M/s. Vizhinjam International Seaport Ltd, Trivandrum V. The ITO, Trivandrum

ITA 7/COCH/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8532 (ITAT-COCHIN)
• Duration Of Justice: 5 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-06-2016
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 07-06-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 13-01-2016
• Court: TRIBUNAL
• Department Lawyers: SHANTAM BOSE
• Assessee Lawyers: C PANKAJAKSHAN C GOVIND
• Keywords: Capital receipt; Revised return

Judgement Text

ITA NO.07/COCH/2016 1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI B P JAIN, AM & GEORGE GEORGE.K, JM ITA NO.07/COCH/2016 (ASST YEAR : 2010-11) M/S. VIZHINJAM INTERNATIONAL SEAPORT LTD., 3 RD FLOOR, TRANS TOWERS, VAZHUTHACAUD, TRIVANDRUM. THE INCOME TAX OFFICER, WARD- 2(4), TRIVANDRUM. ( ASSESSEE APPELLANT) VS (REVENUE -RESPONDENT) PAN NO. AACCV 0069M ASSESSEE BY SHRI C.PANKAJAKSHAN C. GOVIND, CA REVENUE BY SHRI SHANTAM BOSE, CIT(DR) DATE OF HEARING 07/06/2016 DATE OF PRONOUNCEMENT 15/06/2016 ORDER PER B.P. JAIN, AM: THIS APPEAL OF THE ASSESSEE ARISES FROM THE O RDER OF THE LD. CIT(A), TRIVANDRUM DATED 11-12-2015 FOR THE ASSESSMENT YEAR 2010-11. 2. THE ASSESSEE HAS RAISED AS MANY AS FIVE GROUN DS RUNNING INTO FOUR PAGES. HOWEVER, THERE IS ONLY ONE ISSUE, WHICH IN FACT, IS REPRODUCED HEREINBELOW: THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HA S ERRED IN CONFIRMING THE ASSESSMENT TO INCOME OF THE INTEREST ON DEPOSIT RECEIVED FROM BANKS AMOUNTING TO RS.2,76,67,028/- OUT OF SURPLUS FUNDS FROM THE DEFINED AGENCY ACTIVITIES ON BEHALF OF THE GOVT. OF KERALA IN SETT ING UP OF VIZHINJAM INTERNATIONAL SEAPORT AT VIZHINJAM IN THIRUVANANTHA PURAM. ITA NO.07/COCH/2016 2 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE IS A DOMESTIC COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED. THE GOVERNMENT OF KERALA VIDE ITS ORDER DATED 09.03.2007 HAD ENTRUSTED THE ASSESSEE C OMPANY THE TASK OF IMPLEMENTING THE INTERNATIONAL SEAPORT PROJECT AT V IZHINJAM AND GIVEN GRANTS OF RS.54.74 CR. UPTO 31/03/2010 TO BE UTILIZED FOR ACQ UISITION OF LAND AND CONSTRUCTION OF SEAPORT. AS PER THE MEMORANDUM OF ASSOCIATION, THE MAIN OBJECT OF THE COMPANY IS TO ADDRESS ALL SUPPORTING INFRASTRUCTURE REQUIREMENT FOR THE SEAPORT PROJECT AS WELL AS OTHER DEVELOPMENT NE EDS. OUT OF THE GRANTS RECEIVED FROM THE GOVERNMENT OF KERALA, THE FUND WH ICH WAS NOT IMMEDIATELY REQUIRED TO IMPLEMENT THE ASSIGNED TASK WAS DEPOSIT ED WITH BANKS DURING THE INTERVENING PERIOD. THE INTEREST RECEIVED ON BANK DEPOSITS REPORTEDLY HAS NOT BEEN CREDITED INTO THE PROFIT AND LOSS ACCOUNT OF T HE ASSESSEE COMPANY BUT CREDITED TO THE GRANT RECEIVED ACCOUNT CONTEMPLATIN G THAT INTEREST RECEIVED ON BANK DEPOSITS FORMS PART OF GOVERNMENT GRANT WHICH IN TURN SHOULD NECESSARILY BE UTILIZED FOR ACQUISITION OF LAND AND CONSTRUCTIO N OF INFRASTRUCTURE FACILITIES. THE ASSESSEE THUS HAS FILED A REVISED RETURN RETURNING NIL INCOME SUBSEQUENT TO CLAIMING EXEMPTION OF THE ENTIRE AMOUNT OF INTEREST RECEIVED ON BANK DEPOSITS AS A CAPITAL RECEIPT BEING PART OF CAPITAL GRANTS R ECEIVED FROM THE GOVERNMENT OF KERALA. THE ASSESSING OFFICER HAS NOT ACCEPTED THE ASSESSEES INTERPRETATION THAT THE INTEREST RECEIVED ON BANK DEPOSITS WAS A C APITAL RECEIPT AND FORMS PART OF GRANT FROM THE GOVERNMENT AND THEREBY BROUGHT TO TAX THE ENTIRE INTEREST RECEIVED OF RS.2,76,67,028/- RELYING ON THE DECISIO NS OF THE HONBLE SUPREME ITA NO.07/COCH/2016 3 COURT IN THE CASES OF TUTICORIN ALKALI CHEMICALS AN D FERTILIZERS LTD. VS. CIT (227 ITR 172), CIT VS. BOKARO STEEL LIMITED (236 ITR 315) AN D CHALLAPALLI SUGARS LTD. VS. CIT (98 ITR 167). THE LD. CIT(A) CONFIRMED THE ACTION OF THE ASSESSING OFFICER. 4. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE SUBMISSIONS MADE BEFORE TH E LD. CIT(A). 5. THE LD. DR RELIED UPON THE ORDERS OF BOTH THE AUTHORITIES BELOW. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE FACTS OF THE CASE. THE ONLY ISSUE IN THIS APPEAL IS WHETHER THE LD. CIT(A) WAS IN ORDER IN CONFIRMING THE ASSESSMENT TO INCOME OF INTEREST RECEIVED FROM SURP LUS FUNDS INVESTED OUT OF FUNDS PROVIDED BY GOVERNMENT OF KERALA EXCLUSIVELY FOR CARRYING OUT NODAL AGENCY FUNCTIONS IN CONNECTION WITH SETTING UP OF T HE DEEP SEA INTERNATIONAL PORT. THE DEVELOPMENT OF VIZHINJAM AS AN INTERNATIO NAL CONTAINER TRANSSHIPMENT TERMINAL IS SET TO CHANGE THE FACE OF STATE OF KERA LA AND EVEN THE ENTIRE SOUTH INDIA AND THE PUBLIC UTILITY VALUE/SIGNIFICANCE OF THE PROJECT IS VERY HIGH AND WIDELY ACCLAIMED. IT WAS SUBMITTED THAT THE ASSESS EE WAS SET UP AS A SPECIAL PURPOSE VEHICLE, INCORPORATED UNDER THE COMPANIES A CT, 1956, WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF UNDERTAKING CERTAIN DEFINED AGENCY FUNCTIONS/ACTIVITIES ON BEHALF OF THE GOVT. OF KERA LA LIKE ACQUISITION OF LAND FROM THE PUBLIC, PROVIDING EXTERNAL INFRASTRUCTURE LIKE ROAD, RAIL, POWER AND WATER AND ARRANGEMENT OF FINANCE FOR THE PROJECT BY ENTERING INTO TIE UP AGREEMENTS WITH ITA NO.07/COCH/2016 4 VARIOUS FINANCIAL INSTITUTIONS AND BANKS. COPY OF THE GOVERNMENT ORDER FOR SETTING UP THE ASSESSEE GO (MS) NO.43/04/F&PD DATED 23.11.2004 HAS BEEN ALREADY FILED WITH THE APPEAL PETITION PAGE NO. 38 -40. THE ABOVE GO PROVIDES THAT COMPANY WILL HAVE OPERATIONAL FREEDOM AND AUTO NOMY FOR IMPLEMENTING THE PROJECT EFFICIENTLY AND EFFECTIVELY AND THAT AS AN ARM OF THE GOVERNMENT, THE SPC WOULD WORK UNDER THE SUPERVISION OF THE GOV ERNMENT AND ENTER INTO AGREEMENTS WITH PRIVATE PARTIES AND SOURCE FUNDS FO R OPERATIONS. THE COMPOSITION OF THE BOARD OF DIRECTORS WAS ALSO PROV IDED FOR IN THE ABOVEMENTIONED GO, WITH THE CHIEF MINISTER OF KERAL A AS THE CHAIRMAN, AND OTHER MINISTERS/SENIOR GOVERNMENT SECRETARIES INCLU DING THE CHIEF SECRETARY AS ITS MEMBERS. 7. FROM THE ABOVE DETAILS IT IS CLEAR THAT THE AS SESSEE IS ONLY AN EXTENDED ARM/WING OF THE GOVERNMENT SET UP WHOLLY AND EXCLUS IVELY FOR UNDERTAKING CERTAIN SUB-SOVEREIGN FUNCTIONS ON BEHALF OF THE GO VERNMENT OF KERALA FOR THE PUBLIC UTILITY PROJECT INVOLVING PROVIDING SUPPORT/ ASSISTANCE FOR SETTING UP A DEEP SEA INTERNATIONAL SEAPORT AND THEREFORE, IS NOT ENG AGED IN ANY BUSINESS ACTIVITIES INVOLVING A PROFIT MOTIVE. THE COMPANY WAS APPOINTE D BY THE GOVERNMENT AS ITS NODAL AGENT VIDE GO (MS) NO.9/07/F&PD DATED 09/03/2 007 PARA 7.1 (COPY ALREADY FILED WITH THE APPEAL PETITION PAGE NO. 3 4-37). AS PER PARA 5 OF THIS GO, THE IMPLEMENTATION AND OPERATION OF THE PROJECT (PORT) WILL BE ON BOT MODEL WITH A CONCESSION PERIOD OF 30 YEARS BY A PRI VATE SECTOR DEVELOPER ITA NO.07/COCH/2016 5 SELECTED THROUGH OPEN AND COMPETITIVE BID PROCESS. PARA 7.3 OF THE GO PROVIDES THAT INVESTMENT OF THE GOVERNMENT OF KERAL A AND PRIVATE SECTOR FOR THIS PPP JOINT VENTURE