AI Drafter 
TaxTMI 
TaxTMI 
2020 (12) TMI 441
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....ving construction of bridges, maintenance of state highways, maintenance of major district roads, construction of roads and other infrastructure projects. Ld. AR at the outset submitted that the entire group of appeals could be segregated issue wise since common issues are involved in these appeals. He has filed a chart consicising the issues involved in the appeals under consideration. For sake of convenience, we tabulate the issues contested and argued by assessee as well as Department against relevant appeal numbers and cross objection numbers vis-o?=-vis assessment years as under: Particulars Assessment years ITA No./CO No. Issue I: Interest earned on temporary deployment of HUDCO loan funds 703,704, 705, 706, 322/Bang/2018 Filed by assessee for assessment years 2008-09 to 2012-13 Issue II: Interest on grants received from government of Karnataka set of against advances recoverable from contractor's 805, 808/B/2017 CO No.44 & 47/B/2018 And 935/B/2018, CO No. 80/B/2018 Cross appeals filed by revenue and assessee for assessment years 2008-09, 2012-13 2013-14 Issue III: Interest earned from mobilisation advance given to contractor's Issue No. IV: Roya....
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....cts for which the company has been established by the State Govt. The bridges are constructed out of appellant's investment on work in addition to the grants received from Govt. to cover up the shortfall of the grant amount and the same is capitalized and shown under fixed assets in the books of account. 4. The learned assg. authority has also erred in not considering the fact that the ownership of bridges so constructed are not transferred to the State Govt. and remain in the books and records of the appellant, which establishes that all such bridges form the assets of the appellant company, which should have been considered by the assg. authority. 5. The assg. authority is incorrect in holding that the appellant is not using the bridges for its business without considering the objects for which the company has been established by the State Govt., the activity of which forms the business activity assessed as per the provisions of Section 28, entitling to claim all deductions including depreciation u/s. 32. 6. The learned assg. authority, ought to have followed the judgment of The Hon'ble Supreme Court in the case of M/s. Mysore Minerals vs. CIT, ....
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.... income as taxable, being in the nature of interest earned on temporary deployment of HUDCO loan funds. Ld. CIT(A) confirmed the order of Ld. AO. Aggrieved by order of Ld. CIT(A) assessee is in appeal before us now. Relevant grounds raised by assessee in its appeals on Issue I relate to Ground Nos. 6-8. Based on submissions made by Ld. AR in the synopsis filed, We restrict adjudication of assessee's appeals only to Grounds 6-8, which are identically numbered in all appeals for relevant assessment years pertaining referred to in the table hereinabove. Grounds 6-8: 4.4. At the outset, Ld. AR submitted that, identical issue on similar facts was considered by coordinate bench of this Tribunal in preceding assessment years. He has filed before us order dated 04/01/2019 passed in assessee's own case for assessment year 2005-06 in ITA No. 284/be/2011, wherein this issue have been considered and decided. 4.5. On the contrary, Ld. CIT.DR placed reliance on written submission commonly filed by him for all issues under consideration reproduced herein under: Written Submission In the case of M/s. Karnataka Road Development Corporation Ltd., ITA No:703 to 706/....
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....ly be set off against interest paid on loans from HUDCO as these deposits had a cost to it and were not made out of interest free funds. The assessee, without prejudice to this contention, also took an alternate plea that the entire interest paid on loans availed from HUDCO should actually be permitted to be written off as Revenue Expenditure. The CIT(A) in his common order passed for the AYs 2002-03, 2003-04 & 2004-05 rejected the plea of set off against interest payments and upheld the order of the AO on this count. He however allowed the alternate plea of the Appellant that the entire interest payment made to HUDCO on the loans availed from them ought to be allowed as Revenue Expenses. 13. It may be noted that the Revenue has accepted the order of the CIT(A) and is not agitating the same. It is the assessee's submission that the ITAT decide this issue based on the given set of facts for the AYs 2002-03, 2003-04 & 2004-05. In respect of AY 2005-06, however, the CIT(A) has dismissed the plea that the interest ought not to be taxed under the head Income from Other Sources by following the order of his predecessor for the AYs 2002-03 to 2004-05. The CIT(A) has followed ....
