TaxTMI 
TaxTMI 
2026 (1) TMI 190
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Centre ["the Id. CIT(A)") erred in facts and law in upholding the addition of interest income of Rs. 3,65,72,861/- on Fixed Deposits as 'income from other sources' without appreciating that 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 and therefore, in view of clause (1) of Article 289 of the Constitution of India; the interest income earned on Fixed Deposits is exempt from tax as the said interest income is not derived from trade or business carried on by the appellant. b) Without prejudice to ground no. 2(a), the Id. CIT(A) erred in facts and law in upholding the addition of interest income of Rs. 3,65,72,861/- on Fixed Deposits as 'income from other sources' as against appellant's treatment of reducing the interest income from the cost of the project without appreciating the explanations / submissions placed on record that funds are inextricably connected with the development work/project. c) Without prejudice to the Ground no. 2(a) and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rying any independent business of the appellant, is exempt from tax. c) The Id. CIT (A) erred in facts and law in upholding the addition of Grantin- aid received from the Government of Maharashtra towards Land acquisition, rehabilitation, infrastructural development, etc. amounting to Rs. 1,74,03,00,000/- by invoking provisions of Section 2(24)(xviii) of the Act without appreciating the assessee being an arm of the State and all the explanations and documents placed on record by the appellant. d) The id. CIT(A) failed to appreciate that the Grant in Aid given by the State Government is for specific purpose the usage of which is regulated by the State Government and that the appellant is not the beneficiary of such grants. e) Without prejudice to ground no. 3(a), (b), (c) & (d), the grant received by the assessee can be treated as income only in the year in which the expenses are incurred or utilisation thereof is made based on the principle of matching concept and only the resultant net income be taxed." 3. Ground No. 1, raised in assessee's appeal, was not pressed during the hearing. Accordingly, the same is dismissed as not pressed. 4. Grounds No.....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Accordingly, the same is admitted for adjudication in view of the ratio laid down by the Hon'ble Supreme Court in NTPC vs. CIT, reported in (1998) 229 ITR 363 (SC). 7. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee was constituted as a company under the Companies Act, 1956, in the year 2002 by the Government of Maharashtra as a Special Purpose Company to develop Multi-modal International Hub Airport at Nagpur ("MIHAN"), Special Economic Zone ("SEZ") and Aviation Infrastructure in the State of Maharashtra to provide the regional air connectivity and operationalizing certain government schemes. The broad objective of the assessee was the development of MIHAN as a world-class multi-modal International Hub Airport, development of the adjacent area of MIHAN as a multi-product SEZ and to provide supporting infrastructure, build and operate airports in the other parts of the State of Maharashtra, facilitate intra-state and inter-state connectivity, encourage overall growth of the aviation sector in the State of Maharashtra, and ensure planned development around airports. 8. Apart from MIHAN, the assessee is also engaged in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... own case for the assessment year 2008-09, the Tribunal directed the AO to ascertain whether the fixed deposits made with the banks were out of surplus funds or out of borrowed funds and if the deposits were out of borrowed funds then the interest earned on such deposits was directed to be taxed as business income, else was held to be taxed as income from other sources. The AO held that in the year under consideration, the assessee had not furnished any evidence to establish that the borrowed funds and not the surplus funds had found their way into fixed deposits. Accordingly, the AO held that the onus was on the assessee to establish that the fixed deposits were made out of borrowed funds and not out of surplus funds, which it has failed to discharge. Accordingly, the AO made an addition of Rs. 3,65,75,861/- by treating the interest earned on fixed deposits as income from other sources. 11. The learned CIT(A) vide impugned order, dismissed the ground raised by the assessee on this issue and upheld the addition on interest income received by the assessee from fixed deposits by treating the same as income from other sources. Being aggrieved, the assessee is in appeal before us. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. 7. Further, a bare perusal of Article 12 of the Constitution of India shows that the definition of "the State" given in this article is inclusive and not exhaustive. "The State" includes: (a) the Government and Parliament of India, (b) the Government and the Legislature of each of the States, (c) all local and other authorities within the territory of India, and (d) all local and other authorities under the control of the Government of India. 