ITA NO.25/TVM/CIT(A), TVPM/2014-15 DT.06.01.2016 ITA NO.100/COCH/2016 DTD 1.12.2017 15/2018 2 2010-11; 21.03.2013 ITA NO.8/TVM/CIT(A), TVPM/2013-14 DT.06.01.2016 ITA NO.101/COCH/2016 DTD 1.12.2017 17/2018 3 2011-12; 27.03.2014 ITA NO.26/TVM/CIT(A), TVPM/2014-15 DT.06.01.2016 ITA NO.102/COCH/2016 DTD 1.12.2017 16/2018 2.2 The circumstances surrounding the controversy and the arguments on the fact and the law are substantially similar in all the three appeals. The learned counsel have treated ITA No.15/2018 as the lead case for referring to the circumstances, the conclusion recorded by the authorities under the Act and have stated that the other two appeals could be disposed of by I.T.A. No.15, 16 & 17/2018 -8- referring to the circumstances and contentions considered in ITA No.15/2018. ITA No. 15/2018 3. For the purpose of appreciating the case of the assessee on the interest earned from FD A/cs as non- computable income and the objections taken thereto by the Revenue resulting in the conclusions assailed in the appeal, we find it necessary to refer to a few circumstances about the assessee and the preceding circumstances enabling the assessee to receive the amount covered by the Fixed Deposit Receipts (FDRs). 3.1 The 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 I.T.A. No.15, 16 & 17/2018 -9- and NPO Mashinostroyenia (for short, ‘NPOM’) a State Enterprise of Russian Federation holding 49.50%. The holding company of the assessee, it is stated, is engaged in the strategic business of design, development and supply of Supersonic Cruise Missiles and other critical equipment and related systems for the Armed Forces of the Nation. 3.2 The assessee is engaged in the fabrication and supply of critical components and system requirements to various Defence establishments, ISRO, BARC etc which are finally required for the Defence, Space and Nuclear programmes of the Nation. The assessee claims to have served in many critical and strategic areas of the country like RFQ and TPM for BARC/IGCAR, Liquid Engines and Cryogenic Engine Systems and subsystems for ISRO. Briefly stated, the establishment, existence and continuation of the assessee are for the benefit of I.T.A. No.15, 16 & 17/2018 -10- Defence, ISRO, Department of Atomic Energy, and other Organisations of the Country in the strategic sectors. The Kerala Hitech Industries Ltd, a Kerala Government Undertaking, was engaged in job work for ISRO. The said Company has accumulated huge losses and the Kerala Government in the year 2007 handed over Kerala Hitech Industries Limited to the assessee. After the takeover of the facilities of Kerala Hitech Industries Limited at Thiruvananthapuram by the appellant, DRDO and ISRO have availed the services of assessee-company for establishing facilities at the premises of the assessee for the benefit and utility of respective organization. In the subject appeals, we are concerned with a sum of Rs.50 crores transferred or made available by DRDO and a sum of Rs.25 crores by ISRO to the assessee account, through its holding company, which were deposited in FD A/cs. I.T.A. No.15, 16 & 17/2018 -11- 3.3 In October 2008 a Memorandum of Understanding (MoU) between the DRDO, Ministry of Defence, Government of India and assessee were entered into. In terms of the said MoU the DRDO recognized/empowered the assessee to act as the implementing agent of DRDO in the Integrated Guided Missile Development Programme for achieving the indigenous capability to launch operational Missiles and support the Missile Programmes by manufacturing and delivering Motor Cases, Nozzles, Booster Motors, Control system Components, Reaction Control Systems, Propellant Tankages, Gas Bottles etc. Considering the strategic importance of the project and the role the assessee has undertaken to play as the implementing agent of DRDO in the Integrated Guided Missile Development Programme, DRDO had transferred Rs.50 crores to set up a I.T.A. No.15, 16 & 17/2018 -12- Missile Integration Complex at the factory premises of the assessee at Thiruvananthapuram. It is contextual to advert to the role of the assessee as custodian of funds under subject MoU to appreciate the case of the assessee and the Revenue with regard to the interest earned from FD A/cs. Article 5.4 of the MoU reads thus: “The Company may exercise the option to take the equipment at original value less depreciation (charged as per reducing balance method as per Companies Act, 1956; Schedule 14), on the mutual agreement after a period of 10 years after installation and commissioning of equipment.” (emphasis supplied) 3.4 DRDO in terms of MoU