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....est of the Revenue, is opposed to law and the fact and circumstances of the case. 2. On facts of the case, the Ld. CIT(A) has failed to appreciate that the assessee has reduced the capital expenditure incurred in the form of interest on loan with the interest income offered under the head income from other source. 3. On the facts of the case, the Ld. CIT(A) ought to have appreciated that the assessee has taken loan for the purpose of construction of bridges which are under construction and any expenditure in the form of interest on loan for this purpose has to be capitalized and not eligible for set off against the interest income. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. The appellant craves leave to add, alter, amend and/or delete any of the grounds that may be urged. Ld. AR submitted that cross objection raised by assessee is in support of view taken by Ld. CIT(A). He submitted that, issue in these revenue appeals are summarized as Issue No. II in the table her....
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....al Data Society reported in (2016) 389 ITR 441. 5.5.1. He submitted that, contention of revenue that, interest on loans borrowed to be capitalised are not eligible for set off, is contrary to the facts of the case. Ld. AR submitted that, interest received on temporary deposits made out specific grants as a nodal agency/custodian in accordance with accounting standards consistently followed. He also submitted that, method followed by assessee does not make any difference insofar as treating the interest income as capital receipt since the same is reduced from the capital works which otherwise amounts to treating the same as a creation to fund account. Ld. AR emphasised that, accounting treatment followed by assessee has also been referred to by Hon'ble Karnataka High Court in case of CIT vs. Karnataka Urban Infrastructure Development and Finance Corporation and CIT vs. Karnataka State Agricultural Produce Processing and Export Corporation Ltd. (supra). 5.6. On the contrary, Ld. CIT.DR filed writes submission as under: Written Submission In the case of M/s. Karnataka Road Development Corporation Ltd., ITA No. 935/Bang/2018 A.Y: 2013-14 & CO. 80/Bang/18 DATE O....
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....essee. 2. The Ld. AO has ignored to follow the decision of Hon'ble Karnataka High Court in the case of CIT vs Karnataka Urban Infrastructure Development & Finance Corporation (KUIDFC) and another case law Karnataka State Agricultural Produce Processing & Export Corporation vs ACIT (2013) in ITA No. 1078/Bang/2012 (Hon'ble ITAT 'B' Bench) which is squarely applicable to the appellant case based on the facts, accounting policy followed by the appellant and the Accounting Standard-12 prescribed by Institute of Chartered Accountants of India. .......................................... Conclusion : In view of the submissions made above, examination of submissions made by the revenue, the order of the Ld. CIT(A), Bangalore is erroneous and bad in law. The Ld. CIT(A) order may be dismissed and the cross objection of the assessee may be rejected. Prayer : In the wake of the above submissions, it is humbly prayed to dismiss the CIT(A) order in respect of the above issue and any other order as may please your honours. Respectfully submitted. 5.7. We have perused submissions advanced by both sides in light of records placed befor....
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.... considered the interest earned on the grant released by the Government should be treated as additional grants of the scheme for which the grant is originally released. The learned counsel placed reliance on the Judgment of this Court in Karnataka Urban Infrastructure Development Finance Corpn's case (supra), Indian Oil Panipat Power Consortium Ltd. v. ITO [2009] 315 ITR 255/181 Taxman 249 (Delhi), CIT v. Karnataka Power Corpn. [2001] 247 ITR 268/[2000] 112 Taxman 629 (SC), CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315/102 Taxman 94 (SC) to contend that the grant amount received from the Government of Karnataka, temporarily kept in fixed deposits till the utilization period has to be treated as the amount capitalized and is not an income to bring in within the tax net under the Act. 9. After hearing the rival contentions and perusing the material on record, we have noticed that the assessee-company is a Government owned company. In order to facilitate infrastructure facilities in various parts of the State of Karnataka, for increasing the export of horticultural produce, a sum of Rs. 10.00 crores was granted to the assessee. Before the utilisation of this grant amount, i....
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....s 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 centrally sponsored scheme of infrastructure development for mega-city of Bangalore. Funds of one wing of the Government is distributed to the other wing of the Government for public purpose as per the guidelines issued. The monies so received, till it is utilised, is 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 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 be fully im....
