2024 (10) TMI 644 - AT - Income Tax

State instrumentality under Article 12 qualifies for tax exemption on interest income under Article 289(1)

ITAT Mumbai held that the assessee qualified as a State instrumentality under Article 12 of the Constitution, applying the Som Prakash Rekhi criteria. The ... Legal status of the assessee as a State or an agent of the State - Claim of the assessee for its nontaxability is on the strength of the Article 289 of the Constitution of India, since its activities are akin to that of the State or any agent of the State - deduction claimed by the assessee u/s. 57 against interest income earned by it on fixed deposits with banks, offered under the head “income from other sources”. HELD THAT:- If the body is found to be an instrumentality of the agency of the Government, it would be an authority included in term 'State' under Article 12 of the Constitution of India. The tests indicated by the Hon'ble Apex Court in the case of Som Prakash Rekhi [1980 (11) TMI 113 - SUPREME COURT] are merely indicative and not absolute and thus, have to be applied discretely. If any body or organisation falls within the criteria as laid down by the Hon'ble Apex Court, it can be considered that it falls within the term 'State'. We are in agreement with the same to hold the assessee to be a State, being an instrumentality / agent of the State, thereby resulting in its interest income earned on fixed deposits not chargeable to tax. Further, we note that clause (2) of Article 289 provides an exception and authorises the Union to impose a tax in respect of the income derived by the Government of a State from trade or business carried out by it or on its behalf. In this respect, it is undisputed fact that ld. Assessing Officer has himself assessed the interest income on fixed deposits under the head “income from other sources”. The said interest income thus, cannot be said to be derived from trade or business carried out by the assessee. Accordingly, clause(2) of the Article 289 is inapplicable. Since the assessee is held to be a State, or a surrogate of the State or an agent, performing the functions of the State and /or on behalf of the State of Maharashtra, whereby its income is not chargeable to tax within the meaning of clause(1) of the Article 289, all the other grounds of appeal raised by it in Form no.36 including the revised one and other additional grounds are rendered academic in nature and therefore not adjudicated upon. Assessee appeal allowed. Issues Involved:1. Admissibility of additional evidence under Rule 46A of the Income Tax Rules, 1962.2. Deduction of interest expenditure under Section 57 of the Income Tax Act, 1961.3. Legal status of the assessee as a State or an agent of the State under Article 12 and Article 289 of the Constitution of India.4. Taxability of interest income from fixed deposits.Issue-wise Detailed Analysis:1. Admissibility of Additional Evidence under Rule 46A:The Revenue challenged the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] for accepting additional evidence in the form of a statement from the assessee, which was not filed before the Assessing Officer (AO) earlier. The Revenue argued that this acceptance was perverse as it denied the AO the opportunity to examine the evidence, violating Rule 46A of the Income Tax Rules, 1962. The Tribunal noted that the grounds of appeal by the Revenue essentially related to fulfilling the conditions of Rule 46A and denying the AO the opportunity to examine the additional evidence.2. Deduction of Interest Expenditure under Section 57:The assessee contested the restriction of deduction of interest expenditure under Section 57(iii) of the Income Tax Act, 1961. The AO had restricted the allowance to Rs. 1,72,15,048 as against the claimed amount of Rs. 8,87,83,570. The assessee argued that the CIT(A) and AO failed to appreciate that a one-to-one nexus is not relevant for allowing deduction under Section 57(iii). The assessee further contended that a mixed pool of funds was used for investments in fixed deposits, and the principle of 'Proportionate Theory' should apply, allowing apportionment of interest expenses based on the proportion of investment in fixed deposits to total assets sourced from common funds.3. Legal Status of the Assessee as a State or Agent of the State:The assessee raised a legal issue claiming its status as a State or an agent of the State under Article 12 and Article 289 of the Constitution of India. The Tribunal noted that the assessee is a company registered under the Companies Act, 1956, and functions as a Special Planning Authority for the development of airports in Maharashtra. The assessee argued that it performs functions on behalf of the State of Maharashtra and should be considered a State or an agent of the State, exempting its income from taxation under Article 289(1) of the Constitution. The Tribunal considered precedents where similar entities were held to be agents of the State, thereby exempting their income from taxation.4. Taxability of Interest Income from Fixed Deposits:The Tribunal addressed the taxability of interest income earned by the assessee on fixed deposits. The assessee contended that this income should not be taxed as it is not derived from any trade or business carried out by the assessee. The Tribunal examined Article 289 of the Constitution, which exempts State income from Union taxation, except for income derived from trade or business. The Tribunal found that the interest income was assessed under 'income from other sources,' and not from trade or business, making Article 289(2) inapplicable. Consequently, the Tribunal held that the interest income was not chargeable to tax, as the assessee is considered a State or an agent of the State.Conclusion:The Tribunal allowed the appeal of the assessee, holding that its status as a State or an agent of the State exempts its interest income from taxation under Article 289(1) of the Constitution of India. Consequently, the grounds raised by the Revenue regarding Rule 46A were rendered infructuous, and the appeal by the Revenue was dismissed. The Tribunal's decision focused on the constitutional immunity granted to the assessee, rendering other grounds of appeal academic.