had transferred a sum of Rs.50 crores for utilization by the assessee as stipulated in the MoU. The letter dated 28.03.2008 of DRDO, Government of India, refers to maintaining a separate bank account of joint venture I.T.A. No.15, 16 & 17/2018 -13- company, and that the assessee shall maintain and render separate accounts of the Government funds committed under this sanction, which would be subject to audit by the C&AG. The holding Company vide letter dated 16.10.2008 transferred Rs.50 crores together with interest to the assessee. The holding company was called upon to conform to the requirement of maintaining separate accounts and the transferred fund will have to be accounted for. To complete the narration of the obligations under MoU with DRDO the following two dates are referred to. On 27.06.2016 the infrastructure provided by the assessee for and on behalf of DRDO was also taken over by the assessee. On 31.03.2017 the assessee returned to DRDO the balance unspent amount, together with interest, from Rs.50 crores transferred in favour of the Missile Integration Facility project during the Financial Year 2007-08 at BATL. I.T.A. No.15, 16 & 17/2018 -14- 3.5 On 11.06.2008 an MoU, between Vikram Sarabhai Space Centre (VSSC), ISRO and the assessee, was entered into enabling the assessee to act as implementing agent for the Satellite Launch Vehicle programme and Mars Orbit Mission of ISRO among other objectives. ISRO for the purpose of establishment of facility or enhancement of capabilities, of both technical and plant and machines, transferred Rs.25 crores to the account of the assessee. The conditions agreed between the assessee and the ISRO are substantially identical to the conditions with which the MoU was entered into between the assessee and DRDO in October 2008. Hence for brevity, we avoid referring to these conditions once again. Under the above said Memorandums of Understanding the assessee received in its account a sum of Rs.75 crores in the previous year ending on 31.03.2008. The assessee for better management of the funds kept at its disposal by DRDO/ISRO under separate accounts I.T.A. No.15, 16 & 17/2018 -15- deposited the said sum with nationalized banks. The assessee earned interest on the Fixed Deposit amount of Rs.75 crores kept and maintained by it as custodian of DRDO and ISRO. The account in the assessee books of account is separate and the deposit since is made by the assessee, the Banks have effected TDS and issued a TDS certificate in favour of the assessee during the Assessment Years – 2009-10, 2010-11 and 2011-12. 3.6 On 26.09.2009, the assessee filed tax return for the Assessment Year 2009-10 declaring total loss of Rs.1,21,56,832/-. The assessment was completed vide order dated 23.12.2011 determining Nil income. The Revenue initiated proceedings under Section 147 and issued notice under Section 148 to the assessee on the ground that the assessee has not offered as income the interest collected from Fixed Deposits accounts of the funds received from DRDO/ISRO Facilities. The interest I.T.A. No.15, 16 & 17/2018 -16- received in the subject Assessment Year is as follows: “(i) Interest on DRDO Facilities Fund : Rs.5,35,19,890 (ii) Interest on ISRO Facilities Fund : Rs.1,13,57,345 Total : Rs.6,48,77,235 ==============” The assessee, in response to the notice, stated that the funds from which the interest was realised belonged to the Departments of Government of India. The funds were received for creating facilities for the Departments. The funds earned interest. As per the MoU, the assets would belong to the respective Departments and not to the assessee-Company. The assessee, in required categorical terms, stated that the interest earned on Fixed Deposits is from the accounts of DRDO and ISRO Facilities, does not belong to the assessee. The interest shall not be treated as income of the assessee-Company. The Assessing Officer through Annexure-A order dated 30.03.2014 rejected the case of the assessee by recording the following findings: I.T.A. No.15, 16 & 17/2018 -17- “(i)The income appearing in the accounts is in the nature of interest only. (ii) The interest income so received is not an income which is exempt, hence, taxable. (iii) Against such interest income, TDS has duly been made. (iv) Assessee claimed credit for tax deducted by way of TDS. (v) Corresponding income on which credit is claimed does not form part of total income. (vi) Had the income belonged to ISRO/DRDO, it would have been deposited in the Govt. A/c directly. Considering the above parameters, it can be comfortably concluded that the income received by the assessee is the income of the assessee only and it should have been offered accordingly. In view of the same, interest income of Rs. 64877235/- is brought to tax accordingly.” 