WILL BE MADE THROUGH THE ASSESSE E COMPANY. THE GOVERNMENT OF KERALA HAS PROVIDED UPTO 31.03.2010 A N AMOUNT OF RS.54.74 CRORES BY WAY OF GRANT AND RS.12 CRORES BY WAY OF E QUITY CAPITAL CONTRIBUTION TO THE ASSESSEE COMPANY AND STATEMENT GIVING DETAILS O F VARIOUS GOVERNMENT ORDERS IS ANNEXED TO ANNEXURE A. THE FUNDS RECEIVE D NOT IMMEDIATELY REQUIRED FOR IMPLEMENTATION OF THE PROJECT WAS INVESTED IN D EPOSITS WITH NATIONALIZED BANKS FROM TIME TO TIME PURELY FOR AUGMENTING/MAXIM IZING THE RESOURCES OF THE ASSESSEE COMPANY AND INTEREST INCOME OF RS.2,63,66, 732 (RS.2,79,83,000 WAS ASSESSED IN THE ORDER BASED ON ENTRIES IN 26AS WHIC H INCLUDES AMOUNTS ALREADY OFFERED TO TAX IN PRECEDING YEAR) WAS EARNED ON DEP OSITS MADE DURING THE FINANCIAL YEAR 2009-10 RELEVANT TO ASSESSMENT YEAR 2010-11. COPY OF THE AUDITED ACCOUNT OF THE ASSESSEE FOR THE FINANCIAL YEAR 2009 -10 IS ANNEXED TO ANNEXURE B FROM WHICH IT MAY BE NOTED THAT INTEREST RECEIVED O N DEPOSITS AMOUNTING TO RS.2,63,66,732 HAS BEEN CREDITED TO FORM PART OF GR ANT FROM GOVERNMENT OF KERALA UNDER CAPITAL RESERVES IN SCHEDULE B RESOU RCES AND SURPLUS. AS PER AUDITED ACCOUNTS, THE ASSESSEE DID NOT HAVE ANY OTH ER INCOME FROM ITS ACTIVITIES EXCEPTING A MEAGRE AMOUNT OF RS.438/- SHOWN UNDER O THER INCOME. THE ASSESSEE FILED THE RETURN OF INCOME FOR YEAR DECLAR ING NIL INCOME CLAIMING THAT INTEREST RECEIVED ON DEPOSITS IS A CAPITAL RECEIPT FORMING PART OF GRANT FUNDS RECEIVED FROM GOVERNMENT OF KERALA. ITA NO.07/COCH/2016 6 8. THE ASSESSING OFFICER ASSESSED THE INTEREST INCO ME ON DEPOSITS OF RS.2,79,83,000/- BASED ON THE CREDIT IN FORM 26AS U NDER OTHER SOURCES ON AN ERRONEOUS UNDERSTANDING OF THE FACTS OF THE CASE TH AT THE ASSESSEE WAS DIRECTLY ENGAGED IN THE CONSTRUCTION WORK OF THE PORT. (AS C OULD BE NOTED FROM PARA 3 OF THE ORDER WHEREIN IT IS STATED THAT ASSESSEE AN INT ERNATIONAL SEAPORT, A GOVERNMENT COMPANY, THE CONSTRUCTION OF WHICH IS TA KEN UP BY ITSELF WHICH IS ABSOLUTELY A MISTAKE ON FACTS) AND BASED ON THIS UN DERSTANDING, INTEREST RECEIVED WAS RECKONED AS RECEIVED DURING PRE CONSTR UCTION PERIOD AND WAS ASSESSABLE AS INCOME FROM OTHER SOURCES RELYING ON THE DECISIONS OF HON. SUPREME COURT OF INDIA IN TUTIKORIN ALKALI CHEMICAL S AND FERTILIZERS LTD. VS. CIT REPORTED IN (119) 227 ITR 172 AND CIT VS. BOKORO ST EELS LTD. REPORTED IN 236 ITR 315. THE ASSESSEE MAY CATEGORICALLY SUBMIT THAT BOTH THE SE DECISIONS OF THE HONBLE APEX COURT ARE NOT APPLICABLE TO THE ASSESSEE AS IT IS NOT AT ALL UNDERTAKING OR ENGAGED IN THE CONSTRUCTION ACTIVITIES OF THE INTER NATIONAL DEEP SEA PORT BUT IS ONLY CARRYING OUT CERTAIN DEFINED AGENCY FUNCTIONS ON BEHALF OF THE GOVERNMENT OF KERALA LIKE ACQUISITION OF LAND, PROV IDING EXTERNAL INFRASTRUCTURE TO FACILITATE SMOOTH SETTING UP OF THE PORT LIKE RAIL, ROADS, POWER AND WATER AND ALSO ARRANGING SOURCING OF FUNDS FOR THE PROJECT BY WAY OF LOANS AS DETAILED IN THE GOVERNMENT ORDERS AS STATED ABOVE. THE FACT THAT T HE ASSESSING OFFICER HAS ASSESSED THE INTEREST INCOME ON DEPOSITS UNDER OTHE R SOURCES ON A ERRONEOUS ITA NO.07/COCH/2016 7 APPRECIATION/UNDERSTANDING OF THE FACTS OF THE CASE IS THUS VERY CLEAR FROM A CURSORY READING OF THE ASSESSMENT ORDER AS STATED A BOVE. 9. THE LD. CIT(A) HAS ALSO REFUSED TO ACCEPT THE ASSESSEES CLAIM FOR EXEMPTION OF TAX OF INTEREST INCOME ON DEPOSITS AS BEING A CA PITAL RECEIPT ON ACCOUNT