M/s. Bangalore Metro Rail Corporation Limited, Bangalore V. Deputy Commissioner Of Income Tax, Circle- 1(1)(2), Bangalore

ITA 1115/BANG/2019

AI Insights

The case involves multiple appeals by the Bangalore Metro Rail Corporation Ltd. (BMRCL) against the orders of the Deputy Commissioner of Income-tax and the Additional Commissioner of Income-tax concerning various assessment years. The primary issues revolved around the taxability of certain receipts and the nature of expenditures claimed by BMRCL. The Tribunal examined whether BMRCL qualifies as a 'State' under Article 12 of the Constitution and whether its income is exempt from Union taxation under Article 289. The Tribunal also considered the implications of the Metro Railways Act, 2002, and various Supreme Court and High Court decisions on the matter.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 129617 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 10 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 27-02-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 19-05-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Not Found
• Assessee Lawyers: Not Found
• Keywords: Capital asset; Gift; Business income; Depreciation; Charitable institution; Audit objection; Principle of natural justice; Diversion of income; Question of law; Capital receipt; Commercial expediency; Revenue expenditure; Set aside; CHAPTER IV
• Section: 37; 80G; 205; 43; 48; 13(2); 13; 22

Judgement Text

ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore IN THE INCOME TAX APPELLATE TRIBUNAL “A’’ BENCH: BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA No.1112/Bang/2019 Assessment Year: 2011-12 Bangalore Metro Rail Corporation Ltd. 3 rd Floor, BMTC Complex KH Road Shanti Nagar Bangalore 560 027 PAN NO : AAACB4881D Vs. Deputy Commissioner of Income-tax Circle-1(1)(2) Bangalore APPELLANT RESPONDENT ITA No.1048/Bang/2019 Assessment Year: 2011-12 Addl. CIT Special Range-1 Bangalore Vs. Bangalore Metro Rail Corporation Ltd. Bangalore 560 027 APPELLANT RESPONDENT ITA Nos.1113 to 1116/Bang/2019 Assessment Year: 2012-13 to 2015-16 Bangalore Metro Rail Corporation Ltd. Bangalore 560 027 Vs. Deputy Commissioner of Income-tax Circle-1(1)(2) Bangalore APPELLANT RESPONDENT Appellant by : Shri Srihari Kutsa, A.R. Respondent by : Shri Sankar Ganesh K., D.R. Date of Hearing : 28.02.2023 Date of Pronouncement : 06.04.2023 ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 2 of 60 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: ITA No.1112/Bang/2019 & ITA No.1048/Bang/2019 are cross appeals for the assessment year 2011-12 directed against order of CIT(A) dated 26.2.2019. Other appeals in ITA Nos.1113 to 1116/Bang/2019 are appeals by assessee for assessment year 2012- 13 to 2015-16 directed against different orders of CIT(A) dated 26.2.2019. For brevity purpose, we will decide groundwise in a consolidated manner. First we will take up assessee’s appeals: 2. First common ground in assessee’s appeals from A.Ys. 2011- 12 to 2015-16 is with regard to whether assessee is a state within the meaning of Article 12 of the Constitution and consequently exempt from Union tax as per Article 289 of the Constitution. 2.1 The ld. A.R. for the assessee made following submissions in respect of the issue that is common among all the above appeals viz., whether the assessee is a State within the meaning of Article 12 of the constitution and consequently exempt from union taxation as per Article 289 of the constitution. 2.2 The assessee in these appeals is Bangalore Metro Rail Corporation Limited. The assessee is a joint venture of Government of India and Government of Karnataka is a Special Purpose Vehicle entrusted with the responsibility of implementation of Bangalore Metro Rail Project. 2.3 The ld. A.R. submitted that the creation of Metro Rail Corporations across the country is contemplated by The Metro Railways (Operation and Maintenance) Act, 2002 [for short, the ‘Metro ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 3 of 60 Railways Act’]. The said Act was promulgated by the Parliament as an Act to provide for the operation and maintenance and to regulate the working of the metro railway in the National Capital Region, metropolitan city and metropolitan area and for matters connected therewith and incidental thereto. 2.4 Section 2(h) of the Metro Railways Act defines metropolitan area as under – (h) “metropolitan area” shall have the meaning assigned to it in clause (c) of article 243P of the Constitution 2.5 The clause (c) of Article 243P defines Metropolitan area as under – (c) “Metropolitan area” means an area having a population of ten lakhs or more, comprised in one or more districts and consisting of two or more Municipalities or Panchayats or other contiguous areas, specified by the Governor by public notification to be a Metropolitan area for the purposes of this Part; 2.6 Section 3 of the Metro Railways act provides for constitution of metro railways as under – 3. Constitution of Government metro railway (1) The Central Government may, for the purpose of efficient administration of a Government metro railway, in the National Capital Region, metropolitan city and metropolitan area, by notification, constitute such railways as it may deem fit. (2) A Government metro railway administration may, for efficient performance of its functions under this Act, appoint such officers and other employees as it considers necessary on such terms and conditions of service as may be determined by regulation. 2.7 Thus, the assessee was constituted based on the above provisions of metro railways act. A perusal of the provisions of the ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 4 of 60 statute reveal that the act governs all primary aspects of administration of metro railways viz., functions of the metro railway administration (Chapter III), appointment of commissioner for metro railway safety (Chapter IV), Procedure for opening up of metro railway (Chapter V), Working of metro railway (Chapter VI), Fare Fixation (Chapter VII), Procedure in the event of any accident, claims arising and liabilities (Chapter VIII to X), Offences and Penalties for violations on Metro railways (Chapter XI). 2.8 Two things become absolutely clear from the above. Firstly, that the management of the assessee company do not have the discretion as regards the day to day administration of the company and they are completely bound by the provisions of the Metro Railways Act. Secondly and more importantly, the assessee company does not have the discretion of charging any fare and fares are to be fixed as per the provisions of Chapter VII of the Act. Section 33 provides for fare fixation to be as per the recommendations of the Fare Fixation Committee that would consist of a Chairperson who would be a serving or retired judge of a High Court and two other members of the qualification specified in Section 34. It is also provided under section 37 that the recommendations of the Fare Fixation Committee shall be binding on the metro railways administration. 2.9 It is the contention of the assessee that it is an agent/instrumentality of the state and hence in view of the Article 289 of the Constitution of India, the Income Tax Act, 1961 is not applicable to the assessee. Article 12 and 289 of the constitution are reproduced below – Article 12. In this Part, unless the context otherwise requires, “the State” includes the Government and Parliament of India and the Government and the Legislature of each of the ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 5 of 60 States and all local or other authorities within the territory of India or under the control of the Government of India. *** Article 289. (1) The property and income of a State shall be exempt from Union taxation. (2) Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a 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. (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. 2.10 The ld. A.R. submitted that Clause (1) of Article 289 supra exempts from Union Taxation the property and income of a State. Clause (2) provides an exception, namely, that income derived by a State from trade or business would be taxable, provided a law is made by Parliament in that behalf. And Clause(3) is an exception to the exception provided by Clause (2) and provides that the income derived from a particular trade or business may still be immune from Union taxation if the Parliament declares that such trade or business is incidental to the ordinary functions of the Government. 2.11 Clause (3) provides that exemption from union taxation shall not apply to a business or trade which is incidental to the ordinary functions of the government. In order to examine if the assessee is entitled to protection given under Article 289(3) of the constitution, it is important to appreciate if the activity of the assessee falls within the ambit of business that is incidental to the ordinary functions of the government. ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 6 of 60 2.12 The activity in question is metro rail service which falls under sole domain of the central government. It is well known that Indian Railways is a business activity carried out by the central government and the Indian Railways enjoys exemption under clause (3) of the Article 289 of constitution. The Parliament in order to expedite the process of setting up railway infrastructure across the country in the metropolitan areas provided for creation of metro rail corporations in cooperation with the state government. It is noteworthy that the Metro Railways Act vide section 4 provides for general superintendence and control of the government metro railway in the hands of general manager appointed by the central government. 2.13 It is a settled understanding of the Article 289 that a claim of exemption under it must proceed on the foundation that the exemption is claimed in respect of property and income of a State. Once it is held that the property and income is that of the State, a question may well arise whether it is still taxable in view of the provision of Clause (2) of Article 289 which dominantly is in the nature of a proviso. Clause (2) empowers the Union to impose any tax to such extent as Parliament may by law provide, in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operation connected therewith. Thus, even the income of the State within the meaning of Clause (1) of Article 289 may be taxed by law made by the Parliament, if such income is derived from a trade or business of any kind carried on by or on behalf of the Government of a State or any operations connected therewith. Clause (1) of Article 289, therefore, empowers Parliament to frame law imposing a tax on income of a State which is earned by means of trade or business of any kind carried by or on behalf of the State Government. That is to submit, that Clause (2) empowers the Parliament to make a law imposing a tax on income earned only from ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 7 of 60 trade or business of any kind carried by or on behalf of the State. It does not authorize the Parliament to impose a tax on the income of a State if such income is not earned in the manner contemplated by Clause (2) of Article 289 i.e., by means of trade or business. 2.14 It is the contention of the Petitioner that since the source of income for the Petitioner is fare collected from metro railway tickets and the fare to be collected in that regard is not in the hands of the assessee but in the hands of a committee appointed by the central government vide Chapter VII of metro railways act, therefore the assessee lacks the fundamental right to carry on business under Article 19(1)(g) therefore bringing it at par with any government body or government agency. 2.15 The ld. A.R. submitted that the activity of the assessee cannot be said to be in the nature of business or trade as contemplated under Clause (2) of Article 289 of the Constitution. The intention of the Parliament is clear that where the State Government operates an enterprise/corporation solely with an intention to make profits commercially in a manner alike to any other private corporation, then such enterprise/corporation are not eligible to claim exemption under clause (1). Thus it is important to examine if the activity of the assessee can be said to be covered within the meaning of business or trade, as envisaged under clause (2) of Article 289 read with the Income Tax Act. 2.16 The word business has been explained by the Hon’ble Supreme Court in the case of Sole Trustee, Loka Shikshana Trust v. CIT reported in 101 ITR 234 (SC) 2.17 The other word used is trade. The meaning of the word trade has been explained by the Hon’ble Supreme Court in the case of State of Punjab v. Bajaj Electricals Ltd. reported in 70 ITR 730 (SC) ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 8 of 60 2.18 Thus the ld. A.R. submitted that it is clear from the above, that the word business indicates the motive behind the carrying on of an activity to make profits. It is pertinent to point out at this point that the assessee in the present form exists solely for the purpose of implementation of the metro rail project in phases 1, 2, 2A, 2B and metro line to Kempegowda International Airport. Thereafter the company structure will undergo substantial change and day to day administration will be carried out as per metro rail act. That is also the reason why the assessee has never established a corporate office in Bengaluru as the existence of assessee in present form is temporary. 2.19 Further, the ld. A.R. submitted that it is pertinent to appreciate the organizational structure of the assessee, duties & responsibilities assigned to various managerial personnel and the relationship of the assessee vis-à-vis the State Government & the Central Government, and towards the public at large. The same is explained as follows: 2.20 The assessee Company was incorporated in the year 1994 and the Government of Karnataka held the entire 100% share capital of the company. Given the enormous financial requirement for the project and the Central Government’s commitment to assist the State Government in this project for the sake of public welfare, in the year 2006 the Central Government decided to contribute capital to the Company and the sole venture of the Government of Karnataka was thus transformed into a Joint Venture of Government. The share- holding pattern of the assessee Company since then is - 50% held by the Government of India and 50% held by the Government of Karnataka. The assessee is thus a Government Company under section 617 of the Companies Act, 1956. ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 9 of 60 2.21 The Main object of the Company as provided in its Memorandum of Association is to establish, operate and maintain a Rapid Rail Transport system by the construction of circular or other type of railway lines in and around Bangalore City so as to meet the urban transport needs of Bangalore and to carry on the activity of railway transport, carriers of passengers by rail and to generally carry on all activities relating to a Railway Company as defined in the Indian Railways Act, 1890. 2.22 Article 57 of Articles of Association provides that the Government of India and the Government of Karnataka shall have the right to nominate 5 person for appointment as Directors on the Board of the Company. Article 58 provides that it is the Government of Karnataka that shall have the right to designate one of the nominees as the Managing Director, with prior consent of Government of India. Article 59 provides that the Government of India shall have the right to appoint Chairman of the Board of Directors. Article 69 provides that no meeting shall be deemed to have been validly constituted unless atleast one nominee each of Government of India and Government of Karnataka are present. 2.23 The ld. A.R. submitted that in pursuance to the powers vested in them vide the Articles of Association, the Government of India and Government of Karnataka has accordingly nominated the following persons as its nominees to the Board. Government of India Government of Karnataka 1 Secretary, Ministry of Urban Development, Government of India, New Delhi Principal Secretary to Government, Urban Development Department, Government of Karnataka 2 Director, Delhi Metro Rail Corporation Limited, New Delhi Additional Chief Secretary to Government, Government of Karnataka ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 10 of 60 3 Ex-Officio Joint Secretary, Ministry of Urban Development, Government of India, New Delhi Principal Secretary to Chief Minister, Government of Karnataka 4 Executive Director – Works (Planning) Railway Board, Ministry of Railways, Government of India, New Delhi Commissioner, BBMP 5 Senior Advisor, Rapid Metro Rail Gurgaon Limited, Gurgaon, Haryana Government of Karnataka Nominee 2.24 In pursuance to the Center’s commitment towards the project, the Central Government entered into a Memorandum of Understanding with the Government of Karnataka and the assessee, dated 24/12/2010 (for short, MOU) in order to set-out the broad principles of cooperation and modalities that will guide and govern the role of the Government of India and Government of Karnataka in the effective implementation of the Metro project through the assessee company. 2.25 The MOU describes the assessee as a Joint Venture Company of Government of India and Government of Karnataka within the meaning of section 617 of the Companies Act, 1956. 2.26 Clause 6.1 of the MOU provides for Institutional Arrangement as follows: The Project will be implemented by joint venture Company with Government of India and Government of Karnataka as partners. The Executing Agency i.e., the BMRCL, which is a company, established under the Companies Act, will work as a Special Purpose Vehicle for the implementation of the Project. 2.27 Clause 10.1 provides that the financing for the project will be done by way of Equity (equally by both GOI and GOK), Sub-ordinate ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 11 of 60 debt (by both GOI and GOK) and Senior-term debt (from domestic/international financial institutions). Clause 10.3 provides that Government of Karnataka will exempt the assessee from its State/Local taxes and duties/levies or reimburse the same. 2.28 Clause 12 provides the obligation of the Government of Karnataka as follows:  Government of Karnataka shall bear the entire cost of land and R&R through interest free subordinate debt.  To grant and cause its instrumentalities to accord all necessary sanctions, approvals, consents, clearances etc., for the smooth and timely implementation of the project;  To dispose off, resist and resolve any obstacle or impediment created by any person to thwart or challenge the implementation of the project;  To expeditiously acquire the land/properties identified in the alignment free from encroachments and encumbrances and handover possession of the same to the assessee;  Government of Karnataka covenants that it will not restrict the use of land in any way and that the assessee shall at all times have full freedom and discretion to develop and use the land, subject to zoning and rezoning of the land;  To ensure electric power is made available to the project on a no-profit-no-loss basis;  To subscribe to the equity share capital and also to provide Subordinate debt for utilization of the assessee ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 12 of 60 and to release the same before the Senior term debt is drawn to the extent possible with the objective of minimizing the interest burden on the project;  To share with Government of India any cost escalation as may be approved by the Empowered Committee and Empowered Group of Ministers at Government of India level;  To initiate or amend any law, rule, order or notification necessary or desirable for the implementation of the project;  To finance cash losses, if any, during the operational phase in case the same cannot be provided by the assessee;  To bear the cost of procurement of additional rolling stock required for the passenger traffic more than the DPR estimates, if the same cannot be provided by the assessee;  To repay the Senior term debt as and when it becomes due on account of cash losses, in case the assessee is not able to repay the same to the Government of India;  To not give any new assignment to the assessee unilaterally;  To place the State Government officers, if required, on deputation to BMRCL under the administrative control of the BMRCL Board of Directors; 2.29 Clause 13 provides for the obligations of the Government of India. Obligations apart from the ones which are mutual between ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 13 of 60 Government of Karnataka and Government of India and already listed supra are follows:  To subscribe towards equity share capital and provide subordinate debt for utilization by the assessee before taking recourse to the Senior-term debt in order to minimize the cost of borrowing to the assessee;  To make available Senior-term debt from Japanese International Co-operation Agency (JICA) directly to the assessee through gross budgetary resources in the form of Pass Through Assistance (PTA) on back-to-back basis;  Not to give any assignment to the assessee unilaterally;  To place the annual report of the assessee before the Parliament;  To reply to the CAG’s audit observations;  To place the Government of India officers, if required, on deputation to the assessee under the administrative control of the assessee’s board of directors. 2.30 The clause 14 of the MOU provides for the obligations of the assessee as follows:  The assessee having been set up as a joint venture of the Government of India and the Government of Karnataka is meant exclusively for the implementation of the project and shall not undertake any new assignment unless mutually agreed by the Promoters; ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 14 of 60  The assessee shall not without the prior approval of the promoters/Empowered Group of Ministers change the funding pattern;  To open an escrow account with a scheduled bank as required by the Senior-term debt lenders and the Government of India shall have the first charge over the escrow account;  The entire loan disbursed by the JICA through the Government of India shall be repaid by the assessee through an escrow account; 2.31 The clause 15 provides the Organizational set-up as follows:  That the management of the assessee shall entirely vest with the Board of Directors and that the assessee Company is neither a Central Public Sector Unit nor a State Public Sector Unit, but a Board governed Company.  That the Secretary, Ministry of Urban Development will be the Chairman of the Board and the Managing Director shall always be the nominee of the Government of Karnataka;  Subject to the policies and principles approved by the Board, the Managing Director shall be vested with the powers of general management of the business of the Company and shall have the power and authority on behalf of the assessee to enter into all contracts and do all other things as are necessary ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 15 of 60 2.32 The ld. A.R. submitted that it is clear from the very preamble of the MOU supra that the sole purpose of establishment of the assessee was to carry out the essential service of providing affordable rail based rapid transportation facilities to the people of the Bangalore city to travel through the city. The constitution of the board of the assessee company proves beyond doubt that it is the Government of Karnataka jointly with Government of India that is actually controlling and running the assessee Company. . 2.33 The clause 6.1 referred supra particularly mentions the assessee to be a mere executing agency and the sole purpose of establishing it is to act as a special purpose vehicle for the purpose of implementation of the project. Thus it is reiterated by the ld. A.R. that the assessee Company has been formed as a joint venture of the Government of Karnataka and Government of India primarily with an objective of providing rapid mass transit system in Bangalore. The fare policy has been structured to be affordable by the commuters and as such the fares have been kept to the bare-minimum. 2.34 The ld. A.R. submitted that unlike any private corporation, the assessee is governed by Public Policy of providing services to the masses at affordable costs and hence there is every possibility that the assessee may not be able to service its debts from its earnings. Therefore, as a contingency to this eventuality of the assessee not being able to repay the debts, the MOU provides, under clause 12(15) that the Government of Karnataka shall support the assessee Company, for cash losses in the event of default in repayments of its debts on due dates. This itself proves that the assessee is not created with a profit motive, inasmuch as its object is purely for public purpose and essentially a government prerogative.. ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 16 of 60 2.35 The ld. A.R. submitted that the project essentially belongs to the Government of Karnataka as apart from the Equity contribution, along with Government of India, Government of Karnataka has the responsibility to fund additional amounts towards land and reimbursement of State taxes as sub-ordinate debt out of the budget of the State Government, inter alia. 2.36 The same is further proved by the manner in which the Government of Karnataka has participated in the project as detailed in Clause 12 (see point 3.11 (f)(iv) supra). The cost of the land is being borne by the Government of Karnataka and it is provided that the same shall rank as a sub-ordinate debt i.e., a debt subordinate to all the other debts. Therefore the company shall repay the cost of the land to the Government of Karnataka without any interest only after complete repayment to the other debts raised for the project. 2.37 Likewise, the MOU also provides under clause 10.4 that as cost of the project financing the Government of Karnataka will either exempt BMRCL from its State/Local taxes and duties/levies or reimburse the same. The Government of Karnataka, due to VAT regime, has chosen to reimburse the taxes borne by the assessee in the form of sub-ordinate debt. 2.38 The fact that the assessee is nothing but an instrumentality or agency of the State is further proven vide Clause 12.14 that the State through the High Power Committee will be granting all necessary approvals, consents, clearances etc., for the smooth and timely implementation of the project and further undertakes to itself resist or resolve any obstacles to the implementation of the project. 2.39 The ld. A.R. submitted that the Government of Karnataka has undertaken to provide electrical energy from BESCOM on a no-profit- no-loss basis and further undertakes to amend any law that acts as ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 17 of 60 an obstacle for the functioning of the assessee company and, to place the State Government officers, if required, on deputation to BMRCL, further lend credence to the submission that the assessee is an instrumentality or agency of the state. It is to be further noted that the general management of the business of the assessee company shall be in the hands of the Managing Director who shall be appointed by the Government of Karnataka. 2.40 The ld. A.R. submitted that it is essentially to reap the benefits of better management, control and to foster expedition of work, that the Government of Karnataka has chosen to implement the project by way of company-form of organization to have reasonable autonomy and flexibility for implementing the project. Because except for the assessee being a company, key-officials are essentially serving Government officers on deputation and is being headed by serving IAS officer who and thus it is essentially the Government of Karnataka under joint venture with Government of India that is actually running the project in the form of Company-form of organization. 