4. The assessee filed appeal before the Commissioner of Income Tax and the Commissioner dismissed the appeal. The I.T.A. No.15, 16 & 17/2018 -18- assessee aggrieved thereby filed ITA No.100/Coch/2016 before the Income Tax Appellate Tribunal, Cochin Bench. The Tribunal, through its order dated 01.12.2017 in Annexure-D, dismissed the appeal. Hence the Tax Appeal at the instance of the assessee. 4.1 The Tribunal paraphrased the conclusions recorded by the Assessing Officer and the Commissioner of Income Tax and further recorded that the MoUs, between the Departments and the assessee, do not direct or enable assessee to deposit the surplus funds of the Government Departments in the Fixed Deposit accounts, and a stipulation that the interest earned on these deposits would belong to ISRO and the DRDO. The Tribunal referred to a situation that there could have been a case of diversion of income by an overriding title, i.e., the title of DRDO/ISRO with regard to the interest. Further, there is no I.T.A. No.15, 16 & 17/2018 -19- diversion of interest income by an overriding title in favour of DRDO/ISRO. The record discloses that the interest received by the assessee was shown as income in the books of account of the assessee-Company and tax deducted at-source was claimed by the assessee in the returns of income filed by the assessee for the respective Assessment Years. The Tribunal, to appreciate whether the interest income is computable to the assessee or DRDO/ISRO observed that if at all it is the income of DRDO/ISRO the interest ought to have been directly credited to the accounts of DRDO/ISRO. The Tribunal noted that the funds, together with the interest, have been returned to DRDO may not hold good for the return of funds together with interest was subsequent to the previous year in which the interest was earned by the assessee and, therefore, constitutes the income of the assessee. With the above consideration and conclusion, the Tribunal dismissed the appeal filed by the assessee. I.T.A. No.15, 16 & 17/2018 -20- 5. Senior Advocate Mr Joseph Markos makes no bones in assailing the orders under appeal. He argues that there are two ways to look at the findings recorded by the Tribunal and the authorities under the Act, firstly, convince the Court on the inherent illegality or infirmity in the orders in Annexures-A, B and D, and, another way is to convince the Court, for the purpose of Section 260A of the Act, that the interest income received by the assessee was not forming part of the income of the assessee under any one of the sources and computation of interest as income is illegal. For the said purpose it is stated that the undisputed documents relied on by the assessee, if are independently considered by this Court, then a conclusion is inevitable that the funds and the interest earned on the FD A/cs do not belong to the assessee in any other manner. The recognition of entries in books of account of the assessee are relevant, but is subject to acceptable and irrefutable material I.T.A. No.15, 16 & 17/2018 -21- the assessee could demonstrate to claim exclusion of interest income from computation of the assessee. The consideration of interest income by the Tribunal and authorities have gone by form, but not by substance of the matter in issue. He argues that the assessee is discharging a few of the functions entrusted to it by DRDO/ISRO, Government of India. The functions discharged by the assessee are matters of security and secrecy. The projects entrusted to the assessee need to be taken up and implemented as desired by the respective departments of the Government at short notice also. With a view to avoiding bureaucratic delays in sanction of amount, resulting in delay in execution of the project etc, the amount has been kept with or transferred to the assessee as a custodian of the amount of the respective Government Departments. The facilities executed or are to be executed by the assessee are for the national benefit and importance. The amount in FD A/cs was and would be the I.T.A. No.15, 16 & 17/2018 -22- amount of DRDO/ISRO, and the sanction in favour of assessee is to utilise the transferred fund for the execution of projects or DRDO/ISRO and utilisation of fund since is on Treasury account, was made subject to C&AG audit. 