Ita/103/2016 Of M/S Karnataka Municipal Data Society v. The Income-Tax Officer

1 IN THE HIGH COURT OF KARNATAKA, BENGALURU| DATED THIS THE O5[‘T]DAY OF OCTOBER, 2010 PRESENT THE HON’BLE MR.JUSTICE JAYANT PATEL AND. THE HON’BLE MR.JUSTICE ARAVIND KUMAR. ITA NOS.103.1104/2016 & 38.3988/201C/WITA NO.306/2014 BETWEEN: M/S KARNATAKA MUNICIPAL DATASOCIETY, MRC, 6 FLOOR,1-4 IT PARK, RAJAJINAGAR_INDUSTRIAL ESTATE|BANGALORE-5600 10RBEPRBSEBENTBD BY ITSECRBTARYDR.N. MANJULAAGED ABOUT 40 YEARSD/O SRI. K.N. NARAYANAPPA NAIK _. APPELLANT (BY SRI.S PARTHASARATHI, ADVOCATE) AND: THE INCOME TAX OFFICERWARD-9(2), BANGALORE. .. RESPONDEN (BY SRI.K.V. ARAVIND, ADVOCATE) 2 THESEHK APPEALS ARE FILED UNDER SECTION JZ6OF INCOME TAX ACT 1961, PRAYING TO FORMULATE THESUBSTANTIAL QUESTIONS OF LAW AND ALLOW THEAPPEAL AND SEIT ASIDE THE ORDER OF THE [IAI DATED14.08.2015 BEARING ITA NOS. 1430 & 1431/BANG/2014AND 8.P.NOS.19 & 20/BANG/2015 FOR THE ASSESSMENTYEARS 2008-09 AND 2010-11 AND ETC.,, THRBSK APPBALS COMING ON FOR ADMISSION THISDAY,JAYANT PATEL J,DBLIVBRBED THE FOLLOWING: ORDER As common questions are to be considered, they are considered simultaneously. 2Assessee has preferred all appeals by raising. following questions of law: “(a)Whether in law, the authorizationbelow are justified in treating the grantand the interest earned thereon as!income of the Appellant-society on thepeculiar facts and circumstances of thecase and also when the Appellant wasclearly guided by the directions of theGovernment of Karnataka with regardto both the grant as well as interestearned on the unspent money Keptwith banks? (b) Whether in law, the authoritiesbelow are justified in rejecting the pleaof the Appellant and treating the grant O| and the interest earned thereon as'income|ottheAppellant|whenadmittedly the funds were held by theAppellant in the capacity of custodianonly and the funds and interest were tobe utilized as per the directions of theGovernment of Karnataka alone? (c)Whether in law, the authorities|below are justified in interpreting theorder of the Government of Karnataka|dated 02.02.2010 as an after thoughtwithout understanding the true objectsand spirits behind the formation of theAppellant.aswelltheatoresaidGovernment order: the Government§order having only made it clear whatwas intended right from the creation ofthe Appellant-society?” 3.The short facts of the case appears to be thatas per the assessee, grant is being released by the|Government for its various schemes to the appellant —|assessee and such amount of grant is to be utilised for|the purposes specified by the Government. Until the|amount of grant is utilised, money is to remain in the|respective Bank account of the assessee — Society and| 4. interest may accrue thereon. In the assessment|proceedings, assessing officer found that interest earnedon the aforesaid deposits lying in the Bank account can|be termed as “income” of the assessee and therefore,|exemption from income was unavailable. Matters were|carried in the appeal before the CIT (Appeals) and CIT|(Appeals) dismissed the appeal. The matter was further|carried in appeals before the Tribunal and the Tribunal|observed thus: “AadWe.haveheard|therival submissionsotboththelearnedAuthorisedrepresentativefortheassessee and the learned DepartmentalRepresentativeforTEVENUEandperused and carefully considered thematerial|OT)record includingthedecision oft the co-ordinate bench inthe assessee’s case for Assessment|Year 2009-10 (supra). We find thatidentical issues were before the co-ordinate bench of this Tribunal or'consideration in the assessee’s own|case for Assessment Year 2009-10. InJsits order in ITA No.1843/Bang/2013dated 9.5.2014 the co-ordinate bench|adjudicated these issues in favour of 5 Revenue and against the assesseeholding as under at paras 12 to 14:- “AadWe.haveheard|therival submissionsotboththelearnedAuthorisedrepresentativefortheassessee and the learned DepartmentalRepresentativeforTEVENUEandperused and carefully considered thematerial|OT)record includingthedecision oft the co-ordinate bench inthe assessee’s case for Assessment|Year 2009-10 (supra). We find thatidentical issues were before the co-ordinate bench of this Tribunal or'consideration in the assessee’s own|case for Assessment Year 2009-10. InJsits order in ITA No.1843/Bang/2013dated 9.5.2014 the co-ordinate bench|adjudicated these issues in favour of 5 Revenue and against the assesseeholding as under at paras 12 to 14:- “12. We have given a carefulconsideration|TO|therival submissions. At pages 98 & 99 of|the assessee’s paper book are|copies of the English translation|of the Government Order dated|17.1.2009 releasing grants to the|assessee society for the year.2008-09. The order in vernacular|is placed at pages 60 to 61 of the|assessee’spaperbook.The|operativeportionottheGovernment Order reads thus:-“Covernment Order No.UDD 15.SEFC2008Bangalore,dated17.01.2009 As explained in the Preamble,|Government has released a sum)oft Rs.274.00 lakhs to Directorateof Municipal Administration for|the Operational Cost of Rs.77.00|lakhs for the year 2008-09 to|KarnatakaMunicipalData|society and to reimburse a sum|of Rs.197.00 lakhs, which was|released for the year 2007-08. This grant should be incurred for.the year 2008-09 under the.Account Head ‘*3604-00-193-0O1” (100) (plan). IntheGovernmentOrder,Director, Directorate of Municipal|Administrationhas.beenauthorized to draw from StateHuzur Treasury and to recover a|sum of Rs.197.00 lakhs, which|Wasreleased|TO KarnatakaMunicipal Data Society for the|year 2007-08, and the remaining|amount of Rs.77.00 Lakhs to)KarnatakaMunicipalDatasociety for the Operational Cost|and pay through cheque”. 