2.41 It is important to note that the Clause 15 of the MOU provides very clearly that the assessee is neither a Central Public Sector Undertaking nor a State Public Sector Undertaking, but a Board governed Company. Since the Board consists of the nominees of the State Government and the Central Government, with the general management vested with the nominee of the state government, this in itself creates a distinct identity for itself and hence cannot be compared with any government undertaking that are subject to the provisions of the Income Tax Act, 1961. 2.42 The ld. A.R. submitted that the functions and powers of the assessee indicate that it is acting as an extended arm of the State ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 18 of 60 Government in establishing rail based rapid transport system and it being an instrumentality and agency of the state Government is a 'State' and its income cannot be brought to tax in view of Article 289 of the Constitution of India. 2.43 He further submitted that even if the assessee is to be viewed in the form of a company and not as a state, even then the income derived by the corporation from its activities of providing rail-based rapid transit system would be the income of the State. The doctrine of the separate entity or personality of the Company is always subject to the exceptions and thus if veil is lifted, it will be clear that despite the concept of the separate personality of the Company, this transit service carried on by it belongs to the shareholders who brought the corporation into existence and the income received from the activities likewise belongs to them i.e., Government of Karnataka and Government of India. 2.44 The ld. A.R. once again submitted that the very fact that the object of the assessee company i.e., establishing the metro rail project, has been provided to be a Joint Venture between the Government of Karnataka and Government of India and that the company has been provided to be acting as a special purpose vehicle for the Government of Karnataka with the assistance of Government of India and that the company has been provided to be a board governed company and not any public sector undertaking, further drive home point that the assessee satisfies the requirement of Article 289(1) of the Constitution of India. 2.45 The ld. A.R. submitted that the assessee is an instrumentality and an agency of State Government and as a result it functions as an extended arm of the Government. The law of agency contained in sections 182, 212, 213, 222, 223 and 226 of the Indian Contract Act ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 19 of 60 throw light on the relationship between the principal and his agent. The principal always indemnifies the agent for the loss incurred in the course of the business. The agent is required to act in the interest of the principal with due diligence. He is to give accounts of dealings with other principals to his principals. The assessee submits that all the ingredients of relationship between principal and agent are present in its case. 2.46 Therefore, the above referred facts viz., - that the State Government has undertaken to reimburse the state taxes, - that the State Government has undertaken to provide for the cost of land, - that the State government has undertaken to facilitate the project in every manner possible; - that the State Government has undertaken to repay the loan to the Central Government in the event of the assessee being unable to repay itself; - that the State government has undertaken to provide help to the assessee in the event of losses/shortage of funds further add emphasis to this submission that it is instrumentality/agent of the State and the Article 289(1) is applicable to the assessee and the provisions of Act are not applicable to the assessee. 2.47 The ld. A.R. submitted that in Biharilalllobray v. Roshan Lal Dohray reported in (1984) 1 SCC 551 (SC), the Supreme Court held that, even though the incorporation of a body corporate may suggest that the statute intended it to be a statutory corporation independent ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 20 of 60 of the Government it is not conclusive on the question whether it is really so independent. Sometimes the form may be that of a body corporate independent of the Government but in substance it may be just the alter ego of the Government itself. The true test of determination of the said question depends upon the degree of control the Government has over it, the extent of control exercised by the several other bodies or committees over it and their composition, the degree of its dependence on Government for its financial needs and the functional aspect, namely, whether the body is discharging any important Governmental function or just some function which is merely optional from the point of view of Government. He submitted that the assessee passes all the tests necessary in the opinion of the Supreme Court in this case and qualifies itself as a State. 2.48 The nine judge bench of the Supreme Court in New Delhi Municipal Council v. State of Punjab, (1997) 7 SCC 339, has held that an activity can be described as trade or business only when it is carried on with profit motive. Accordingly, it held that only where a trade or business is carried on with profit motive, clause (2) of Article 289 would be attracted. Where there is no profit motive involved in any activity carried on by the State Government, the Court held that it cannot be said to be carrying on a trade or business within the meaning of clause (2), merely because some surplus results from such activity. This observation of the Supreme Court squarely applies to assessee. The assessee being formed for the sole purpose of establishing and providing rail based rapid transport system to the people of Bangalore, there is no motive to make profits and profits that may arise in future, if any, would only be incidental to the activity and would not represent the intention to make profits as such. ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 21 of 60 2.49 The ld. A.R. relied on the ratio of the decision of the Constitution Bench of the Apex court in the case of Ujjam Bhai v. State of Uttar Pradesh reported in AIR 1962 SC 1621 at Page 1678: In the first place, it has to be pointed out that the definition is only inclusive, which itself is apt to indicate that besides the Government and the Legislature there might be other instrumentalities of State action which might be comprehended within the expression “State”. ... Again, Art. 12 winds up the list of authorities falling within the definition by referring to "other author“ties"”within the territory of India which cannot, obviously be read as ejusdem generis with either the Government and the Legislatures or local authorities. The words are of wide amplitude and capable of comprehending every authority created under a statute and functioning within the territory of India. There is no characterisation of the nature of the “authority” in this residuary clause and consequently it must include every type of authority set up under a statute for the purpose of administering laws enacted by the Parliament or by the State including those vested with the duty to make decisions in order to implement those laws. 2.50 Reliance is also placed by the ld. A.R. on the decision of the seven judges bench of the Apex Court in the case of Sukhdev Singh & Ors. v. Bhagatram Sardar Singh Raghuvanshi reported in (1975) 1 SCC 421: 39. A public authority is a body which has public or statutory duties to perform and which performs those duties and carries out its transactions for the benefit of the public and not for private profit. Such an authority is not precluded from making a profit for the public benefit. 82. Part IV of the Constitution gives a picture of the services which the state is expected to undertake and render for the welfare of the people. Article 298 provides that the executive power of the Union and State extends to the carrying on of any business or trade. As I said, the question for consideration is whether a public corporation set up under a special statute to carry on a business or service which Parliament thinks necessary to be carried on in the interest of the nation is an agency or instrumentality of the State and would be subject to the limitations expressed in Article 13(2) of the Constitution. A state is an abstract entity. It can only ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 22 of 60 act through the instrumentality or agency of natural or juridical persons. Therefore, there is nothing strange in the notion of the state acting through a corporation and making it an agency or instrumentality of the State. 98. The state may aid a private operation in various ways other than by direct financial assistance. It may give the organization the power of eminent domain, it may grant tax exemptions, or it may give it a monopolistic status for certain purposes. All these are relevant in making an assessment whether the operation is private or savours of state action(1). 2.51 Reliance is placed by the ld. A.R. on the decision of the Constitution Bench of the Apex Court in the case of Ajay Hasia & Ors. v. Khalid Mujib Sehravardi ors. reported in (1981) 1 SCC 722 : We may point out that it is immaterial for this purpose whether the corporation is created by a statute or under a statute. The test is whether it is an instrumentality or agency of the Government and not as to how it is created. The inquiry has to be not as to how the juristic person is born but why it has been brought into existence. The corporation may be a statutory corporation created by a statute or it may be a Government Company or a company formed under the Companies Act, 1956 or it may be a society registered under the Societies Registration Act, 1860 or any other similar statute. Whatever be its genetical origin, it would be an "authority" within the meaning of Article 12 if it is an instrumentality or agency of the Government and that would have to be decided on a proper assessment of the facts in the light of the relevant factors. The concept of instrumentality or agency of the Government is not limited to a corporation created by a statute but is equally applicable to a company or society and in a given case it would have to be decided, on a consideration of the relevant factors, whether the company or society is an instrumentality or agency of the Government so as to come within the meaning of the expression "authority" in Article 12. 2.52 Similar reliance is also placed on the decision of the seven judge bench of the Hon’ble Apex Court in the case of Pradeep Kumar Biswas v. Indian Institute of Chemical Technology reported in (2002) 5 SCC 111: ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 23 of 60 23. From this perspective, the logical sequitur is that it really does not matter what guise the State adopts for this purpose, whether by a Corporation established by statute or incorporated under a law such as the Companies Act or formed under the Societies Registration Act, 1860. Neither the form of the Corporation, nor its ostensible autonomy would take away from its character as 'State' and its constitutional accountability under Part III vis-a-vis the individual if it were in fact acting as an instrumentality or agency of Government. 2.53 The ld. A.R. relied on the decision in the case of Som Prakash v. Union of India AIR [1981] SC 212 wherein the Hon’ble Supreme court has laid down four tests to check if an organization is instrument or agent of the Government. Justice Krishna Iyer speaking for the majority summarized the tests that may be applied to determine whether a particular authority is an instrumentality of the State or not. They are : "1. One thing is clear that if the entire share capital of the corporation is held by Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of Government. 2. Existence of deep and pervasive State control may afford an indication that the corporation is a State agency or instrumentality. 3. It may also be a relevant factor. . .whether the corporation enjoys monopoly status which is State conferred or State protected. 4. If the functions of the corporation are of public importance and closely related to Governmental functions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of Government. 5. Specifically, if a department of Government is transferred to a corporation, it would be a strong factor supportive of this inference of the corporation being an instrumentality or agency of Government." 2.54 Applying the above five tests to the case of the assessee: ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 24 of 60 (a) A plain reading of the preliminary clauses of the Memorandum of Association and the Articles of Association of the petitioner-company unequivocally establishes that it is a company, the share capital of which is wholly subscribed by the Government- both the Central and the State of Karnataka equally. That, according to the Hon’ble Supreme Court, goes a long way towards indicating that the corporation is an instrumentality or agency of the Government. (b) The second test is of 'existence of deep and pervasive State control' which, according to the Hon’ble Supreme Court, gives an indication that the corporation is a State agency or instrumentality, is also fully satisfied. All the shares were owned by the State Government until 2006 and after the sanction was obtained by the Central Government for the project, Central Government contributed equity capital and became equal share holder along with the Government of Karnataka. The board consists of ten members, five appointed by the Government of India and five appointed by the Government of Karnataka. The board of directors is required to carry out the directions issued by the Government from time to time in the management of the affairs of the company towards achieving the object for which the company has been incorporated. Even the auditors may be appointed by the Central Government and not by the board of directors in their own discretion. Clause 13.11 of the MOU presented in paragraph 6.1... supra provides that the Government of India shall be responsible to reply to the audit objections raised by the ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 25 of 60 Comptroller and Auditor General and further present the Annual Report of the assessee Company before the Parliament. The MOU also provides at several places that assessee cannot take any other assignment other than what is decided mutually by its shareholders viz., State Government and the Central Government. The degree of control exercised by the Government is thus all pervasive. (c) Since it is only the Government that has the prerogative to build rail-based transportation system for the public use, hence there is hence monopoly created. There is the authority vested in the Government to create such a monopoly consistent with the provisions of Article 19 of the Constitution and the State Government, which owns the company, may discharge these functions through the instrumentality of this corporation for which sufficient provision is made in the Memorandum and Articles of Association. This also gives an indication that it is an instrumentality of the State. (d) The fourth test that the functions of the corporation are of such public importance and so closely related to Governmental functions, as already discussed in detail in the foregoing submissions, must also be said to have been satisfied. (e) The fifth test is not applicable to the assessee’s case in as much as the project is novice and thus embarked directly under the flagship of the assessee Company and thus the question of transferring an already existing department does not arise. ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 26 of 60 2.55 Thus, all the tests laid down by the Hon’ble Supreme Court in Som Prakash v. Union of India (supra) are fulfilled by the assessee Company. 2.56 The ld. A.R. submitted that the Hon’ble jurisdictional High Court in the case of Flemingo Duty-Free Shop Pvt. Ltd. v. Union of India in Writ Petition No. 14215 of 2008 has held that the Bangalore International Airport Limited wherein 74% shares are held by private parties and 24% by governmental authorities, is a State. The Bombay High Court in the case of the same Petitioner in Writ Petition No. 617 of 2007 has held that the Mumbai International Airports Pvt. Ltd., is a State within the meaning of Article 12 of the Constitution. 2.57 The ld. A.R. submitted that over a hundred writ petitions have been filed on the assessee on the assessee and the jurisdictional High Court has admitted such petitions. 2.58 The ld. A.R. further submitted that the Supreme Court in V.P. Avas Evam Vikas Parishad v. Friends Coop. Housing Society Ltd, 1996 AIR 114 : 1995 SCC Supl. (3) 456, has held that right to shelter is a fundamental right, which springs from the right to residence assured in Art.19(1)(e) and right to life under Article 21 of the Constitution. The State Government is expected to provide housing facilities to the public and create housing infrastructure ensuring planned urban development. In W.B. Housing Board v. Brijendra Prasad Gupta (1997) 6 SCC 207, the Supreme Court held that the public purpose is not lost, if the State or Housing Board earns any profit. In Gulam Mustafa vs. The State of Maharashtra (1976) 1 SCC 800, the Supreme Court held that the excess land acquired by the Municipal Committee, when sold in plots for housing colony, it served public purpose. Similarly, the Supreme Court in State of Gujarat v. Sankalchand Khodidas Patel, (1977) 4 SCC 590, has held that the ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 27 of 60 acquisition of land for housing facilities of a Cooperative Society was for public purpose. It is submitted that the activity undertaken by the assessee at the behest of the State Government is a Governmental function carried on for public purpose. The observations of the Supreme Court in above rulings are supportive of the assessee's plea that the rail based public transport system implemented by it is for public purposes and that the same is being provided as a fundamental duty towards the Public. 2.59 The ld. A.R. relied on the observation of the Supreme Court in Baburao Shantaram More v. Bombay Housing Board, reported in AIR 1954 SC 153, wherein it was held that Bombay Housing Board as a corporate body was brought into existence for the purpose of framing housing schemes to solve the problem of acute shortage of accommodation in Bombay and in effect, it is a Government sponsored body not having any profit making motive. The same principle applies to the assessee. The assessee has been created for the sole purpose of addressing the transportation and pollution problem of the Bangalore City as provided in the preamble of the MOU. 2.60 He submitted that it is clear from the above that the assessee is an instrumentality or agency of the State and accordingly a State within the meaning of Article 12 of the Constitution and hence it is submitted that the income of the assessee constitutes income of the state and consequently the same is not exigible to income tax. 2.61 The ld. A.R. in the end placed reliance on the decision of the Mumbai Tribunal in the matter of City and Industrial Development Corporation of Maharashtra Limited v. ACIT reported in 160 TTJ 477 (Mumbai) where the Hon’ble Tribunal after detailed examination of the facts held that since the assessee was engaged in construction ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 28 of 60 and development of residential and commercial structures totally on behalf of State, revenue authorities were not justified in assessing business income in hands of assessee. The Bombay High Court in the case of Percival Joseph Pareira v. Special Land Acquisition Officer [WP No. 1211 of 2009] wherein City & Industrial Development Corporation (CIDCO), which was appointed as the New Town Development Authority by the Government was one of the parties. In that case the Hon'ble High Court accepted the contention of CIDCO, and held that the latter is an agent of the State Government. 2.62 Wherefore in view of the above it is finally submitted that since the assessee is state carrying on the functions of the State Government and its income is income of the state, and accordingly in view of the Article 289 of the Constitution, its income is not liable to income tax. 2.63 The above submissions were made by the ld. A.R. before the CIT(A) and the CIT(A) at Para 5 of the order for the A.Y. 2011-12 expressed his disagreement with the contentions of the assessee by holding that it is nothing but a company that intends to make profits. 2.64 The ld. A.R. submitted that if this ground is allowed, then all other grounds do not arise for consideration. 3. The ld. D.R. submitted that the assessee is nothing but a company that intends to make profits. Merely because there are no private individuals in the management or because the government nominees are appointed, does not give the assessee a ground to claim exemption from income tax. That the Central Govt or the State Govt have participation in management of company and therefore no income tax should be charged would mean all the government owned companies must be exempted from income tax, which ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 29 of 60 certainly is not the intention of the legislature as Government carries on most of the public utility-based business activities. The assessee has also separately argued that its income is not taxable on the basis of taxation principle 'diversion of income by overriding title' on the ground that income it receives is only on behalf-of the state and therefore the same does not constitute income for the purpose of taxation. However, the ld. D.R. submitted that since the earlier ground has not been allowed, question of adjudication of this ground does arise. 4. Further the ld. D.R. relied on the order of the Tribunal in the case of M/s. Udupi Nirmithi Kendra in ITA No.1962/Bang/2018 for the assessment year 2013-14 dated 16.6.2022. 5. We have heard the rival submissions and perused the materials available on record. The argument of the Ld. A.R. is totally misconceived. We have also gone through the Article 289 of the Constitution, which provides for exemption of property of income of a state from Union taxation. For clarity, we will mention the Article 289 of the Constitution, which reads as under:- (1) “The property and income of a State shall be exempt from Union taxation. (2) Nothing in clause (1) shall prevent the Union from imposing, or - authorising the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a 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. (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." ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 30 of 60 5.1 The main contention of the ld. A.R. is that assessee is a wing of the Karnataka State Government, since it is performing Rapid Rail Transport System by the construction of circular or other type of Railway line in and around Bangalore city so as to meet the urban development of Bangalore and carry on all the activities relating to the railway company as defined in the Indian Railway Act, 1890 it is the public utility services. Further, 50% shares of the assessee Corporation were held by Government of India and 50% held by Government of Karnataka and the companies u/s 617 of the Companies Act and Article 57 of the Articles of Association of the assessee corporation permits the Central Government as well as State Government to appoint 5 persons as Directors of the Board of the company and as per Article 58 one of the above nominees would be appointed as a MD of the company and no meeting shall be deemed to have been held unless atleast one nominee of each of Government of India and Government of Karnataka are present in the meeting. Thus, crux of the argument of the assessee’s counsel is that the assessee is wholly and fully controlled by the Central Government as well as by State Government. As such, assessee’s income is immune from Union Taxation. At this point it is appropriate to refer the observation made by Hon’ble Supreme Court in the caes of Andhra Pradesh State Road Transport Corporation Vs. ITO 52 ITR 524, wherein held as under: “It may be that the statute under which a notification has been issued constituting the appellant Corporation may provide expressly or by necessary implication that the income derived by the Corporation from its trading activity would be the income of the State. The doctrine of separate identity or personality of the corporation is always subject to the exceptions which statutes may create, and if there is a statutory provision which clearly indicates that despite the concept of separate personality of the corporation, the trade carried on by it belongs to the share holders who brought the corporation into existence and the income received from the said trade likewise belongs to them, that would be another matter. It would then be ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 31 of 60 possible to hold that as a result of the specific statutory provisions the income received from the trade carried on by the corporation belongs to the shareholders who have constituted the said corporation, and so, we must look to the Act to determine whether the income in the present can be said to be income of the State of Andhra Pradesh. 5.2 In this connection, we may refer to the observations made by Lord Denning in Tamlin Vs. Hannaford (1950) 1 KB 18: 18. “In the eye of the law” said Lord Denning, “the corporation is its own master and is answerable as fully as any other person or corporation. It is not the Crown and has none of the immunities or privileges of the Crown. Its servants are not civil servants, and its property is not Crown property. It is as much bound by Acts of Parliament as any other subject of the King. It is, of course, a public authority and its purposes, no doubt, are public purposes, but it is not a government department nor do its powers fall within the province of government.” 5.3 These observations tend to show that a business activity carried on by the corporation is not a business activity carried on by the State departmentally, or is it a business activity carried on by a State through its agents appointed in that behalf. 5.4 The observations made by Lord Denning, viz., “It is, of course, a public authority and its purposes, no doubt, are public purposes, but it is not a government department nor do its powers fall within the province of government” are very much relevant here and, in our view, they squarely apply to the assessee herein. We notice that the Hon’ble Gujarat High Court in the case of Gujarat Industrial Development Corporation V/s CIT [1985] 151 ITR 255 (Guj) has considered an identical issue and has held as under: “11. Having considered as to whether the assessee—Gujarat Industrial Development Corporation, Ahmedabad—is entitled or is not en titled to exclude its income from liability under the 1922 Act, we are clearly of the opinion that from their total income, no exclusion could be made on the ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 32 of 60 ground that it is a State, as contemplated by article 289(1). The State is entirely different from the corporations, which are created by laws which are enacted either by the Parliament or by the State Legislatures for different and distinct purposes. They are separate entities in law. They sue and are sued in their own capacities and for any contractual liability of the corporation, no person can sue the State because every corporation in itself is not the State but a separate legal entity. Under these circumstances, our opinion on the first question would be in the affirmative, and we hold that the decision of the Tribunal is right. Therefore, this point is decided in favour of the revenue and against the assessee.” 5.5 We also place reliance on the decision of Bombay High Court rendered in the case of Vidarbha Housing Board V/s ITO (1973) (92 ITR 430). Identical view has been expressed by Pune Bench of ITAT in the case of Goa, Daman and Diu Industrial Development Corporation (151 ITD 447). The Hon’ble Supreme Court in the case of Andhra Pradesh State Civil Supplies Corporation Ltd (1984)(148 ITR 497) has, in clear terms, held that “What is exempt from taxation is the income of a State and not the income of the instrumentality or agency of a State.” Hence, we are of the view that the assessee cannot considered to be a part of the Government department immune from Union Taxation. 