5.1 Ex post facto, it is a matter of accounting that the amount together with interest has been returned to the respective Departments. Hence, he argues that the assessee under the respective MoUs was under obligation to maintain separate accounts and return the balance unspent amount together with interest to the respective Departments. The assessee has accordingly returned the balance unspent amount to DRDO/ISRO. The assessee is called upon by the respective Departments to claim refund of TDS, for neither DRDO nor ISRO, being Government Departments, is not under any obligation to pay income tax. The refunded TDS was directed to the returned I.T.A. No.15, 16 & 17/2018 -23- to the respective Departments. Therefore, he contends that after the entire amount was returned, upon receipt from the Department the income tax if is levied on the assessee, the assessee would be paying tax on an element which does not constitute income from any standpoint of view and also that the assessee would be made to pay through its nose towards income tax for unearned income. The findings are more recorded without appreciating the niceties involved right from the day on which the amount has been entrusted as a fund in favour of the BATL-holding Company and, therefore, in favour of the assessee. 5.2 The findings recorded by the Tribunal and the authorities are beyond the admitted circumstances of the case and suffer from patent illegality and failure to appreciate the MoU etc., is a substantial question of law. By referring to the I.T.A. No.15, 16 & 17/2018 -24- overriding title adverted to by the Tribunal he argues that the concept of overriding title does not arise in the fact situation of the present appeal. For, throughout the implementation of the project, the asset which is acquired for the establishment of the facility, the fund received from DRDO/ISRO, the residue, everything continues to be with the assessee. Till the exercise of the option for purchasing the assets/facilities, as provided for under the MoUs, the DRDO/ISRO were the owners of capital assets and the funds in FD A/cs. Upon transfer of the facilities for consideration, the assets became the capital assets of assessee. The transfer of interest periodically does not arise, inasmuch as what has been agreed is a continuing project at the hands of the assessee. He prays for setting aside the orders under appeal and relieve the assessee from illegal and avoidable income tax liability imposed by the orders under appeal. He cites the decision in Commissioner of Income Tax v. Karnataka I.T.A. No.15, 16 & 17/2018 -25- Urban Infrastructure Development and Finance Corporation1 in support of his argument that once it is not in dispute that the funds belong to the State exchequer and the assessee had to channelize them for the objects for which the funds are kept at the disposal of the assessee, the interest accrued on the bank deposits made by the assessee could not be treated as income of the assessee or could be subject to computation of income. 5.3 He further points out the inconsistency of approach in the order of the Tribunal under appeal, by relying on the judgment in ITA No.07/Coch/2016 of ITAT Cochin in the case of Vizhinjam International Seaport. In ITA No.07/Coch/2016 the Tribunal has appreciated substantially similar circumstances, and the addition of income made by the Assessing Officer received by the assessee towards interest from deposits made of the funds received from the Government was held as 1 (2006) 284 ITR 582 I.T.A. No.15, 16 & 17/2018 -26- unsustainable. In spite of the said decision being brought to the notice of the Tribunal, the Tribunal ought not to have taken the view assailed in the appeals. 4. Learned Standing Counsel Mr Christopher Abraham sustains the orders under appeal by inviting our attention to the very conclusion recorded, on one hand by the primary and appellate authorities and on the other confirming order by the Tribunal in continuation thereof. He does not dispute that the assessee is the subsidiary of BATL and the funds have emanated from DRDO and ISRO, Government of India. According to him, the recognition of interest in the books of account of the assessee, as has been rightly held by the Assessing Officer, could make all the difference for determining whether interest income constitutes computable income of the assessee or not. The TDS was received by the assessee, the Tribunal has taken I.T.A. No.15, 16 & 17/2018 -27- note of the effect of the concept of overriding title, and for all the reasons recorded in the orders under appeal, he prays for dismissing the appeal. 5. The appellant raises the following substantial questions of law: “1) Whether on the facts and in the circumstances of the case, the 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? 