2014 (10) TMI 1054 - AT - Income Tax

Tax Tribunal exempts governmental agency's interest income, following Karnataka High Court precedent.

The Tribunal ruled in favor of the assessee, a governmental nodal agency, determining that the interest earned on temporarily parked funds should not be ... Income from other sources - Interest earned by the assessee on funds temporarily parked - rejecting the claim of the assessee that interest income is not chargeable to tax at all - HELD THAT:- We are also of the view that the decision in the case of KUIDFC [2006 (2) TMI 114 - KARNATAKA HIGH COURT] will be squarely applicable to the facts of the present case wherein answered the question Interest earned by Governmental nodal agency set up for development activities on funds provided by Central Government but parked in banks for the period of non-utilisation is income chargeable to tax in negative. CIT(A) has not followed the aforesaid decision on the basis that KUIDFC was engaged in welfare activities to transform Bangalore to a mega city, whereas the assessee was engaged in trading of agricultural produce. In our view, this distinction sought to be made out by the CIT(A) cannot be accepted. The assessee as well as KUIDFC are engaged in welfare activity wholly owned by State Government. KUIDFC is also a company. The assessee is also engaged in welfare activity and formed for the purpose of helping the agricultural produce and procession of export. Therefore the ratio laid down by the Hon’ble Karnataka High Court in the case of KUIDFC (supra) will clearly apply to the facts of the present case also. The fact that the Assessee would charge commuters for use of metro rail service which is an infrastructure to be created by the Assessee cannot be the basis not to follow the decision in the case of KUIDFC (supra). KUIDFC would also charge fee for use of infrastructure facility that it creates from the end users. CIT(A) would call this a nominal fee and distinguish the fare charged by a commuter of metro rail. We are of the view that the distinction sought to be made out by the CIT(A) from the case of KUIDFC (supra) and the Assessee’s case in our view cannot be sustained - we hold that the interest income in question cannot be brought to tax as income of the assessee - Decided in favour of assessee. Issues Involved:1. Taxability of interest earned on funds temporarily parked by the assessee.2. Applicability of the Karnataka High Court's decision in the case of Karnataka Urban Infrastructure Development & Finance Corporation (KUIDFC) to the assessee's case.Issue-wise Detailed Analysis:1. Taxability of Interest Earned on Temporarily Parked Funds:The primary issue in both appeals was whether the interest earned by the assessee on funds temporarily parked should be taxed under the head 'income from other sources.' The assessee, a wholly owned company of the Government of Karnataka, was established to implement the Bangalore Metro Rail Project. The funds received from the Government, which were not immediately required, were invested in Fixed Deposits and Mutual Funds, generating interest and dividends.The Assessing Officer (AO) taxed the interest income, distinguishing the assessee's case from the Karnataka Urban Infrastructure Development & Finance Corporation (KUIDFC) case by noting that KUIDFC did not commercially exploit the infrastructure developed, whereas the assessee would commercially exploit the metro rail by charging commuters. The AO observed that the infrastructure developed by the assessee would ultimately be used for commercial purposes, thereby generating profit.On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, agreeing that the assessee's profit motive distinguished it from KUIDFC. The CIT(A) applied the ratio of the decision in Tuticorn Alkali case to bring the interest income to tax, noting that the assessee had previously shown such interest as income and paid tax thereon.2. Applicability of KUIDFC Decision:The assessee argued that the decision of the Karnataka High Court in the KUIDFC case should apply, where interest earned on unutilized funds temporarily deposited in banks by a nodal agency for public utility projects was not treated as taxable income. The assessee contended that it was a special purpose vehicle for implementing a public utility project and relied on the KUIDFC case, where the Karnataka High Court held that interest earned by a governmental nodal agency on funds provided by the Central Government but parked in banks was not chargeable to tax.The Tribunal agreed with the assessee, noting that the decision in the KUIDFC case was directly applicable. The Tribunal observed that both the assessee and KUIDFC were engaged in welfare activities and were wholly owned by the State Government. The Tribunal rejected the distinction made by the CIT(A) between nominal fees charged by KUIDFC and fares charged by the assessee, stating that the nature of the activity and the ownership structure were similar.The Tribunal concluded that the interest income in question could not be brought to tax as the income of the assessee, following the precedent set by the Karnataka High Court in the KUIDFC case. Consequently, the appeals of the assessee were allowed, and the interest income was not subjected to tax.Conclusion:The Tribunal held that the interest earned on temporarily parked funds by the assessee, a governmental nodal agency, was not chargeable to tax, aligning with the Karnataka High Court's decision in the KUIDFC case. The appeals of the assessee were allowed, and the interest income was excluded from taxation.