5.6. The next contention urged before us was that the assessee is performing sovereign function of the Government. Since we have held that the assessee cannot be considered to be a part of State Government and since the private parties could also carry on the activity of Rail transport, in our view, the said contention is bound to fail. 5.7 In this case, the assessee has been incorporated under Companies Act for the purpose of operation and maintenance and to regulate the working of Metro Railway in and around Bangalore so as ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 33 of 60 to meet the Urban Transport requirement in Bangalore, thereby assessee carrying on the activity of railway transport of passengers and this is an independent corporation managed by a Board of Directors. The assessee corporation was enjoying monopoly i.e it was the only organisation involved in transport of passengers through rail in and around Bangalore. The assessee has been carrying on the transport of the passengers through rail in and around Bangalore by charging for tickets. The ticket price has been fixed by the corporation not at cost to cost price and it has been fixed with an element of profit. The assessee is not functioning under the policy of no profit and no loss. On the other, it is a profit oriented organisation and no profit no loss has not been the policy of the corporation and the assessee also a monopoly corporation in this field. In our opinion, the activity of transporting the passengers through rail in and around Bangalore to be considered as a business activity and the activity carried on by the assessee is nowhere different from that one carried on by private entrepreneurs and it is always by business activity of the assessee company with profit motive. 5.8 Further, the ld. A.R. made an argument that assessee is carrying on its operations in accordance with the direction of the State Government and there are 5 nominees from Central Government as well as State Government. In our view, the control or directions issued by the State Government would not change the character of “business activity”. We are of the view that activity carried out by the assessee should be examined independently and the fact that assessee is being regulated by the State Government would not make any difference. In our view, “ownership of the Corporation” and “activities of the Corporation” are two different aspects and the ownership cannot be considered or taken into ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 34 of 60 account to determine the character or nature of the activities carried on by the Corporation. 5.9 The next argument of the ld. A.R. is that the capital required by the assessee company have been contributed by the Central Government as well as the State Government of Karnataka as such it is a wing of the State Government. This argument holds no merits. The assessee being separate personality of its own, incorporated under Companies Act for carrying on the business activity and the profit or loss arising there from are the profit and loss of the Corporation itself. The income derived from the Corporation from the business activities cannot be said to be income of the Karnataka State Government under Article 289. For this purpose, we place reliance on the judgement in the case of Andhra Pradesh State Road Transport Corporation Vs. ITO (52 ITR 524), wherein held as under: “ The Andhra Pradesh State Road Transport Corporation constituted under the Road Transport Corporations Act, 1950, by a notification issued by the Andhra Pradesh Government, is not immune from liability to income-tax on income derived from its trading activities, under article 289 of the Constitution of India, on the ground that its trading activities were carried on by or on behalf of the Government of the State. Though the majority of its shares are owned by the Andhra Pradesh Government and its activities are controlled by the State, the Corporation has a separate personality of its own, the trading activities are the trading activities of the Corporation and the profit and loss arising therefrom are the profit and loss of the Corporation. The income derived by the Corporation from its trading activities cannot be said to be the income of the Andhra Pradesh State under article 289. There is no repugnancy whatever between the provisions of the Indian Income-tax Act, 1922, and the Road Transport Corporations Act, 1950, so as to make the provisions of the Income-tax Act inapplicable to the Road Transport Corporation. A corporation constituted under the Road Transport Corporation Act, 1950, though statutory, has a personality of its own distinct from that of the State or other shareholders. It cannot be said that a shareholder owns the property of the corporation or carries on the business with which the corporation is concerned. The income derived by such a corporation from its trading activity cannot be claimed by the State which is one of the shareholders of the corporation.” ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 35 of 60 5.10 Further, we place reliance on the judgement of Hon’ble Supreme Court in the case of Adityapur Industrial Development Authority (283 ITR 97), wherein held as under: “4. It would thus be seen that the income of a local authority chargeable under the head "Income from house property", "Capital gains" or "Income from other sources" or from a trade or business carried on by it was earlier excluded in computing the total income of the Authority of a previous year. However, in view of the amendment, with effect from April 1, 2003, the Explanation "local authority" was defined to include only the authorities enumerated in the Explanation, which does not include an authority such as the appellant. At the same time Section 10 (20A) which related to income of an authority constituted in India by or under any law enacted for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, which before the amendment was not included in computing the total income, was omitted. Consequently, the benefit conferred by (20A) on such an authority was taken away. ............................................... ................................................ 8. A mere perusal of Article 289(1) discloses that a claim of exemption under it must proceed on the foundation that the exemption is claimed in respect of property and income of a State. Once it is held that the property and income is that of the State, a question may well arise whether it is still taxable in view of the provision of Clause (2) of Article 289 which dominantly is in the nature of a proviso. Clause (2) empowers the Union to impose any tax to such extent as Parliament may by law provide, in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operation connected therewith. Thus, even the income of the State within the meaning of Clause (1) of Article 289 may be taxed by law made by the Parliament, if such income is derived from a trade or business of any kind carried on by or on behalf of the Government of a State or any operations connected therewith. Clause (1) of Article 289, therefore empowers Parliament to frame law imposing a tax on income of a State which is earned by means of trade or business of any kind carried by or on behalf of the State Government. 9. It is true, as submitted by Sri Venugopal, that Clause (2) of Article 289 empowers the Parliament to make a law imposing a tax on income earned only from trade or business of any kind carried by or on behalf of the State. It does not authorize the Parliament to impose a tax on the income of a State if such income is not earned in the manner contemplated by Clause (2) of Article 289. This, to our mind, does not answer the question which arises for our consideration in this appeal. Clause (2) of Article 289 pre- supposes that the income sought to be taxed by the Union is the income of the State, but the question to be answered at the threshold is whether in terms of Clause (1) of Article 289, the income of the appellant/ Authority is the income of the State. Having regard to the provisions of the Bihar Industrial ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 36 of 60 Areas Development Authority Act, 1974, particularly Section 17 thereof, we have no manner of doubt that the income of the appellant/ Authority constituted under the said Act is its own income and that the appellant/ Authority manages its own funds. It has its own assets and liabilities. It can sue or be sued in its own name. Even though, it does not carry on any trade or business within the contemplation of Clause (2) of Article 289, it still is an Authority constituted under an Act of the Legislature of the State having a distinct legal personality, being a body corporate, as distinct from the State. Section 17 of the Act further clarifies that only upon its dissolution its assets, funds and liabilities devolve upon the State Government. Necessarily therefore, before its dissolution, its assets, funds and liabilities are its own. It is, therefore, futile to contend that the income of the appellant/ Authority is the income of State Government, even though the Authority is constituted under an Act enacted by the State Legislature by issuance of a Notification by the Government thereunder. 10. According to Basu's Commentary on the Constitution of India (Sixth Edition, page 50, volume 'L') Articles 285 and 289 are analogous to each other inasmuch as while Article 285 exempts Union property from State taxation, Article 289 exempts the State property from taxation. While clause (1) of Article 289 exempts from Union taxation any income of a State, derived from governmental or non-governmental activities, clause (2) provides an exception, namely, that income derived by a State from trade or business will be taxable, provided a law is made by Parliament in that behalf. Clause (3) of Article 289 is an exception of the exception prescribed by clause (2) of Article 289 and it provides that income derived from particular trade or business may be made immune from Union taxation if Parliament declares such trade or business as incidental to the ordinary functions of Government (emphases supplied). The reason is obvious. Under the constitution, the State has no power to tax any income other than agricultural income. Under the Constitution, power to tax "income" is vested only in the Union. Therefore, while any property of the Union is immune from State taxation under Article 285(1), income derived by the State from business, as distinguished from governmental purposes, shall not have exemption from Union taxation unless the Parliament declares such trade or business as incidental to the ordinary functions of Government of the State [See Article 289(3)] (emphasis supplied). 11. Applying the above test to the facts of the present case it is clear that the benefit, conferred by Section 10(20A) of the Income Tax Act, 1961 on the assessee herein, has been expressly taken away. Moreover, the explanation added to Section 10(20) enumerates the "local authorities" which do not cover the assessee herein. Therefore, we do not find any merit in the submission advanced on behalf of the assessee. ................................................. 20. Having considered all aspects of the matter we hold that the High Court is right in concluding that the appellant/ Authority could not claim exemption from Union taxation under Article 289 (1) of the Constitution of India. The impugned notice issued by the Income Tax Authorities was, therefore, valid and legal and could ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 37 of 60 not be successfully challenged in the writ petition. Accordingly, this appeal is dismissed but without any order as to costs.” 5.11 Being so, we do not find any merit in this ground of appeal and same is dismissed in all assessee’s appeals. 6. Next common ground in all the years from 2011-12 to 2015-16 is with regard to taxation of reimbursement of state tax revenue receipt instead of treating it as capital receipt. We consider the facts as narrated in AY 2011-12. 6.1 Facts as narrated in assessment year 2011-12 are considered for brevity. The AO made an addition in respect of receipt of such sum from the Government of Karnataka. In assessment year 2011- 12, the said amount was Rs.50 lakhs. The said sum relates to subordinate loan released by Government of Karnataka, under the Major Head “Account 6217-60-800-04-394”, in pursuance to its commitment for funding the Metro Rail Project. In support of this assessee produced a copy of Government order No.UDD 171 PMR 2010, Bangalore dated 27.8.2010 before the AO and ld. CIT(A). 6.2 The assessee also accounted in its books of account as a subordinate loan. A copy of the extract of the ledger titled Sub- Ordinate Debt - Govt.of Karnataka is enclosed in the paper-book compilation as Annexure - 7. The ld. A.R. submitted that since the transaction is basically one of extension of loan by the Government of Karnataka to the Appellant which is repayable in the future, the same is capital in nature and not exigible to tax under any circumstances. The said amount does not come under the purview of income under the provisions of the Act. ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 38 of 60 6.3 The ld. A.R. submitted that even in cases where subsidy is received from Governments to Government managed corporations/bodies with a specific direction as to the purpose of such subsidy, the said subsidies are held to be out of realms of taxation (Ref: Sahney Steel & Press Works Ltd v. CIT 228 ITR 253 (SC), ClT v. Ponni Sugar and Chemical Limited 306 ITR 392 (SC) & Bihar Agricultural Produce Marketing Board v. CIT 205 Taxman 378 (Patna). Therefore, since the impugned amount of Rs.50 crores is a loan which is repayable in the future, the question of treating the same as income does not arise at all. 6.4 The ld A.R. submitted that the above submission may be taken on record and the said addition of Rs.50 crores may be deleted for the advancement of substantial cause of justice. 