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....rdingly, applying the law enunciated in Bokaro Steel Limited case allowed the appeal. 14. In the light of the judgments referred to above, we have examined the case on hand. It is clear that the assessee has received the grant of Rs. 10.00 crores 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. 15. As explained by the Apex Court, in Bongaigaon Refinery & Petrochemicals Ltd.'s case, (supra), in Tuticorin's case, the investment in deposits was made by the Company during its formative period by investments and in Bokaro Steels Ltd.'s case (supra) the inextricable link between the interest earned and the set up of the plant was establi....
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....re considered to be capitalized 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." 5.7.1. It is an admitted fact that assessee received Grant for Government of Karnataka for carrying out construction activities. It is also not disputed that assessee was a nodal agent for Government of Karnataka. And that assessee had parked the Grants so received in FD till such monies were utilized, against which interest was earned. Hon'ble Karnataka High Court on identical facts has held that such interest income earned was inextricably linked with the business activity of assessee. Revenue has not brought before us any evidence to establish that these grants were used for any other purpose other than for construction activities on behalf of Government of Karnataka. 5.7.2. Admittedly, there is no difference in factual background in respect of this issue for years under consideration as well as facts considered by Hon'ble High Court in case of CIT vs Karnataka State Agric....
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.... has failed to appreciate that the assessee has earned income on short term deposits made out of mobilization advance which is nothing but income from other sources. 4. On the facts of the case, the Ld. CIT(A) ought to have appreciated that the interest paid to the HUDCO or other agency is part of capital work in progress and need no to be debited in the account till the completion of the project. 5. On the facts of the case, the Ld. CIT(A) is not correct in holding that the Royalty payment and the Labour Welfare Cess paid by the assessee to the Govt. of Karnataka is capital in nature. 6. On the facts of the case, the Ld. CIT(A) has failed to appreciate that the Royalty payment and Labour Welfare Cess is revenue in nature and allowable to the assessee on the basis of actual payment s per the provisions of section 43B of the Act. 7. On the facts of the case, the Ld. CIT(A) ought to have appreciated that the Royalty payment to the Govt. of Karnataka is nothing but the fee/cess charge by the Govt. for the use of fixed asset of the State eg., land for the construction of roads and bridges. 8. For these and other grounds that may be urged at ....
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....hat, assessee could not have received mobilisation advance being the person executing projects through contractor. On the contrary, Ld. CIT(A) recorded that, assessee advanced mobilisation advances to contractor's and earned interest thereon. He has thus negated the observation of Ld. AO that assessee had deposited spare funds arising out of loan received from HUDCO. Ld. CIT(A) thus allowed the interest earned from mobilisation advances as not taxable in the hands of assessee. 6.4. Aggrieved by view taken by Ld. CIT(A) revenue is in appeal before us now. 6.5. Ld. CIT.DR placed reliance on the written submission filed by him it is been reproduced hereinabove. 6.6. On the contrary, Ld. AR submitted that, giving mobilisation advance is an industrial practice at the time of commencement of the work. He submitted that mobilisation advances given to mobilise men and material for the contract and as per the terms of the contract mobilisation advances required to be deducted during the various stages of project completion. Interest on mobilisation advances charged as per the agreed contract will terms and interest received on mobilisation advance are not out of fixed deposits ....
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....iable to be assessed as the income of the assessee or such interest should reduce the cost of construction of the assessee and, therefore, would not constitute the income of the assessee?" ................... 5. We will take the first three heads under which the assessee has received certain amounts. These are the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee. Secondly, hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and thirdly, interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the a....
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.... in the hands of assessee. Respectfully following the above view by Hon'ble Supreme Court we do not find any infirmity in the view taken by Ld. CIT(A) and the same is upheld. Accordingly Grounds 1, 4 identically raised by revenue in these appeals stands dismissed. 7. Issue No. IV: Royalty and labour welfare assess disallowed under section 43B. Ground 5-7 deals with this issue in the appeal filed by revenue considered herein. 7.1. Brief facts for Issue no. IV are as under: In the written submission filed by assessee, it has been submitted that, royalties are in connection with deduction made on contractor's bills, who carried out the construction of bridges and other infrastructure and assessee was required to remit the same to the Government of Karnataka. He submitted that these are related to capital fixed assets. In respect of labour welfare cess, Ld. AR submitted that they are also related to capital works fixed assets and not in respect of employee benefits. It has been submitted that such royalty and labour welfare cess was not debited to profit and loss account. Ld. AR thus submitted that, section 43B does not apply to such royalty payments, which are n....