2026 (1) TMI 190 - AT - Income Tax

Fixed-deposit interest and state grants received by a government instrumentality held immune under Article 289; additions deleted.

Interest income on fixed deposits was taxed as income from other sources. Relying on a co-ordinate Bench ruling in the assessee's own case, the Tribunal ... Addition made on account of interest income received by the assessee on fixed deposits - Exemption under Article 289 of the Constitution of India - AR submitted that as the assessee is a State by itself or a surrogate of the State or an agent, performing the functions of the State and/or on behalf of the State of Maharashtra and the assessee is a State also within the meaning of Article 12 of the Constitution of India - whether interest income is not derived from trade or business carried on by the assessee? - HELD THAT:- Co-ordinate Bench of the Tribunal in assessee’s own case in Maharashtra Airport Development Company Ltd. [2024 (10) TMI 644 - ITAT MUMBAI] after taking into consideration the provisions of Article 12 and 289 of the Constitution of India as well as the main objects, shareholding structure and the purpose for the constitution of the assessee held that the assessee fall within the definition of State as per the provisions of Article 12 read with Article 289 of the Constitution of India and thus the interest income earned on fixed deposits is not chargeable to tax. Addition on account of the Grant-in-Aid received by the assessee from the Government of Maharashtra - We find that this issue is no longer res integra and has been decided in favour of the assessee by the Co-ordinate Bench of the Tribunal in preceding years. In Maharashtra Airport Development Company Ltd [2024 (3) TMI 825 - ITAT MUMBAI] the Co-ordinate Bench held that as the assessee is wholly owned company of the State of Maharashtra to carry out / execute the work of development of land acquisition, development of Airport etc. as an arm of the State, therefore it is an instrumentality of the State and thus Grant-in-Aid received by the assessee from the State of Maharashtra is not taxable in its hands. Addition on account of the Grant-in-Aid received by the assessee was directed to be deleted. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether a fresh legal contention-claiming immunity from Union taxation under Article 289(1) on the footing that the assessee is 'State' within Article 12-could be admitted and adjudicated at the appellate stage when it had not been raised before the first appellate authority. (ii) Whether interest earned on bank fixed deposits was chargeable to tax, or was exempt by virtue of Article 289(1), given the Tribunal's finding that the assessee functions as an instrumentality/agent of the State and the interest was assessed under the head 'income from other sources'. (iii) Whether grants received from the State Government towards land acquisition, rehabilitation and infrastructure development were taxable as income (including by invoking section 2(24)(xviii)), or were not assessable to tax in the assessee's hands because the assessee acted as an agent/instrumentality of the State while discharging statutory/public functions. 2. ISSUE-WISE DETAILED ANALYSIS (i) Admission of additional legal ground at appellate stage Legal framework: The Tribunal considered the principle that a purely legal issue can be raised at any stage if it goes to the root of the matter and can be decided on the basis of material already on record. Interpretation and reasoning: The Tribunal found that the exemption claim under Article 289(1), premised on the assessee being 'State' within Article 12, was raised for the first time before it. Although no formal application for an additional ground had been filed, the Tribunal treated the plea as an additional ground because it was a legal issue capable of determination from existing record. Conclusion: The Tribunal admitted the additional legal ground for adjudication. (ii) Taxability of interest on fixed deposits vis-à-vis Article 289(1) Legal framework: The Tribunal applied Articles 12 and 289 of the Constitution of India and examined the exception in Article 289(2) (taxability of income from trade or business carried on by or on behalf of a State). The Tribunal also took note that the assessing authority itself assessed the interest under 'income from other sources'. Interpretation and reasoning: Relying on prior co-ordinate bench decisions in the assessee's own case, the Tribunal accepted that the assessee-having been constituted for public/governmental objectives, with government-controlled management and functioning as an agent/instrumentality of the State-fell within 'State' for purposes of Article 12, and therefore its income enjoyed immunity under Article 289(1). The Tribunal further reasoned that the Article 289(2) exception did not apply because the interest was not treated as business/trade income; it had been assessed under 'income from other sources', and therefore could not be characterised as income derived from trade or business carried on by or on behalf of the State. Conclusion: Interest earned on fixed deposits was held not chargeable to tax in the assessee's hands under Article 289(1). Consequential grounds concerning alternative head of income treatment, netting against project cost, deduction of interest expenditure, proportional allocation, and restatement of work-in-progress were rendered academic and were not adjudicated. (iii) Taxability of State Government grant-in-aid and applicability of section 2(24)(xviii) Legal framework: The Tribunal examined the addition sustained on the basis that grants are 'income' under section 2(24)(xviii), and tested it against the Tribunal's earlier determinations on the assessee's status and functions as an agent/instrumentality of the State performing statutory/public functions. Interpretation and reasoning: The Tribunal followed earlier co-ordinate bench rulings holding that the assessee was a wholly State-controlled entity executing land acquisition, rehabilitation and infrastructure/airport development as an arm/agent of the State under a statutory framework with pervasive governmental control and ultimate vesting of properties/functions in the State. On that basis, it held that grant-in-aid received from the State Government for such functions was not assessable to tax in the assessee's hands. Since the receipt itself was held not taxable on this foundational reasoning, the addition sustained by invoking section 2(24)(xviii) could not stand. Conclusion: Grant-in-aid received from the State Government for land acquisition, rehabilitation and infrastructure development was held not taxable in the assessee's hands. The matching/concept-based alternative plea was rendered academic and was not adjudicated.