6.5. On disallowance by the AO, assessee went in appeal before ld. CIT(A) and pleaded for allowability of the same as the same was capital receipt. However, ld. CIT(A) observed that the assessee cannot claim exemption from income tax as the assessee is nothing but a company that intends to make profits. Merely because there are no private individuals in the management or because the government nominees are appointed, does not give the Appellant a ground to claim exemption from income tax. That the Central Govt or the State Govt have participation in management of company and therefore no income tax should be charged would mean all the government owned companies must be exempted from income tax, which certainly is not the intention of the legislature as Government carries on most of the public utility-based business activities. Accordingly, for the above reasons and also considering the detailed reasoning given by the AO in the assessment order, this ground of appeal was not allowed by the ld. CIT(A). ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 39 of 60 6.6 The assessee has also separately argued before the ld. CIT(A) that its income is not taxable on the basis of taxation principle 'diversion of income by overriding title' on the ground that income it receives is only on behalf-of the state and therefore the same does not constitute income for the purpose of taxation, however, the ld. CIT(A) observed that since the earlier ground has not been allowed, question of adjudication of this ground does not arise. Accordingly, this ground was dismissed by the ld. CIT(A). Against this assessee is in appeal before us. 7. The ld. A.R. submitted that the learned AO has made an addition of Rs.50 crores in respect of the receipt from the Government of Karnataka towards reimbursement of state taxes. The addition has been made by the AO by invoking the section 41(1) of the Act. In the appeal before CIT(A), the assessee submitted the copies of Government Order and case laws in support of the submission that the reimbursement is capital in nature and a contrary view cannot be taken under any circumstances, but the CIT(A) held that the receipt is revenue in nature [Para 15 at Page 36 of CIT(A) order]. 7.1 The ld. A.R. submitted that the sum of Rs. 50 crore was received towards reimbursement of state taxes vide the Government Order No. UDD 171 BMR 2010 BANGALORE, DATED, 27/08/2010. Relevant extract is reproduced below for ease of reference – Sanction is accorded to release Rs.50.00 crore (Rupees Fifty Crore only) under the Head of Account “6217-60-800-04- 394” towards Subordinate debts to Bangalore Metro Rail Project during the financial year 2010-11 towards the land acquisition and utility shifting purpose. The Managing Director, BMRCL shall draw the amount through payee receipt duly countersigned by the Joint ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 40 of 60 Director (Planning), Urban Development Department, Government of Karnataka. This order is issues with the concurrence of the Finance Department vide its U. O. Note No. FD 530 Exp 9/2010, dated 10/08/2010. 7.2 The ld. A.R. submitted that in the accounts for the financial year 2010-11 the same was accounted as sub-ordinate debt released by Government of Karnataka, under the major Head Account 6217- 60-800-04-394, in pursuance to its commitment for funding the Metro Rail project. 7.3 The ld. A.R. further submitted that since the transaction is basically one of extension of loan by the Government of Karnataka to the assessee which is repayable in the future, the same is capital in nature and not exigible to tax under any circumstances. The said amount does not come under the purview of income under the provisions of the Act. 7.4 The ld. A.R. submitted that even in cases where subsidy is received from Governments to Government managed corporations/bodies with a specific direction as to the purpose of such subsidy, the said subsidies are held to be out of realms of taxation (Ref: Sahney Steel & Press Works Ltd v. CIT 228 ITR 253 (SC), CIT v. Ponni Sugar and Chemical Limited 306 ITR 392 (SC) & Bihar Agricultural Produce Marketing Board v. CIT 205 Taxman 378 (Patna)). Therefore since the impugned amount of Rs.50 crores is a loan which is repayable in the future, the question of treating the same as income does not arise at all. 7.5 The ld. A.R. submitted that the learned CIT(A) ought to have appreciated the submissions above and deleted the appeal and he prayed that the above submission may be taken on record and the ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 41 of 60 said addition of Rs.50 crores may be deleted for the advancement of substantial cause of justice. 8. The ld. D.R. relied on the order of the lower authorities. 9 . We have heard the rival submissions and perused the materials available on record. The assessee is said to be received refund of sale tax from the State Government. The said amount has not been offered for taxation. The AO treated it as a revenue receipt. According to the assessee, it is a subordinate loan released from the Government in pursuance to its commitment for funding the Metro Rail project and to be considered as a capital receipt only being State Government as a shareholder of the assessee corporation. On the other hand, the contention of the ld. D.R. is that it is a refund of sale tax to be treated as a revenue receipt. In our opinion, if the amount has been granted to the assessee towards the capital cost incurred by the assessee, the same to be considered as capital receipt. On the other if it is granted to the assessee towards refund of the sale tax as incentives, the same to be brought to tax as a revenue receipt. In our opinion, the character of the receipt has to be considered for taxing the same. If the receipt is given to recoup revenue expenditure it will take the same colour and will be deemed to be a revenue receipt in the hands of the assessee. It is the purpose for which it is given that is material and is the determining factor if the receipt was given to meet the capital cost of the assessee company that receipt to be considered as capital receipt and cannot be taxed. In other words, if the receipt has been given to meet the actual expenses of the assessee corporation in the revenue field, the same to be considered as a revenue receipt and to be taxed. These facts to be examined by the AO in all these years and if he finds the receipt is to meet the capital cost of the assessee company as per the sanction letter of the State Government, the same shall not be brought to tax. On the other if ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 42 of 60 the receipt has been received by the assessee to meet the revenue expenditure or reimbursement of revenue expenditure, the charge to the P&L account same to be considered as revenue receipt. Accordingly, this issue is remitted to the file of AO for fresh consideration in all these assessment years. This ground of appeals in AY 2011-12 to AY 2015-16 is allowed for statistical purposes. 10. Ground No.3 is common in assessment years 2012-13 & 2013- 14 which is with regard to disallowance in respect of gift and donation given to third parties. 10.1 Facts of the case are that t he learned AO noted that the assessee had claimed as expenditure under the head donations and gifts but the same was not added back in the computation. The AO further stated that no supporting was given to substantiate the claim. The assessee contended that no details were called in this regard by the AO. The assessee further contended that the sum debited consists of donation made to Red Cross Society, Japan Relief Fund after Tsunami hit Japan. The assessee contended that Japan's corporation 'Japan International Corporation Agency' has funded nearly l/3rd of the assessee’s project and therefore in order to maintain better relationship and to promote the business with Japanese corporation, the assessee contributed to Japan Relief Fund in the need of the hour and argued that it needs to be allowed under section 37 of the Act. The assessee further contended that gifts were given to dignitaries on special occasions and therefore the same constitute business promotion expenses and therefore cannot be disallowed on the facts of the case. The assessee also contended that donation was made to one M/s A K Gopalan Trust, an education trust of ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 43 of 60 Rs.50,000/- and therefore it is eligible for deduction u/s 80G of the Act. 11. The ld. CIT(A) had gone through the submissions of the assessee and observed that the donation of Rs. 1,00,00,000/- to Red Cross Society, Japan Relief Fund cannot be claimed as business promotion expenses and therefore requires to be disallowed. As regards the other expenses Rs. 3, 83,156/-, the ld. CIT(A) observed that the gifts and donations are required to be supported by bills and vouchers and in the absence of the same the addition is required to be sustained. Accordingly, the addition was upheld to the extent of Rs. 3, 83,156/-. The assessee raised a claim before the AO during the course of assessment proceedings that the interest amount received during the year is not taxable and was erroneously offered to tax. The AO has rejected the claim of the assessee. The assessee contended during the course of appeal proceedings that the claim may be allowed as the interest is not taxable in view of the decision of the jurisdictional Tribunal in its own case for the A.Y. 2007-08 & 2008-09. The ld. CIT(A) considered the submission of the assessee and observed that the claim is not maintainable as according to the assessee the commercial operations have commenced during the financial year 2011-12 and therefore it is not possible to hold that the interest amount is not chargeable to tax. Further, the assessee ought to have made the claim by way of return of income and a mere claim before the AO or before the CIT(A) by way of letter is not maintainable. Accordingly, this ground of appeal was dismissed by the ld. CIT(A). Against this assessee is in appeal before us. 12. The ld. A.R. submitted before the CIT(A) that the disallowance is not sustainable in law for the reason that the details in respect of ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 44 of 60 the said gifts/donations were never called for by the Assessing Officer. Had the same been called for, the assessee would have submitted the details. 12.1 The ld. A.R. submitted that the impugned addition is not sustainable in law, as it amounts to making an addition without even making a basic enquiry regarding the same and therefore not sustainable in law as it is in violation of principles of natural justice. 12.2 Without prejudice, the assessee however submitted that the said amount of Rs.1,03,83,156/- basically consists of the following: Particulars Amount (Rs.) Donation to Red Cross Society, Japan Relief Fund on account of Tsunami in Japan 1,00,00,000 Gifts 3,33,156 Donation to Educational Trust 50,000 Total 1,03,83,156 12.3 The ld. A.R. submitted that the above expenditure having been incurred in relation to the business of the assessee corporation, the same is allowable under section 37 of the Act. 12.4 The ld. A.R. submitted that the assessee has contributed Rs.1 crore to Japan Relief Fund when Tsunami hit Japan, because Japan’s corporation Japan International Corporation Agency has funded nearly 1/3 rd of the assessee’s project and therefore in order to maintain better relationship and to promote the business with Japanese corporation, the assessee contributed to Japan Relief Fund in the need of the hour. ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 45 of 60 12.5 This expenditure is truly and completely in the course of business and therefore requires to be allowed under section 37 of the Act on the facts and circumstances of the case. 12.6 It is further submitted by the ld. A.R. that the expenditure on Gifts of Rs.3,33,156/- is business promotion expenses, viz., the expenditure on gifts given to foreign dignitaries, high ranking government officials, etc., which is in line with corporate practice and since the amount is relatively small, it is requested that it may please be allowed in the interest of justice. 12.7 The ld. A.R. submitted that the donation to M/s A K Gopalan Memorial and Charitable Trust is allowable u/s 80G to the extent of 50% and therefore the learned AO may be directed to grant the deduction under section 80G of the Act. 12.8 The CIT(A) however failed to appreciate the submissions of the assessee and upheld the disallowance. 12.9 The ld. A.R. prayed before this Tribunal to appreciate the submissions of the assessee and delete the additions made. In view of the above submissions on merits of the matter and the submissions on legal issues submitted in the common synopsis filed before this tribunal, the ld. A.R. prayed to allow this appeal in the interest of justice. 13. The ld. D.R. relied on the order of the CIT(A). 14. We have heard the rival submissions and perused the materials available on record. In our opinion, any expenditure incurred from section 30 to 38 of the Act are allowable as deduction while computing the business of assessee. Specifically u/s 37 of the Act any expenditure not being expenditure of nature described in ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 46 of 60 section 30 to 36 of the Act not being in the nature of capital expenditure or personal expenditure of the assessee laid out are expended wholly and exclusively for the purpose of business or profession and the assessee shall be allowed in computing the income chargeable under the head “profit and gains of business or profession”. The main thrust is that the expenditure should have been incurred wholly and exclusively for the purpose of business or profession and it should not be capital expenditure or personal expenditure of the assessee. If the condition laid down above is not satisfied, the expenditure cannot be allowed. Before us, ld. A.R. submitted that the above expenditure incurred for the purpose of business in view of the commercial expediency. However, we find that the above expenditure is not incurred wholly and exclusively for the purpose of business specifically donation to Red Cross Society and Japan Relief Fund nowhere contributed to the business of assessee. It is just like a donation or in the nature of gift, which cannot be allowed u/s 37 of the Act. However, we make it clear that if the assessee produce necessary details to claim exemption u/s 80G of the Act, the same may be examined and exemption u/s 80G of the Act may be granted after verifying the relevant details from the receipt issued by the respective party. This ground in AY 2012-13 & 2013- 14 are allowed for statistical purposes. Ordered accordingly. 