OF AN UNFORTUNATE ERROR IN UNDERSTANDING OR APPRECIATI ON OF THE BASIC FACTS OF THE CASE AS COULD BE NOTED FROM THE DETAILS FURNISHED B ELOW: THE LD. CIT(A) HAS HELD THAT ASSESSEE IS NOT AUTHOR IZED BY ITS OBJECTS CLAUSE OF MEMORANDUM TO MAKE THE INVESTMENT VIDE PARA 28 OF CLAUSE IIIB THE MOA REFERRED TO BY THE AUTHORITY IN PARA 3.3.1 (PAGE12 OF THE ORDER) REPRODUCED BELOW CLEARLY AUTHORIZE INVESTMENT OF SURPLUS FUNDS . TO LEND OR DEPOSIT MONEYS BELONGING TO OR ENTRUSTED TO, AT THE DISPOSAL OF TH E COMPANY TO SUCH PERSON, FIRM OR COMPANY AND IN PARTICULAR TO CUSTOMERS AND OTHERS HAVING DEALING WITH THE COMPANY WITH OR WITHOUT SECURITY UPON SUCH TERM S AS MAY BE THOUGH PROPER AND TO GUARANTEE THE PERFORMANCE OF CONTRACT S BY SUCH PERSON, FIRM OR COMPANY AND ALSO TO INVEST AND DEAL WITH THE MONEY OF THE C OMPANY NOT IMMEDIATELY REQUIRED IN SUCH MANNER AT THE DISCRETI ON OF THE BOARD OF DIRECTORS, SUBJECT TO THE PROVISIONS OF THE COMPANIES ACT, 195 6. COPY OF THE MEMORANDUM OF ASSOCIATION OF THE COMPANY HAS BEEN A LREADY FILED WITH THE APPEAL PETITION PAGE NO.85-91. THE LD. CIT(A) H AS HELD THAT PARA 28 OF MOA AS ABOVE DOES NOT AUTHORIZE OR PROVIDE FOR INVESTME NT OF SURPLUS FUNDS OF THE ITA NO.07/COCH/2016 8 COMPANY AND IT COULD BE NOTED THAT THE PORTION IN T HE ABOVE MENTIONED PARA OF MOA HIGHLIGHTED IN BOLD ITALICS ABOVE HAVE BEEN OMITTED BY THE LD. CIT(A) BY AN INADVERTENT ERROR WHILE REPRODUCING THE CONTENTS IN THE TEXT OF THE APPELLATE ORDER AS ABOVE, ON ACCOUNT OF WHICH THE CONCLUSION ARRIVED AT THEREFROM WAS CONTRARY TO THE ACTUAL PROVISIONS OF THE MOA. THE PORTION HIGHLIGHTED IN BOLD ITALICS ACTUALLY AUTHORIZES AND PERMITS INVESTMENT ON SURPLUS FUNDS NOT IMMEDIATELY REQUIRED FOR THE PURPOSES OF THE BUSINE SS AT THE DISCRETION OF THE BOARD OF DIRECTORS SUBJECT TO THE PROVISIONS OF THE COMPANIES ACT, 1956. THE ASSESSEE SUBMITTED THAT THE COMPANIES ACT, 1956 DOE S NOT PLACE ANY BAN OR EMBARGO ON INVESTMENT OF SURPLUS FUNDS, WHICH IS LE FT TO THE SWEET WILL AND DISCRETION OF THE BOARD OF DIRECTORS OF THE ASSESSE E COMPANY TO BE RUN IN AN AUTONOMOUS MANNER. THE ACCOUNTS FOR THE YEAR DULY A UDITED BY THE STATUTORY AUDITORS HAVE BEEN DULY VERIFIED AND AUTHENTICATED BY THE BOARD OF DIRECTORS AS REQUIRED BY THE PROVISIONS OF SECTION 215 OF THE CO MPANIES ACT, 1956, WHICH SPEAKS FOR ITSELF ABOUT THE AUTHORITY FOR THE INVES TMENT MADE. 10. APART FROM THE ABOVE, THE LD. CIT(A) HAS ALSO HELD IN PARA 3.3.1 OF THE APPELLATE ORDER THAT THE DEPOSIT OF MONEY HAS NO DI RECT LINK FOR THE SAID PURPOSE, FOR WHICH THE ASSESSEE COMPANY WAS INCORPO RATED AND THIS IS PRIMA FACIE MISPLACED ON THE FACTS OF THE CASE. IT IS USU AL COMMERCIAL PRACTICE OF ALL COMPANIES AND UNDERTAKINGS TO INVEST THE SURPLUS FU NDS NOT IMMEDIATELY ITA NO.07/COCH/2016 9 REQUIRED IN INCOME EARNING DEPOSITS TO MAXIMIZE THE REVENUE/FUNDS OF THE INSTITUTION SINCE THE DIRECTORS ARE ACTING IN FIDUC IARY CAPACITY ON BEHALF OF THE MEMBERS OF THE COMPANY (THE OWNERS BEING GOVERNMENT OF KERALA IN THIS CASE) AND IF THE INVESTMENT OF SURPLUS FUNDS IS AUTHORIZE D BY A SPECIFIC PROVISION IN MOA, THE ACTION OF THE DIRECTORS IS ABSOLUTELY IN L INE WITH THE OBJECTS CLAUSE OF THE COMPANY SO LONG AS THERE IS NO BAN OR RESTRICTI ON ON SUCH ACTION UNDER THE PROVISIONS OF COMPANIES ACT, 1956 WHICH IS NOT THER E IN THIS CASE AS ALREADY STATED. THE LD. CIT(A) HAS ALSO STATED