7.1. The expression "other authorities" used in Article 12 is neither defined in the Constitution of India nor in any other statute. Therefore, the Hon'ble Supreme Court of India and the Hon'ble High Courts have interpreted this expression in various judgements. The Hon'ble Supreme Court of India while interpreting the expression "other authorities in the case of Som Prakash Rekhi vs. Union of India reported at AIR 1981 SC 212 culled out certain test....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the GoM is achieved and from such date, all properties, funds and dues vested in MADC shall vest in or be realisable by the State Government. 8.1. The main objects of MADC as per clause III (A) of the Memorandum of Association is to design, plan. construct, erect, build, remodel, repair, execute, develop, operate, sale, lease, rent, improve, administer, manage control, maintain and demolish airport, air-traffic equipment, traffic terminals, roads, railways, highways, expressways, bridges, tunnels, railroads, urban transport systems, alleys, township schemes, industrial, docks, shipyards, canal, wells, ports, reservoirs, embankments, dams, r-cation works. reclamations, improvements, sanitary systems, water works, water gas or any other structural or architectural work and Special Economic Zones. 8.2. Pursuant to the above stated objectives, assessee has carried out Development of Nagpur airport as world class Multi-modal International Hub Airport, adjacent multi product Special Economic Zone and supporting infrastructure. It is also carrying out activities to Build and Operate airports in the State, to facilitate Intra-state and Inter-state Connectivity, to enc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... planning authority is required to carry out the work of development and disposing of land in the notified area as an agent of the state. 24. In the backdrop of the aforesaid undisputed facts, we are of the considered view that the assessee company being a wholly owned company of the State of Maharashtra to carry out/execute the work of development of land acquisition, development of airports, repair and maintenance of airports etc. as an arm of the state, thus an instrumentality of the state for the following reasons: i) that the assessee company being a special planning authority is carrying out its activities as an agent of the Government of Maharashtra as per section 113 of the MRTP Act. ii) that the assessee company as a special planning authority is constituted to carry out the work of developing and disposing of land in the notified area as an agent of the State Government. iii) that under section 114(2) of the MRTP Act the assessee company is empowered to exercise its power only after obtaining consent and only in the manner as directed by the Statement Government independently, and cannot function iv) that all the development pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was held to be an agent of the state government. And as such its income cannot be assessed as business income in the hands of the CIDCO. ix) that like CIDCO the assessee company is also wholly owned company of State of Maharashtra which is into land acquisition, development of airports, repair and maintenance of airports and as such receiving of grant-in-aid from Government of Maharashtra by the assessee company being an agent of the state is not assessable to tax. x) that Hon'ble Bombay High Court in Writ Petition No. 1211 of 2009 (supra) ide its order dated 07.11.2009 held that "acquisition of land on behalf of the state government at the cost of state government by CIDCO appointed as new town development authority under sub section 3A of section 113 is doing the work of developing and disposing of the land in the area as an agent of the state government. So the appointment of CIDCO being under section 3A of section 113 of the MRTP Act the CIDCO acts as an agent of the state government. xi) that when we apply the ratio of the decision rendered by Hon'ble Bombay High Court in case of Percival Joseph Pareira (supra) to the case at hand the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te of Maharashtra, amenable to immunity as per Article 289(1) of the Constitution of India. 9.2. We also take note of the decision of Co-ordinate Bench of ITAT in the case of Maharashtra Labour Welfare Board vs. DCIT in ITA No.137/Mum/2023 dated 25.09.2023, wherein the assessee was held as a State, within the meaning of Article 289 of the Constitution of India, being an instrumentality or an agency of the State and thereby the interest earned on the FDRs was held to be exempt. While holding so, the Co-ordinate Bench relied on the decision of the Hon'ble Supreme Court in the case of Som Prakash Rekhi vs. Union of India (supra). Support was also drawn from the decision of the Hon'ble High Court of Karnataka in the case of CIT vs. Karnataka Urban Infrastructure Development and Finance Corporation (2006) 155 taxmann.com 228 (Kar), wherein the Hon'ble High Court held that assessee acted as a nodal agency of the Government for implementing the scheme of the Government and therefore the interest income earned on the bank deposits cannot be treated as the income of the assessee, as the interest is earned out of the money given by the Government for the purpose of imple....