15. Next common ground No.4 in assessment years 2013-14 & 2014-15 is with regard to disallowance of Forward Contract from time to time. 15.1 Facts of the case are that the learned AO noted that the assessee claimed expenditure towards forward contract premium and held that the same constitutes capital expenditure and not revenue expenditure. The assessee contended that the said ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 47 of 60 amount basically reflected the difference in exchange rate between the forward rate and the rate prevailing on entering into forward contract and only the sum crystallized during the year has been claimed as expenditure. The assessee also relied on several decisions to support its case. 15.2 The ld. CIT(A) observed that the assessee has not been able to controvert the finding of the AO that the forward contract premium relate to contracts in relation to capital goods and therefore need to be capitalized and the case laws relied upon by the assessee are on different facts and not applicable to the assessee's case. Accordingly, the ground was dismissed and the addition was upheld by the ld. CIT(A). 16. The ld. A.R. submitted that the learned AO has disallowed a sum of Rs.1,77,09,543/- in respect of the forward contract premium debited to the Profit and Loss Account. The same was challenged before ld. CIT(A) who upheld the addition. The said amount basically reflected the difference in exchange rate between the forward rate and the rate prevailing on the date of entering into forward contract. 16.1 The ld. A.R. submitted that the difference between the forward contract rate and the prevailing exchange rate represented the cost of entering into forward contracts which crystallized in its entirety during the impugned year. Once crystallized, the entire difference i.e., liability is allowable as deduction. Reliance is placed on the decision of the Hon’ble Supreme Court in the case of CIT v. Woodward Governor India (P) Ltd., reported in 312 ITR 254 (SC) where the Hon’ble Court held that loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 48 of 60 of expenditure under s. 37(1). Reliance is further placed on the decision of the Hon’ble Apex Court in Calcutta Co. Ltd., v. CIT reported in 37 ITR 1 (SC) and Bharat Earth Movers Limited v. CIT reported in 245 ITR 428 (SC) where the Apex Court held that deduction for a business liability which has arisen during a particular year should be allowed in that year in its entirety. The ld. A.R. submitted that the learned AO therefore erred in disallowing the same and he prayed that the said disallowance may be deleted as the same is allowable on the facts and circumstances of the case. 17. The ld. D.R relied on the order of the lower authorities. 18. We have heard the rival submissions and perused the materials available on record. The main contention of the ld. A.R. is that this forward contract is relating to acquisition of capital asset. In our opinion, forward contract entered into for the purpose of payment of capital liability with reference to acquisition of asset outside India, then such amount will be governed under section 43A of the Act. However, if the contract entered into for the purpose of capital liability with reference to the acquisition of capital asset within India, that loss is a capital loss. This issue has been considered by following judgements:- • Sutlej Cotton Mills Ltd. vs. CIT – 116 ITR 1 (SC) (1979) • CIT vs. Tata Locomotive and Engineering Company Ltd. – 60 ITR 405 (1966)(SC) • CIT vs. V.S.Dempo & Co Pvt. Ltd (206 ITR 291) (1994) (HC-Bombay) • CIT vs Woodward Governor India P. Ltd (312 ITR 254) (2009) (SC). ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 49 of 60 • CIT vs. Tata Iron & Steel Co Ltd 99 Taxmann 459 (SC) 18.1 In case of Sutlej Cotton Mills Ltd. vs. CIT – 116 ITR 1, it was observed by the Apex court that: “Whether the loss suffered by the assessee was a trading loss or not would depend on the answer to the question, whether the loss was in respect of a trading asset or a capital asset. In the former case, it would be a trading loss but not so in the latter. The test may also be formulated in another way by asking the question whether the loss was in respect of circulating capital or in respect of fixed capital” 18.2 Further observation made in above case that if the amount in foreign currency is utilised or intended to be utilised in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss. 18.3 In case of CIT vs. V.S. Dempo & Co Pvt. Ltd (206 ITR 291) which has specifically laid down principles in order to decide whether loss/gain arising out of foreign exchange fluctuations is in nature of revenue or capital, of which at para 5 of said principles which says as follow: “Loss resulting from depreciation of the foreign currency which is utilised or intended to be utilised in business and is part of the circulating capital, would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be capital loss. 18.4 In view of this, we remit this issue to the file of AO to decide afresh in the ratio laid down by Hon’ble Supreme Court in the case ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 50 of 60 of Sutlez Cottton Mills Ltd. cited (supra). The issue is remitted back to the file of AO for fresh consideration in assessment year 2013-14 & 2014-15. 19. Next ground i.e. ground No.5 which is ground No.6 in AY 2012- 13 is with regard to taxing of the interest wrongly offered as revenue receipt. 20. Facts of the case are that t he assessee raised a claim before the AO during the course of assessment proceedings that the interest amount received during the year is not taxable and was erroneously offered to tax. The AO has rejected the claim of the assessee. The assessee contended during the course of appeal proceedings that the claim may be allowed as the interest is not taxable in view of the decision of the jurisdictional Tribunal in its own case for the A.Y. 2007-08 & 2008-09. The ld. CIT(A) considered the submission of the assessee and observed that the claim is not maintainable as according to the assessee the commercial operations have commenced during the financial year 2011-12 and therefore it is not possible to hold that the interest amount is not chargeable to tax. Further, the assessee ought to have made the claim by way of return of income and a mere claim before the AO or before the CIT(A) by way of letter is not maintainable. Accordingly, this ground of appeal was dismissed by the ld. CIT(A). 21. The ld. A.R. submitted that in the return of income filed for the A.Y.2012-13, the Assessee offered interest income of Rs.38,52,10,180/- earned during the F.Y.2011-12 on temporary fixed deposits for taxation. ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 51 of 60 21.1 The ld. A.R. submitted before the CIT(A) that similarly for the A.Ys.2007-08 & 2008-09 also identical addition was made and the assessee challenged the same in statutory appeal. The said matter was decided by the Tribunal in assessee’s favour in ITA No. 1070 & 1071/Bang/2011 dated 31/10/2014 [upheld by the Hon’ble high court of Karnataka in ITA No. 117 & 118/2015 dated 23/11/2021] wherein it has been held that the interest income of the impugned nature in the assessee’s case constitutes capital income in its hands. A copy of the decision of the Tribunal was submitted before the CIT(A). 21.2 In view of the decision of the Tribunal, the assessee requested the learned CIT(A) to exercise his jurisdiction and allow the relief that the assessee is eligible for in respect of the interest income earned on temporary fixed deposits, which was the subject matter of the dispute before the jurisdictional Tribunal in the assessee’s own matter. The assessee prayed that the interest income of Rs.38,52,10,180/- which constitutes capital receipt in the hands of the assessee may be reduced from the income offered for taxation and consequently the total income of the assessee may to be reworked. 21.3 Whereas in the assessment proceedings, the ld. A.R. submitted that the learned Assessing Officer considered the submissions and took them on record, but denied the claim on the ground that the interest income is chargeable to tax and not exempt from tax. The Ld. CIT(A) noted that the claim cannot be allowed as the assessee started the commercial operations during the period under consideration. The CIT(A) failed to appreciate that the Phase 2 of the Metro Project was under construction and the funds insofar they related to Phase 2 cannot be brought to tax. The CIT(A) further erred in holding that the assessee ought to have made a claim by way of return of income. ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 52 of 60 21.4 The ld. A.R. submitted that in view of the decision of the Tribunal in the assessee’s own case the learned Assessing Officer is not justified in denying the claim of the assessee and accordingly the same is exempt from tax. 21.5 The ld. A.R. further submitted before the CIT(A) that the proceedings before Commissioner of Income-tax (Appeals) are a continuation of assessment proceedings and relied on the decision of the Hon’ble Apex Court in the case of CIT Vs. Kanpur Coal Syndicate, Reported in 53 ITR 225 in which their lordship have held, the relevant paragraph is reproduced for the purpose of clarity “ ...... in disposing of such an appeal the Appellate Assistant Commissioner may in the case of an order of assessment, confirm, reduce, enhance or annul the assessment; under clause (b) therefore he may set aside the assessment and direct the Income-Tax Officer to make fresh assessment. The Appellate Assistant Commissioner has, therefore, plenary powers in disposing of an appeal. The scope of his power is conterminous with that of the Income-tax Officer. He can do what the Income-tax Officer can do and also direct him to do what he failed to do....................”. 21.6 The ld A.R. further submitted that following the decision of the Hon’ble Apex Court in the case of Kanpur Coal Syndicate, various High courts and for that matter even the Hon’ble Apex Court in various cases has held that the appellate commissioner has plenary powers and the scope of his power is coterminous with that of the Income-tax Officer. The appellate commissioner can do what the Income-tax Officer can do and also direct him to do what he failed to do. Reliance is placed by the ld. A.R. on the following decisions in this regard – ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 53 of 60 (i) Jute Corpn. of India Limited v. CIT reported in 187 ITR 688 (SC) (ii) CIT v. Nirbheram Deluram reported in 224 ITR 610 (SC) (iii) NTPC v. CIT reported in 229 ITR 383 (SC) (iv) CIT v. K S Dattatreya reported in 344 ITR 127 (Kar) (v) CIT v. Raghuraji Agro Ind.(P) Ltd reported in 349 ITR 260 (All) (vi) CIT v. Pruthvi Brokers & Shareholders reported in 349 ITR 336 (Bom) 21.7 The ld. A.R. submitted that the learned CIT(A) however failed to appreciate the submissions of the assessee and upheld the decision of the AO. The ld. A.R. submitted that the order of the CIT(A) is perverse and contrary to the position in law. 21.8 Wherefore the ld. A.R. prayed that to direct the learned AO to consider the submission of the assessee and allow the exemption in respect of the interest on temporary fixed deposits in the interest of justice. 22. The ld. D.R. relied on the order of the ld. CIT(A). 23. We have heard the rival submissions and perused the materials available on record. In this case, the claim of the assessee is that interest amount received during the year is not taxable and was erroneously offered to tax and placed reliance on the earlier decision of the Tribunal wherein observed that the interest income earned pre-commencement period not taxable. However, in the present assessment year 2012-13, the business of the assessee has already commenced and it is in the expansion stage and the interest earned from surplus funds after commencement cannot be ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 54 of 60 considered as not taxable though it was received for expansion of the project. Accordingly, this ground of assessee is rejected in AY 2012- 13. Revenue’s appeal in ITA No.1048/Bang/2019: 24. Facts of the case are that the AO has made an addition of Rs.20,21,69,745/- representing the interest on term deposits which the assessee did not offer for taxation The assessee contended that since it was involved in the activity of construction of Metro rail projects, therefore the receipts earned during the construction period are capital in nature, as the deposits from which they arose were only made to reduce the cost of borrowing and there was no income generating activity. The assessee contended that the interest received is capital receipt and should go to reduce the capital expenditure and does not partake the character of income for the purpose of taxation. The assessee has relied on the decision of the Hon'ble Supreme Court in CIT v. Bokaro Steel Ltd., reported in 236 ITR 315 (SC) in support of its submissions. It was also submitted that the jurisdictional Tribunal in the assesee's own case for the A.Ys, 2007-08 & 2008-09 has held in ITA No. 1070 & 1071/Bang/2011 that interest income of identical nature was held to be not taxable and accordingly the same ratio would apply to the present appeals also. 24.1 The ld. CIT(A) after considering the submissions of the assessee has observed that since the assessee has not initiated commercial operations during the year, therefore the incidental receipts during the construction of capital assets before the commencement of the business/commercial operations should go to reduce the value of capital asset in the books, thereby reducing ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 55 of 60 the depreciation claim in the future years. The ld. CIT(A) opined that the decision of the Supreme Court in case of Bokaro Steel is squarely applicable to the facts of the case and accordingly this ground of appeal was allowed and the addition made was deleted. 