THAT INVEST MENT ACTIVITY IS NOT PERMITTED OR AUTHORIZED BY THE GOVERNMENT AND HENCE SUCH ACTIVIT Y CANNOT BE TREATED AS A AGENCY FUNCTION ELIGIBLE FOR EXEMPTION FROM TAX AS PER THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN KARNATAKA URBAN INF RASTRUCTURE DEVELOPMENT AND FINANCE CORPORATION REPORTED IN (2009) 315 ITR 301 (KAR.) (COPY ALREADY FILED WITH THE APPEAL PETITION PAGE NO.44-46). IN GOVE RNMENT ORDER GO (MS) NO.9/07/F&PD DATED 09/03/2007 AS STATED ABOVE, THE GOVERNMENT HAS CLEARLY STATED THAT THE COMPANY WILL HAVE OPERATIONAL FREED OM AND AUTONOMY FOR IMPLEMENTING THE PROJECT EFFICIENTLY AND EFFECTIVEL Y. SINCE IDLE PARKING OF LARGE FUNDS WOULD NOT BE A EFFICIENT WAY OF IMPLEMENTING THE PROJECT, INVESTMENT OF SURPLUS FUNDS NOT IMMEDIATELY REQUIRED FOR THE PROJ ECT ACTIVITIES IS TO BE REGARDED AS ACTING AS PER AUTONOMY AND OPERATIONAL FREEDOM A S PROVIDED IN THE GO. FURTHER SPECIFIC AUTHORIZATION FOR INVESTMENT IS SI MPLY NOT CALLED FOR OR WARRANTED. IN PARA 3.3.1 OF THE ORDER, THE LD. CIT(A) HAS STAT ED THAT IT COULD BE MADE OUT FROM THE ABOVE THAT IT HAS NEVER BEEN THE INTENTION OF THE GOVT. OF KERALA TO LET ITA NO.07/COCH/2016 10 THE APPELLANT COMPANY TO DEPOSIT SURPLUS FUNDS IN B ANKS AND TO EARN INTEREST THEREON SO AS TO CREDIT THE SAME TO THE GRANT A/C B UT TO ADDRESS ALL INFRASTRUCTURE AND DEVELOPMENT NEEDS AND THAT THE A PPELLANT COMPANY WAS NOT INCORPORATED TO EARN INTEREST FROM SURPLUS FUND S AND THIS ACTIVITY IS VERY MUCH AGAINST THE CLAUSE III(B )(25) & (26) OF MOA. 11. IT WAS SUBMITTED THAT PARA (25) AND (26) OF C LAUSE III(B) OF MOA ONLY PROVIDES THAT GRANTS RECEIVED FROM THE GOVERNMENT SHALL NOT BE USED TO CARRY ON BANKING BUSINESS AS DEFINED IN BANKING REGULATION ACT, 1949 WHICH IS NOT AT ALL APPLICABLE IN THE CASE OF THE ASSESSEE AS NO BANKING BUSINESS IS INVOLVED IN INVESTMENT OF SURPLUS FUNDS WITH BANKS, THIS BEING ONLY AN INCIDE NTAL ACTIVITY IN THE USUAL AND NORMAL COURSE OF BUSINESS DONE BY ALL COMPANIES AND INSTITUTIONS. 12. IT HAS BEEN FURTHER STATED IN PARA 3.4.C OF TH E APPELLATE ORDER THAT IN A SITUATION WHERE THE APPELLANT HAD RECEIVED GRANT FR OM THE GOVT. AND RECEIVED INTEREST FROM TEMPORARY PARKING OF FUND ON THE INST RUCTION OF THE GOVERNMENT, THEN THE INTEREST SO EARNED BEING A PART OF GRANT S HOULD NOT BE TAXED AS INCOME BUT IF THE GRANT IS TEMPORARILY PARKED WITHOUT SPEC IFIC DIRECTION/INSTRUCTION FROM THE GOVERNMENT THEN THE INTEREST CANNOT BE INCIDENT AL TO THE SAID PURPOSE AND THEREBY SHALL BE BROUGHT TO TAX AS INCOME FROM OTHE R SOURCES IN THE HANDS OF THE APPELLANT. NO SPECIFIC DIRECTION FROM THE GOVT. OF KERALA WHILE GIVING GRANTS THAT ITA NO.07/COCH/2016 11 THE SURPLUS FUNDS NOT IMMEDIATELY REQUIRED FOR THE IMPLEMENTATION OF THE PROJECT CAN TEMPORARILY BE DEPOSITED WITH BANKS AND INTERES T EARNED THEREON WOULD FORM A PART OF THE GRANT, HAS EVER BEEN MADE. THE E NTIRE CONDUCT OF THE APPELLANT RIGHT FROM THE RECEIVING THE GRANT TO THE DISBURSEMENT AND PARKING OF FUNDS SHOWS THAT IT HAS ACTED ON ITS OWN AND NOT ON BEHALF OF THE GOVERNMENT. THE APPELLANT HAS AS FAR AS THE TEMPORARY PARKING O F FUNDS IS CONCERNED HAS NEVER BEEN SUBJECTED TO THE DIRECTION OF THE GOVT. THE CASE MADE OUT BY THE LD. CIT(A) IS THAT THERE H AS NOT BEEN ANY DIRECTION FROM THE GOVERNMENT FOR INVESTMENT OF SURPLUS FUNDS FROM OUT OF GRANTS AND THEREFORE, THE INCOME EARNED FROM