2) Whether on the facts and in the circumstances of the case interest on deposits out of funds provided by the DRDO/ISRO, both Government of India Departments, I.T.A. No.15, 16 & 17/2018 -28- for specific projects is taxable? 5.1 At the outset let us refer to the decisions relied on by the assessee and examine to what extent the ratio laid down in those cases would be applicable to the case on hand, and have persuasive force on us in appreciating the fact in issue between the parties. In the Karnataka Urban Infrastructure Development and Finance Corporation (supra), the Karnataka High Court was dealing with the order of Tribunal in ITA No.868/Bang/2000 dated 03.11.2004 setting aside the orders of Assessing Authority as well as the CIT (Appeals) holding that the income earned by the assessee therein to the tune of Rs.4,66,75,814/- cannot be treated as income liable to tax under the Act at the hands of Karnataka Urban Infrastructure Development and Finance Corporation/assessee. The assessee in the said decision is M/s.Karnataka Urban Infrastructure Development and Financial Corporation, a fully owned State Government I.T.A. No.15, 16 & 17/2018 -29- Company. The assessee was appointed as a nodal agent to implement the mega-city scheme worked out by the Planning Commission of the Ministry of Urban and Employment for the development of urban infrastructure in Bangalore city. The Central Government provided funds to the assessee for implementing the scheme. The money so received from the Government of India was parked by the assessee in various bank deposits during the un-utilized period as has been done by the assessee in the present case. The FDRs earned interest and the said interest was included in the income of the assessee. The Division Bench taking note of the undisputed and admitted circumstances in the said case, observed that the assessee is a nodal agency for the implementation of a mega-city scheme worked out by the Planning Commission. The funds are made available by the State and the Central Governments. The funds are utilized by the nodal agency as per the schemes approved by I.T.A. No.15, 16 & 17/2018 -30- the Central and State Governments. In the implementation of the work as the nodal agency, there is no profit motive as the funds entrusted and the interest accrued therefrom and deposits in banks though in the name of the assessee have to be applied only for the purpose of welfare of the Nation/State as provided in the guidelines. After all, the interest earned was again utilized for the implementation of the mega-city scheme as permitted under the scheme. Therefore, while computing the total income of the assessee for any previous year, the interest accrued on the bank deposits cannot be treated as income of the assessee as the interest is earned out of the money given by the Government of India and the Government of Karnataka only for the purpose of implementation of mega- city scheme. By independently examining the circumstances and appreciating the finding recorded by the Tribunal, the Division Bench dismissed the appeal filed by the Revenue. The I.T.A. No.15, 16 & 17/2018 -31- decision appreciates the claim of assessee that the substance of the receipt of transferred funds is an aspect for reckoning. 6. The decision of Karnataka Urban Infrastructure Development and Finance Corporation was relied on by another Division Bench in Commissioner of Income Tax v. Karnataka Urban Infrastructure Development and Finance Corporation2. Commissioner of Income-Tax v. Delhi State Industrial Development3 is a case where the development authority treated the interest earned from the deposits made by the assessee of the funds transferred by the Government as income of the assessee. The assessee invested the funds in banks and earned interest. Delhi State Industrial Development, as assumed by the Revenue in the case on hand, separated the fund from interest earned thereon and claimed interest as income from other sources. The C&AG audited the accounts of the assessee and pointed out the mistake in treating 2 (2009) 315 ITR 301 (Karn) 3 (2007) 295 ITR 419 (Del) I.T.A. No.15, 16 & 17/2018 -32- the interest on deposits as income of assessee and advised the assessee that the funds made available by the Government do not belong to the assessee, therefore the interest earned by investing surplus funds in the bank do not belong to the assessee. The assessee, i.e., Delhi State Industrial Development, has rectified the mistakes and has remitted the interest to the respective accounts of the Government. The Revenue treated the interest as income earned by the assessee and made the assessment. The view taken by the Department was set aside by the ITAT, Delhi Bench and the same was challenged by the Revenue before the Delhi High Court. The Delhi High Court confirmed the view taken by the Tribunal and dismissed the appeal filed by the Revenue. 