25. We have heard the rival submissions and perused the materials available on record. The ld. CIT(A) allowed the claim of the assessee that interest income is not taxable by placing reliance on the earlier order of the Tribunal in ITA Nos.1070 & 1071/Bang/2011 dated 31.10.2014 and same has been confirmed by Karnataka High Court in ITA No.117/2015 & 118/2015 dated 23.11.2021, wherein held as under: 12. We have carefully considered the rival submissions of the learned counsel appearing for the parties and perused the material on record. 13. In TaticorZn Alkali Chemicals and Fertilizers Ltd., supra, the facts were that M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd., which was incorporated on 03.12.1971 for the purpose of, inter alia, manufacturing heavy chemicals such as ammonium chloride and soda ash, begun its production during June.. 1982. The term loans taken from various banks and financial institutions for the purpose of setting up the factories, which was not immediately required by the company, were kept invested in short-term deposits with banks, which was specifically permitted by the Memorandum and Articles of Association of the Company. Interest earned by the company from the various loans given by the company and also from the bank deposit,3 which were considered by the departmental authorities as income and brought to tax was the subject matter of the tax reference case before the Hon'ble Apex Court. The following question of law was referred to the Court for the decision:- "Whether, or. the . facts and in the circumstances of the case : interest derived by the assessee from the borrowed funds which were invested in short-term deposits with banks would be chargeable to tax under the head "Income from other sources" or would go to reduce the interest payable by the assessee on the term loans secured by the assessee from financial institutions, which would be capitalised after the commencement of commercial production." In that context, it was held thus: ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 56 of 60 "4. The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income tax. Profits and gains of business or profession is only one of the heads under which the company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the surplus fund in its hand for purchase of land or house property and later sells it at profit, the gat, i made by the company will be assessable under the head `Capital gains'. Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under s. 22 as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under s. 56 of the Act. The company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interests will be chargeable under s. 56 of the Act." 14. The co-ordinate bench of this Court in the case of KUIDFC 1(2009) 315 ITR 301], supra, has held thus:- "An identical question had come up for consideration before a Division Bench of this Court in (CIT v. Karnataka Urban Infrastructure Development and Finance Corporation [2006] 284 ITR 582), I.T.A. No. 2418 of 2005 between the same parties, decided on February 21, 2006 The said judgment has been placed for consideration before us and we have gone through it. Essentially, the Tribunal has also placed reliance on the said judgment and accordingly held in favour of tine assessee. We have no doubt in our mind that the said judgment squarely covers the issue involved in this appeal, It has been held by the Division Bench of this Court in the aforesaid judgment in the relevant paragraph as under (page 584): "The material on record shows that the very purpose of constitution of the assessee was to act as a nodal agency for implementation of the mega city scheme worked out by the Planning Commission. Both the Central and the State Governments are expected to provide requisite finances for implementation of the said project. The funds from the Central and State Governments will flow directly to the specialised institutions/nodal agencies as grant and the nodal agency will constitute a revolving fund with the help of Central and State shares out of which finance could be provided to various agencies such as water, sewerage boards, municipal corporations, etc. The ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 57 of 60 objective is to create and maintain a fund for the development of infrastructural assets on a continuing basis and, therefore, the assessee is a nodal agency formed/ created by the Government of Karnataka as per the guidelines; there is no profit motive as the entire fund entrusted and the interest accrued therefrom on deposits in bank though in the name of the assessee has to be applied only for the purpose of welfare of the nation/ States as provided in the guidelines ; the whole of the fund belongs to the State Exchequer and the assessee has to channelise them to the objects of the Centrally sponsored scheme of infra-structural development for the mega city of Bangalore. Funds of one wing of the Government are distributed to the other wing of the Government for public purpose as per the guidelines issued. The monies so received, till they are utilised, are parked in a bank. The finding recorded by the Tribunal clearly shows that the entire money in question is received for implementation of the scheme which is for a public purpose and the said scheme is implemented as per the guidelines of the Central Government and, therefore, the assessee is only acting as a nodal agency of the Central Government for implementation of these projects. It is not the case of the Revenue that the assessee was carrying on any business or activities of its own while implementing the scheme in question. The unutilised money, during which the project could not he fully implemented, is deposited in a bank to earn interest. That interest earned is also again utilised for the implementation of the mega city scheme which is also permitted under the scheme. Therefore, in computing the total income of the assessee for any previous year the interest accrued on the bank deposits cannot be treated as an income of the assessee as the interest is earned out of the money given by the Government of India for the purpose of implementation of the mega city scheme. Therefore, we do not find any error in the conclusion reached by the Tribunal that there was no income earned by way of interest by the assessee and setting aside the order of the Assessing Officer which is affirmed by the first appellate authority, The finding given by the Tribunal is purely a question of fact. We do not find any substantial question of law involved in this appeal and, therefore, this appeal is liable to be di3rnissed at the stage of admission itself. " In the light of the aforesaid findings recorded by the Division Bench of this Court, we are of the considered opinion that there is no merit or , substance in this appeal. No substantial question of law arises to be answered by this Court. Thus, the appeal is hereby dismissed." 15. in the case of Karnataka State Agricultural Produce Processing and Export Corporation Ltd., supra, the co-ordinate bench of this Court (where one of us the Hon'ble SSJ was a member) following the judgments in the case of KUIDFC 1(2006) 284 ITR 582], Tuticorin Alkali Chemicals ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 58 of 60 and Fertilizers Ltd., supra, as well as Bongaigeort Refinery and Petrochemicals Ltd., vs. Commissioner of Income-tax reported in (2ool) 251 JTR 329 pc) and Commissioner of Income-tax vs, 1okaro Steel Ltd., reported in (1999) 235 ITR 315 (SC), has held thus:- "In the light of the judgments referred to above, we have examined the case on hand. It is dear that the assessee has received the grant of Rs.10 crcres from the Government of Karnataka for a particular project i.e., for improvement of infrastructure and to promote export of horticultural produce. Before the said grant was utilized for the specific purpose it was parked in fixed deposits and the interest was earned and by the subsequent additional evidence produced by the assessee before the Tribunal, it is further made clear that the State Government has categorically specified that any interest earned on those grants originally granted has to be considered as an additional grant and not an income of the assessee- Company. As explained by the Apex Court, in Bongaigaon Refinary and Petrochemicals Ltd. case, (supra), in Tuticorin's case, the investment in deposits was made by the' Company during its formative period by investments and in 8°P:or° Steels Ltd., case (supra) the inextricable link between the interest earned and the set up of the plant was established. Thus, in. the present case we are of the view that this is not an investment made subsequent to the setting up of the project but this is the unutilized income parked in fixed deposits for a temporary period and inextricable link for the interest earned on the grants and the original grant made by the State Government to set up a project is established as in Bokaro Steel case. Thus we are of the view that the facts and circumstances of the present case is squarely covered by Bokaro Steel Ltd.,(supra) and it is not the case of the Revenue that the said interest earned on these fixed deposits was utilized by the Company for any other purpose other than the purpose for which the grants were made by the State Government. Even if we peruse the preamble to the Government Order dated January 23, 2007, by which the grant of Rs.10 crores is made by the Government of Karnataka it is clear that "in view of the National Horticultural Machine Programme implemented in Karnataka and major thrust given by the State Government for the development of horticultural sector, there is unlimited potentiality for export of horticultural produce, but the main constraint is lack of post harvest infrastructures vim., procurement centres, grading, washing, waxing, packing units, refrigerated transport, pre- cooling and cold storages, intermediate cold storages, processing ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 59 of 60 units and export house. In order to harness the potentiality and to increase exports. Further KAPPEC has proposed to create these infrastructure facilities in various parts of State in a phased manner and efforts will also be made to rope in funds from Government of India under the relevant scheme from different agencies". The object of the scheme is to facilitate the farmers and to promote export of horticultural produce. Hence, the very purpose of granting Rs.10 crores to the assessee was to act as a nodal agency for implementation of the scheme. There is no profit motive as the entire fund entrusted and the interest accrued therefrom from deposits has to be utilised only for the purpose of the scheme originally granted. The whole of the fund belongs to the State exchequer and the assessee has to channelise them to achieve the objects of centrally sponsored scheme of infrastructural development as specified in the Government Order. Hence, interest on all these fixed deposits are considered to be ccpitalized and not revenue receipts to treat it as an income. The Tribunal considering these aspects and more particularly, following the judgment of this Court in KUIDC case has held that the interest earned on these grants is not an income, which we do not find fault with." 16. As could be seen from the Government Order dated 25.03.2008 now placed on record, it is ex-facie apparent that the unutilized funds of the project, before the commencement of the functional operation of the project, was invested by the assessee in fixed deposits and mutual funds as per the directions of the Government. It is apt to refer to the said Government Order, the relevant portion of which reads thus:- "The income generated out of earlier release of State Government to BMRCL before the commencement of BMRCL project would have to be converted into State's equity towards the project and therefbre cannot be counted as income of BMRCL. Further release as equity would be made to BMRCL only after adjusting this incnme." 17. In the light of the judgments referred to above vis-a-vis the Government Order dated 25.03.2008, it is clear that the income generated out of earlier release of State Government for its project would have to be converted into State's equity towards the project and the same cannot be counted as income of BMRCL. Thus, there is no profit motive as the entire fund entrusted and the interest accrued therefrom has to be utilized only for the purpose of scheme. Thus, it has to be capitalized and cannot be considered as revenue receipts.” ITA Nos.1048 & 1112 to 1116/Bang/2019 Bangalore Metro Rail Corporation Ltd., Bangalore Page 60 of 60 25.1 Further, we make it clear that the income generated through above impugned interest should be converted into state’s equity towards the project. If it fails so same to be considered as income of the BMRCL. Accordingly, the issue is remitted to the file of AO to decide the issue in the light of judgement of Hon’ble Karnataka High Court cited (supra). The ground of appeal of the revenue is partly allowed for statistical purposes. 26. In the result, all the appeals of the assessee as well as revenue’s appeal are partly allowed for statistical purposes. Order pronounced in the open court on 6 th Apr, 2023. Sd/- (N.V. Vasudevan) Vice President Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 6 th Apr, 2023. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.