SUCH INVESTMENT C ANNOT BE SAID TO BE EARNED OUT OF PROFESSED OBJECTIVE FOR WHICH THE ASS ESSEE HAS BEEN SET UP. IT WAS ALSO SUBMITTED THAT THE FINDINGS AS ABOVE AND T HE CONCLUSION DRAWN THEREFROM IS ENTIRELY FALLACIOUS AND MISPLACED IN V IEW OF THE FACT THAT GO(MS) 43/04/F&PD DATED 23.11.2004 AS STATED ABOVE, WHICH DEALS WITH THE FUNCTIONS OF THE SPECIAL PURPOSE COMPANY INCORPORATED (VIZHINJAM INTERNATIONAL SEAPORT LTD). VERY CLEARLY PROVIDES THAT THE COMPANY WILL H AVE OPERATIONAL FREEDOM AND AUTONOMY FOR IMPLEMENTING THE PROJECTS EFFICIENTLY AND EFFECTIVELY. A COPY OF THE ABOVE GO WAS ALSO FILED WITH THE LD. CIT(A) AT THE TIME OF HEARING OF THE APPEAL, WHICH APPEARS TO HAVE BEEN NOT CONSIDERED. THIS MEANS THAT THE GOVT. HAS GRANTED ABSOLUTE AUTONOMY AND OPERATIONAL FREEDOM TO THE BOARD OF DIRECTORS OF THE COMPANY TO ACT ON ALL MATTERS FOR EFFICIENT AND EFFECTIVE IMPLEMENTATION OF THE PROJECT AND IT CANNOT BE CONS TRUED TO MEAN THAT THE ITA NO.07/COCH/2016 12 INVESTMENT OF SURPLUS FUNDS IS NOT ENVISAGED THEREI N OR AUTHORIZED BY THE GOVT. IF SURPLUS FUNDS ARE KEPT IDLE WITHOUT EARNING INTERES T, THE STATUTORY AUDITORS AND THE C&AG WILL RAISE STRONG OBJECTION ON THE SAME AND TH E BOARD OF DIRECTORS WILL BE ACCOUNTABLE TO ANSWER TO THE ADVERSE COMMENTS IN TH EIR DIRECTORS REPORT AS PROVIDED IN SECTION 272 (2A) OF THE COMPANIES ACT, 1956. FURTHER, IN PARA 3.4 (C) OF THE ORDER, THE LD. CIT(A) HAS STATED THAT THE GO DATED 30.03.2019, THE GOVERNMENT HAS DIRECTED THAT THE GOVERNMENT HAS DIS BURSED EQUITY CONTRIBUTION TO THE PROJECT THAT THE FUNDS SHALL BE DRAWN AND KEPT IN NON INTEREST BEARING ACCOUNT WITH TREASURY SAVINGS BANK (TSB) AN D INVESTMENT IN INTEREST BEARING DEPOSITS IS NOT PERMITTED BY THE GOVERNMENT . IT IS THE USUAL PRACTICE WITH THE GOVERNMENT TO DIRECT TO PARK FUNDS IN GOVE RNMENT TREASURY ACCOUNT, WHICH CLEARLY INDICATES THAT THIS IS SPECIFIC TRUST MONEY FOR SPECIAL PURPOSE OBJECTIVE AND HENCE INTEREST INCOME EARNED BY INVES TMENT OF SURPLUS FUNDS SHOULD BE CLEARLY TREATED AS FORMING PART OF GOVERN MENT FUNDS I.E., AS TRUST MONEY FOR SPECIAL PUBLIC UTILITY PURPOSE. 13. IT WAS SUBMITTED THAT THE FINDINGS OF THE LD. CIT(A) AS ABOVE AND CONCLUSIONS DRAWN THEREFORE SUFFERS FROM THE INHERE NT DEFECT OF BEING VERY MYOPIC AND NARROW MINDED AND NEEDS TO BE SET ASIDE. THE COMPELLING LEGAL PRECEDENTS AS DISCUSSED BELOW STRONGLY SUPPORT THE CASE OF THE ASSESSEE ON ACCOUNT OF ABSOLUTE PARITY AND SIMILARITY OF FACTS AND HENCE THE ORDER OF THE LD. ITA NO.07/COCH/2016 13 CIT(A) WAS PRAYED TO BE REVERSED AND INTEREST INCOM E TO BE HELD AS NOT TAXABLE BEING A CAPITAL RECEIPT FORMING PART OF GRANT FUNDS . ALSO IT WAS SUBMITTED THAT THE LD. CIT(A), THIRUVANANTHAPURAM HAS PASSED ORDER U/S. 264 OF THE INCOME TAX ACT, 1961 FOR THE PRECEDING ASSESSMENT YEAR I.E., A SSESSMENT YEAR 2009-10 WHICH HELD THAT INTEREST INCOME ON DEPOSITS RECEIVED DURI NG THAT YEAR IS NOT ASSESSABLE TO TAX, SINCE THE SAME IS A CAPITAL RECEIPT FORMING PART OF GRANT FUNDS RECEIVED BY THE ASSESSEE FROM GOVT. OF KERALA IN ITS CAPACIT Y AS A NODAL AGENT RELYING ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN KARNATAKA URBAN INFRASTRUCTURE DEVELOPMENT AND FINANCE CORPORATION REPORTED IN (2005) 315 ITR 301 (KAR.). COPY OF THE ORDER IS PLACED ON RECORD AT PB PGS. 92-96. THE FACTS OF THE CASE IN KARNATAKA URBAN INFRASTRUCTURE AND FINA NCE