7. Another interesting case is Infrastructure Development Authority v. Commissioner of Income Tax (TDS)4. The lis, in this 4 (2010) 321 ITR 278 (Patna) I.T.A. No.15, 16 & 17/2018 -33- case, arises in a writ petition filed by the implementing agency for appropriate orders including to set aside the order made by the Commissioner refusing to grant relief under Section 197 of the Act. The Patna High Court after considering the role of the assessee therein, the nature of funds at the disposal of the assessee issued the following directions to the assessee: “Prima facie, this court finds merit in the claim of the petitioner that the interest income over money belonging to the State of Bihar cannot be subjected to income-tax or TDS by the income-tax authorities. However, since the assessment orders have not been passed in respect of the petitioner for the relevant years, hence this court would not like to give a definite and positive finding over the issues involved, at this stage. Hence, the orders contained in annexures 3 and 4 are quashed and the matter is remitted back to the concerned authority of the Income-tax Department, i.e., Assistant Commissioner of Income-tax, TDS Circle, Patna for passing fresh order in accordance with law and after due application of I.T.A. No.15, 16 & 17/2018 -34- mind to all relevant facts, some of which have been noticed in this order. The said authority should pass a fresh order in respect of the petitioner's application under section 197 of the Act without any delay and preferably within one month from today. Till then no coercive action shall be taken to realise tax deduction at source in respect of interest income which the petitioner may receive.” 8. The ITAT, Cochin Bench in M/s.Vizhinjam International Seaport Ltd v. The Income Tax Officer, Ward 2(4), Trivandrum5 has taken a similar view while appreciating the character of interest received by the assessee, whether constitutes income or not. Keeping the above decisions in perspective, let us examine the circumstances which have bearing on appreciating whether the interest received by the assessee could form part of the income of the assessee or the assessee is merely a custodian of the funds of DRDO/ISRO for implementation of Government projects. 5 Order dated 15.06.2016 in ITA No.07/Coch/2016 of ITAT, Cochin Bench I.T.A. No.15, 16 & 17/2018 -35- 9. In the case on hand, we prefer to appreciate whether the interest earned from the investment made by the assessee whether constitutes income of the assessee or the assessee is a mere recipient as custodian of the respective Departments, by examining the documents which have bearing on the issue. For we are convinced that the Revenue and the Tribunal have neither considered the MoUs in right perspective nor, if considered, concluded the issue with unavailable conclusion. This is both a perverse finding warranting correction under Section 260A of the Act. A bare reading of MoU entered into between the DRDO/ISRO and the assessee would, firstly disclose that the MoUs were entered into for augmentation of plant and machinery facilities for DRDO for projects called Missile Integration Complex and for Satellite Launch Programme and Mars Orbit Mission. Under the respective MoUs, the assessee was the custodian of the funds of the respective Government I.T.A. No.15, 16 & 17/2018 -36- Departments. The MoUs refer to the scope of the respective Department’s obligation and the role the assessee had to play during the implementation of the MoU as its authorised agent. The funds, when transferred in favour of the holding Company of the assessee, the holding Company was called upon to maintain a separate account for the transferred amount. And it was made clear that the amount so transferred would be subject to the audit by C&AG. The assessee was implementing either a short term requirement or a long term requirement which the assessee may not be willing to share with anyone, including the Income Tax Department. For either of the purposes, the on- hand resources are important as much as technical layouts for commissioning the projects. 