13.It is seen from the above§GovernmentOrder.thatthepurpose for which the grant is to.be utilized and the utilization of|interest income out of the grant|have not been specifically spelt.out. However, in the addendum|dated 2.2.2010, this lacunae has|been filed up. This was done|apparently after the rejection of,theassessee’sapplicationfOrerant of registration u/s. 12A of|the Act, pursuant to order of the|DIT (E) dated 22.1.2010. This.addendum reads thus:-“Preamble:Government has released a.total sum of Rs.299 lakhs asiunder,formeetingthe expenditure of the Karnataka|Municipal Data Society; 1)|Government Order No.1).SFC 2008 dated 07/03/2008|Rs.197 lakhs 2)|Government Order No.15'SFC 2008 dated 17/01/2009 ©Rs. 77 lakhs 3)|Government Order No.15'SFC 2008 dated 27/08/2009 —Rs. 25 lakhs However, the Government has notspecified the purposes for which theerant is to be utilized nor quantifiedthe amounts to be utilized againstsuch purposes. It is felt necessary toissue an addendum to the aboveGovernmentordersspecifyingtheconditions of the grants released. Aftercareful considerationthefollowing.addendum. Addendum to GO.No.UDD/15/SFC/2008Bangalore, Dated 02-02-2010 As explained in the preamble it is herebydirectedthat.theamountsageregating Rs.299/- lakhs granted to society be utilized by the Society afterprior approval of the Government forspecific purpose. The Government alsoreserves the right to direct Society touse the funds in a manner it may deemfit. The Society shall hold the money asqa custodian for the Government. ItShall create a fund out of the grantmoney and any accrued interest andutilize the funds for assisting themember bodies in implementation of e-Governance. If any asset is created outof this fund shall belong to theGovernment. Utilization|certificate shallbe|submittedTO Governmentafterspending the funds. Further in casethe amount is unspent the same shallvest in such an institution or bodywhich Government prescribes togetherwith any accretion thereto.” 14.It can thus be seen from the.above that the addendum, if at all, society be utilized by the Society afterprior approval of the Government forspecific purpose. The Government alsoreserves the right to direct Society touse the funds in a manner it may deemfit. The Society shall hold the money asqa custodian for the Government. ItShall create a fund out of the grantmoney and any accrued interest andutilize the funds for assisting themember bodies in implementation of e-Governance. If any asset is created outof this fund shall belong to theGovernment. Utilization|certificate shallbe|submittedTO Governmentafterspending the funds. Further in casethe amount is unspent the same shallvest in such an institution or bodywhich Government prescribes togetherwith any accretion thereto.” 14.It can thus be seen from the.above that the addendum, if at all, would operate only for the previousyear relevant to A.Y.2010-11 and not toan earlier period viz., A.Y.2009-2010.In other words during the previousyear relevant to A.Y.2009-10, therewere no restrictions whatsoever on the!use of the grant by the assessee. Itcannot therefore be said that there wasdiversion of income by overriding title.Whatever the assessee does out of theerant and the interest accrued on thegrant can only be said to be applicationof income and it cannot be said thatthere was diversion of income byoverriding title. Taking note of theabove factual position for the A.Y.2009-10, the plea of the assessee that therewas diversion of income by overridingtitle cannot be accepted. Accordingly,the order of the CIT (Appeals) iscontirmed. ...... 44 9.Followingtheatoresaiddecision of the co-ordinate bench of 10| thisTribunalinITANo.1843/Bang/2013 dated 09.05.2014in the assessee’s' own case. forAssessment Year 2009-10, we hold.that in the factual matrix of the case, itis clear that even after the Addendum|of GOK dated 20.2.2010, whatever theassessee does out of the grant andinterest accrued can only be said to beapplication of income for the statedobjects and activity of the assesseesocietyand therefore reject|theassessee’splea.that!thereWasdiversion of income by overriding title.Consequently, the grounds at 8. Nos. 1to 4 raised by the assessee aredismissed.” similar is the view taken by the Tribunal in the other|matters. Under these circumstances, appeals before|this Court. 11| 4We have heard Mr.Parthasarathy, learned.counsel appearing for appellantand Mr.Aravind,learned counsel appearing for respondent. 