DEVELOPMENT CORPORATION DEALT WITH BY THE HONBLE KARNATAKA HIG H COURT AND THAT OF THE ASSESSEE ARE VERY SIMILAR AS BOTH WERE GOVERNMENTAL BODIES VESTED WITH PUBLIC UTILITY OBJECTIVES AND FUNDS RECEIVED FROM GOVERNME NT HAD TO BE USED FOR SPECIFIC DECLARED OR DIRECTED OBJECTIVES AND A GIST OF THE HONBLE KARNATAKA HIGH COURT IS GIVEN BELOW:- NAME OF HIGH COURT CITATION RATIO OF THE DECISION HONBLE KARNATAKA HIGH COURT CIT VS. KARNATAKA URBAN INFRASTRUCTURE DEVELOPMENT AND FINANCE CORPORATION (2009) 315 ITR 301 (KARN.). THE HONBLE COURT HAS HELD THAT INTEREST RECEIVED FROM THE DEPOSITS OF SURPLUS FUNDS IN BANKS, WHICH ARE TO BE USED IN THE PROJECT IN ACCORDANCE WITH THE SCHEME IS NOT TAXABLE. IT WAS HELD THEREIN, THAT SINCE THE ASSESSEE WAS ONLY A NODAL AGENCY AND NOT CARRYING ON ANY BUSINESS OF ITS OWN, INTEREST FROM BANK FROM OUT OF THE FUNDS, ENTRUSTED TO CORPORATION FOR IMPLEMENTATION OF THE SCHEME IS NOT LIABLE ITA NO.07/COCH/2016 14 TO BE TAXED. IT FOLLOWED ITS EARLIER DECISION IN THE SAME CASE IN CIT VS. KARNATAKA URBAN INFRASTRUCTURE DEVELOPMENT AND FINANCE CORPORATION (2006) 284 ITR 582 (KARN.) C IN THE ASSESSEES CASE, GOVT. ORDERS AS STATED ABOV E CLEARLY STIPULATED THE ACTIVITIES THAT HAVE TO BE UNDERTAKEN BY THE ASSESS EE AND NEITHER THE GRANT NOR THE INTEREST CAN BE USED FOR ANY PURPOSE. THE LD. CIT(A) HAS HYPOTHETICALLY VISUALIZED THAT ASSESSEE IS HAVING OWN ACTIVITIES N OT UNDERTAKEN ON BEHALF OF THE GOVERNMENT UNRELATED TO PROJECT WHICH IS ONLY A ILL USORY FIGMENT OF IMAGINATION. THIS IS SO AS THE ASSESSEES ONLY OBJECTIVE WAS TO UNDERTAKE SMOOTH AND EFFICIENT RENDERING OF AGENCY SERVICES ENTRUSTED BY THE GOVER NMENT AND HENCE TREATING INTEREST INCOME AS SEPARATE INCOME OR OWN INCOME OF THE ASSESSEE NOT EARNED OR RECEIVED FOR IMPLEMENTATION OF THE PROJECT IS ON LY A COLOURED AND MISDIRECTED APPLICATION OF MIND BY THE LD. CIT(A) AS THERE IS N O SUCH OWN INCOME OR OWN ACTIVITY ALL THE RECEIPTS AND INCOME ARE ON BEHALF OF THE GOK FOR IMPLEMENTATION OF THE PROJECT 14. THE FOLLOWING DECISIONS OF OTHER HIGH COURTS IN SIMILAR OR IDENTICAL SITUATIONS AND ALSO OF VARIOUS INCOME TAX APPELLATE TRIBUNALS PASSED RELYING ON THE ABOVE DECISION OF HONBLE KARNATAKA HIGH COURT ALSO FORTI FY AND STRENGTHEN THE ITA NO.07/COCH/2016 15 ASSESSEES CASE FOR EXEMPTION OF INCOME TAX ON INTE REST INCOME EARNED FROM INVESTMENT OF SURPLUS FUNDS. THE CONCISE GIST/RATI O OF THE DECISIONS IN EACH CASE IS FURNISHED AGAINST EACH:- NAME OF HIGH COURT/ITAT CITATION RATIO OF DECISION HONBLE BOMBAY HIGH COURT CITY AND INDUSTRIAL DEVELOPMENT CORPORATION OF MAHARASHTRA VS. ACIT (2012) 343 ITR 192 (BOM) THE HONBLE COURT HAD OCCASION TO CONSIDER THE ISSUE OF TAXABILITY OF THE CORPORATION ACTING AS AGENT OF THE GOVERNMENT OF MAHARASHTRA FOR THE NAVI MUMBAI PROJECT. IN THE SAID CASE FOR THE AYS 2003-04, 2004-05 AND 2005-06 , THE ASSESSING OFFICER ACCEPTED THE CONTENTIONS OF THE PETITIONER, THAT IT IS ACTING ONLY AS THE AGENT OF GOVERNMENT FOR THE IMPLEMENTATION OF NAVI MUMBAI PROJECT AND THEREFORE, IS NOT LIABLE TAX ON THE AMOUNT RECEIVED. (COPY ALREADY FILED WITH THE APPEAL PETITION PAGE NO.41-43) HONBLE DELHI HIGH COURT CIT VS. DELHI STATE INDUSTRIAL DEVELOPMENT (2007) 295 ITR 419 (DELHI) THE HONBLE COURT HAS HELD THAT INTEREST RECEIVED FROM THE DEPOSITS OF SURPLUS FUNDS IN BANKS, WHICH ARE TO BE USED IN THE PROJECT IN ACCORDANCE WITH THE SCHEME