9.1 The endeavour of DRDO/ISRO could be appreciated that the expertise and wherewithal of the assessee are I.T.A. No.15, 16 & 17/2018 -37- augmented and utilized by respective Departments for enhancing the facilities for the projects implemented by these Departments. In the scheme of things or in the implementation of the respective projects, the dynamics of the projects may call upon swift implementation of the task entrusted to the assessee by DRDO/ISRO. The purchase of plant and machinery, enhancement of equipment facility etc are decided by DRDO/ISRO. Resultantly, the assessee was required to be the custodian of the funds received from respective Government Departments for carrying out the designs. The assessee instead of investing the amount in its credit account has invested them in Fixed Deposits in a separate account and earned interest on that. This treatment in the books of account of assessee adheres to the condition with which the funds were transferred. The DRDO and ISRO have called upon the assessee to return the unspent amount together with not only the interest accrued I.T.A. No.15, 16 & 17/2018 -38- therein but also claim refund from Income Tax Department the TDS amount as well, and, upon receipt from the Department, transfer to DRDO/ISRO. From the documents which are not disputed by the Revenue, it is very clear that the assessee was merely allowed to operate the funds for the exclusive benefit of respective Government Departments and funds do not belong to the assessee. The assessee will not have any claim over the funds it was holding for and on behalf of DRDO/ISRO. 9.2 Further, the respective MoUs provide for the transfer of facility acquired through the assessee at a given point of time subject to assessee paying the value of equipment so purchased by the assessee in the execution of obligation under respective MoUs. From this circumstance, it is very clear that the facilities established at Thiruvananthapuram continued to be with the respective Departments. It could be one situation, if such an I.T.A. No.15, 16 & 17/2018 -39- arrangement is introduced by an assessee and the Department has a reason to believe that such arrangement has been introduced only as a subterfuge or design to avoid payment of tax by the person who transfers the funds and the assessee who receives the fund and parks them in its name, however, claims exemption from payment of Income Tax. In the case on hand, the assessee is a subsidiary of a Government Company. DRDO is a department in the Ministry of Defence. ISRO is also a department in the Central Government. The funds are the funds of the respective Government Departments. The reasoning of the Tribunal that the Fixed Deposit is not authorised by DRDO/ISRO, suffers from lack of logic. The assessee was entrusted with the fund for utilization for the benefit of DRDO/ISRO. The assessee as a prudent custodian does something, resulting in interest to DRDO/ISRO, such measure shall not result in taxation at the hands of the assessee. I.T.A. No.15, 16 & 17/2018 -40- MoU deals with proper handling of funds subject to C&AG audit. This presupposed all steps necessary and authorised in favour of assessee. The concept of overriding title is inapplicable to case on hand. Because, in the application of overriding title, deflection from the object i.e., assessee is made out in favour of a third party to avoid tax implication. 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 I.T.A. No.15, 16 & 17/2018 -41- 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. 9.3 As rightly pointed out by Senior Advocate Mr Joseph Markos, we have one option or the other to appreciate the orders under appeal before us. We prefer to examine the claim of the assessee that the interest received by it does not form part of its income by referring to the undisputed and admitted I.T.A. No.15, 16 & 17/2018 -42- documents on which the assessee is relying on, and we arrive at the conclusion that the interest received by the assessee could not be treated as computable income of the assessee during the subject Assessment Year. The circumstances in Vizhinjam International Seaport 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 I.T.A. No.15, 16 & 17/2018 -43- 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. For all the above reasons, the substantial questions are answered in favour of the assessee and against the Revenue. ITA No.15/2018 is allowed. I.T.A. No.15, 16 & 17/2018 -44- ITA Nos.16 and 17/2018 10. By following the aforementioned discussions and the reasons, the substantial questions framed in these two appeals are answered in favour of the assessee and against the Revenue. Income Tax Appeals are allowed. No order as to costs. Sd/- S.V.BHATTI JUDGE Sd/- VIJU ABRAHAM JUDGE jjj "