5.As such, when the assessee is to act as a|custodian of the money and the utilization thereof is)fully controlled by the Government, money remains as_given for specified purpose and the interest earned is)also to be utilised for specified purpose, but under the)control of the Government as per the conditions of the)grant. There is no liberty available to the assessee to)utilize the amount of interest as per its desire. — 6.This Court in more or less under similar|circumstances had an occasion to consider the matter|in the case ot|COMMISSIONER OF INCOME TAX AND|ANOTHER vs KARNATAKA URBAN INFRASTURCTUREDEVELOPMENT AND FINANCE CORPORATION‘in itsdecision reported at|(2006)284 ITR 0582' wherein ot 12| course, Tribunal had held that it is not an income of theassessee but the revenue was in appeal before this|Court. In the said decision, this Court at para 4|observed thus: “4 The material on record shows that'§the very purpose of constitution of theassessee was to act as a nodal agencyforimplementationotmega-cityscheme worked out by the PlanningCommission. Both the Central and the'state Governments are expected toproviderequisite financesforimplementation of the said project. Thefunds from the Central and State'Governments will tlow directly to thespecialised institutions/nodal agenciesas grant and the nodal agency willconstitute a revolving fund with thehelp of Central and State shares out ofwhich finance could be provided toVariousagencies such.aSwater,SCWCTI ARboards,municipal 12| course, Tribunal had held that it is not an income of theassessee but the revenue was in appeal before this|Court. In the said decision, this Court at para 4|observed thus: “4 The material on record shows that'§the very purpose of constitution of theassessee was to act as a nodal agencyforimplementationotmega-cityscheme worked out by the PlanningCommission. Both the Central and the'state Governments are expected toproviderequisite financesforimplementation of the said project. Thefunds from the Central and State'Governments will tlow directly to thespecialised institutions/nodal agenciesas grant and the nodal agency willconstitute a revolving fund with thehelp of Central and State shares out ofwhich finance could be provided toVariousagencies such.aSwater,SCWCTI ARboards,municipal corporations, etc. The objective is tocreate and maintain a fund for the’development of infrastructural assetson a continuing basis and, therefore,theass€ssece1SanodalALRCTICformed/created by the Government ofKarnataka as per the guidelines; thereis no profit motive as the entire fundentrusted and the interest accrued/therefrom on deposits in bank thoughin the name of the assessee has to be!applied only for the purpose of welfareof the nation/States as provided in thesuidelines; the whole Of the fundbelongs to the State Exchequer and theassessee has to channelise them to the|objects of centrally sponsored schemeot|intrastructuraldevelopmentfor.mega-city of Bangalore. Funds of onewing of the Government is distributedto the other wing of the Government forpublic purpose as per the guidelinesissued. The monies so received, till it isutilised, is parked in a bank. The finding recorded by the Tribunal clearlyshowsthattheentireTOT1Ceinquestion is received for implementationof the scheme which is for a publicpurpose and the said scheme isimplemented as per the guidelines ofthe Central Government and, therefore,the assessee is only acting as a nodalagency of Central Government forimplementation of these projects. It is"not the case oft the Revenue that theassessee was carrying on any businessOT|activitiesot1tsOWT)whileimplementing the scheme in question.The unutilised money, during whichtheprojectcouldNOT.be.fullyimplemented, is deposited in a bank toearn interest. That interest earned is|alsoagain|utilisedfor.theimplementation|otthemega-city scheme which is also permitted underthe scheme. Therefore, in computingthe total income of the assessee for anyprevious year the interest accrued on 15| bank deposits cannot be treated as anincome of the assessee as the interest|is earned out of the money given by theGovernment of India for the purpose ofimplementation of mega-city scheme.” TSIf the observations made by the Tribunal is considered in light of the above referred observations|made by this Court, we find that when the assessee is toact as a custodian of the Government money released tothe assessee by way of a grant and the interest thereon|is also to be utilised as per the terms and conditions ofthe grant, the view taken by the Tribunal cannot be|sustained for two reasons. One is that such cannot be|termed as ‘income’ of the assessee and another is that|even if the addendum is issued by the Government for|controlling the utilization of the amount of interest on|the deposit at the later date the character of the money|would remain the same and addendum can be termed| as only by way of a clarification. It was not a matter|where the question was to be considered with the|retrospectivity as observed by the Tribunal. When theassessee is held as a custodian and the full command|for utilization of the money including interest earned)thereon remains with the Government, same cannot be|termed as income of the assessee.. In view of the above, impugned order passed bythe Tribunal is set aside and the questions are,answered in favour of the assessee and against the)revenue. Appeals allowed accordingly. SD/-. JUDGE SD/- JUDGE