IS NOT TAXABLE. IT WAS HELD THEREIN, THAT SINCE THE ASSESSEE WAS ONLY A NODAL AGENCY AND NOT CARRYING ON ANY BUSINESS OF ITS OWN, INTEREST FROM BANK FROM OUT OF THE FUNDS ENTRUSTED TO CORPORATION FOR IMPLEMENTATION OF THE SCHEME IS NOT LIABLE TO BE TAXED (COPY ALREADY FILED WITH THE APPEAL PETITION PAGE NO.47-48). IT FOLLOWED ITS EARLIER DECISION IN T HE SAME CASE IN CIT VS. KARNATAKA URBAN INFRASTRUCTURE DEV. AND FINANCE CORPORATION (2006) 284 ITR 582 (KARN.). HONBLE PATNA HIGH COURT INFRASTRUCTURE DEVEL. AUTHORITY VS. CIT & ORS (2010) 321 ITR 278 (PATNA) IT WAS HELD THAT THERE IS MERIT IN THE CLAIM OF THE ASSESSEE THAT INTEREST INCOME OVER MONEY BELONGING TO THE GOVT., CANNOT BE SUBJECTED TO INCOME-TAX OR TDS BY THE IT AUTHORITIES SINCE PETITIONER WAS ACTING AS THE NODAL AGENCY OF THE STATE. (COPY ALREADY FILED WITH THE APPEAL PETITION PAGE NO.49-51) HONBLE INCOME TAX GUJARAT URBAN DEV. CO. LTD. VS. ASST. CIT, HAS UPHELD THE VIEW THAT INTEREST EARNED FROM FUNDS RECEIVED BY A NODAL AGENCY FROM THE GOVT. FOR ITA NO.07/COCH/2016 16 APPELLATE TRIBUNAL AHMEDABAD GANDHI NAGAR INVESTMENT IN INFRASTRUCTURE PROJECTS IS T O BE TREATED AS A CAPITAL RECEIPT. (COPY OF THE BRIEF EXTRACT OF THE ABOVE DECISION HAS BEEN ALREADY WITH THE APPEAL PETITION PAGE NO. 52-56). IT MAY BE NOTED THAT THE HONBLE TRIBUNAL HAS FOLLOWED THE RULING OF HIGH COURT OF GUJARAT IN THE CASE OF CIT (II) VS. SAR INFRACON PVT. LTD. (2014) (3)(TMI 728GUJ. HIC) IN COMING TO THE ABOVE CONCLUSION. CHENNAI BENCH OF THE HON. ITAT TAMIL NADU URBAN FINANCE AND INFRASTRUCTURE DEV. CORPN., 33 TAXMANN.COM 612 INTEREST EARNED ON FUNDS INVESTED BY A NODAL AGENCY OUT OF GRANTS RECEIVED FROM GOVT. IS A CAPITAL RECEIPT AND NOT ASSESSABLE TO TAX. (COPY ALREADY FILED WITH THE APPEAL PETITION PAGE NO.69- 74). AHMEDABAD BENCH OF THE HON. ITAT GUJARAT STATE POLICE HOUSING CORPN. VS. ASST. COMMISSIONER OF INCOME TAX, GANDHI NAGAR. IN THE JUDGMENT DELIVERED ON 18 TH JULY, 2014 (I.T.A. NO. 2549/AHD/2013 FOR AY 2010-11) HAS ALSO UPHELD THE ABOVE VIEW THAT INTEREST ON DEPOSITS EARNED BY A NODAL AGENCY OUT OF FUNDS PROVIDED BY THE GOVT. FOR THE PROJECTS IS NOT ASSESSABLE TO TAX. (COPY ALREADY FILED WITH THE APPEAL PETITION PAGE NO. 75- 83). CHANDIGARH- A BENCH OF THE HON. ITAT HARYANA RURAL DEV. AUTHORITY VS. DCIT IN I.T.A. NO.742/CHD/2012 FOR AY 2008-09 IN THE JUDGMENT DELIVERED ON 22.01.2014 UPHELD THE ABOVE VIEW HOLDING THAT SUCH INTEREST INCOME EARNED BY A NODAL AGENCY IS NOT ASSESSABLE TO TAX. (COPY ENCLOSED AS ANNEXURE C). 15. ACCORDINGLY, IN THE FACTS AND CIRCUMSTANCES O F THE CASE, THE ASSESSING OFFICER IS NOT JUSTIFIED IN MAKING THE ADDITION OF THE ENTIRE INTEREST OF RS.2,76,62,028/- AND ACCORDINGLY, THE ORDER OF THE LD. CIT(A) IS REVERSED. THUS ALL THE GROUNDS OF THE ASSESSEE ARE ALLOWED. ITA NO.07/COCH/2016 17 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 15-06 -2016 SD/- SD /- (GEORGE GEORGE K.) (B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE : COCHIN DATED: 15TH JUNE , 2016 GJ COPY TO: 1. M/S. VIZHINJAM INTERNATIONAL SEAPORT LTD., 3 RD FLOOR, TRANS TOWERS, VAZHUTHACAUD, TRIVANDRUM. 2. THE INCOME TAX OFFICER, WARD-2(4), TRIVANDRUM. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS), TRIVAND RUM. 4. THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 5. THE DR/ITAT, COCHIN BENCH. 6. GUARD FILE. BY ORDER ASSISTANT REGISTRAR ITAT, COCHIN