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rned by the assessee from fixed deposits is not taxable in the hands of the assessee in light of the provisions of Article 289(1) of the Constitution of India. As a result, Ground No.2(a) raised in assessee's appeal is allowed. 14. Grounds No.2(b) to 2(f) raised in assessee's appeal are rendered academic in view of our aforesaid findings, and therefore, need no separate adjudication. 15. The issue arising in Ground No.3, raised in the assessee's appeal, pertains to the addition on account of the Grant-in-Aid received by the assessee from the Government of Maharashtra. 16. The brief facts of the case pertaining to this issue, as emanating from the record, are: For the MIHAN Project, the Government of Maharashtra has released the grants to meet the cost of land acquisition, PAR rehabilitation and construction of the Air Force Road. During the assessment proceedings, the assessee submitted that it has been treating grants as part of other equity in its books of account, except for the grant for repairs and maintenance, and that this accounting treatment has been consistently accepted by the company's statutory auditors in all years. The assessee further submitted that the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....13, 2014-15 and 2015-16, in ITA No.3682/Mum/2017, etc., vide order dated 15.03.2024, 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. The relevant findings of the Co-ordinate Bench, in the aforesaid decision, are reproduced as follows: - "22. In order to decide the issue in controversy we would decide if the assessee company is a state while executing the work of development of airports, repair and maintenance of airports as an arm of the state. 23. Undisputedly the assessee company was incorporated as a company under the Companies Act, 1956 by the Government of Maharashtra as a special purpose company to develop multi model international hub airport at Nagpur and aviation infrastructure in the State of Maharashtra in order to provide regional air connectivity and operationalising certain government schemes. It is also not in dispute that the as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e to time as required under section 155 of the MRTP Act. vi) that under section 160 of the MRTP Act a state government can dissolve the special planning authorities and upon dissolution its properties, the liabilities, undischarge functions shall get transferred to the state government. vii) that as per sub-section 3A of section 113 of MRTP Act any corporation/company or subsidiary company which is into the work of developing and disposing of land in the area of a new town is an agent of the state government. Sub section 3A of section 113 of the Act reads as under: "(3A) Having regard to the complexity and magnitude of the work involved in developing any area as a site for the new town. the time required for setting up new machinery for undertaking and completing such work of development, and the comparative speed with which such work can be undertaken and completed in the public interest, if the work is done through the agency of a corporation including a company owned or controlled by the State or a subsidiary company thereof, set up with the object of developing an area as a new town, the State Government may. Or withstanding anything contained in sub-....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for infrastructure development of airports in the notified area as an agent of the state. The assessee company carries out all the activities for and on behalf of the state government and after development and completion of the project the entire property vests in the state government. The entire control over the assessee company is of state government being exercised through the officer of the state government. In these circumstances the assessee company is an agent of the state not assessable to tax. As such grant-in-aid received by the assessee company from the Government of Maharashtra for land acquisition, development of airports, repair and maintenance of airports etc. is not a capital receipt as has been held by the Ld. CIT(A) rather the assessee company has performed these functions as an agent of the state and as such not assessable to income tax. xii) that the assessee company has been formulated with a specific purpose i.e. to acquire the land for development of airports, repair and maintenance of airports etc. for which it receives grant-in-aid from the state of Maharashtra which is not taxable under Income Tax Act. xiii) that it is however brought on....