Ita/17/2018 Of Brahmos Aerospace Thiruvananthapuram Ltd v. The Assistant Commissioner Of Income Tax

“C.R.” IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM FRIDAY, THE 27 DAY OF AUGUST 2021 / 5TH BHADRA, 1943 ITA NO. 15 OF 2018 AGAINST THE ORDER IN ITA 100/2016 OF I.T.A.TRIBUNAL,COCHIN BENCH,ERNAKULAM APPELLANT/S: BRAHMOS AEROSPACE THIRUVANANTHAPURAM LTDAIRPORT ROAD, CHACKAI BEACH P.O., THIRUVANANTHAPURAM - 695 007, [PAN:AABCK 2217K], REPRESENTED BY ITS MANAGING DIRECTOR, MR. RAMAN PRABHATH. BY ADVS.SRI.JOSEPH MARKOSE (SR.)SRI.V.ABRAHAM MARKOSSRI.ABRAHAM JOSEPH MARKOSSRI.P.G.CHANDAPILLAI ABRAHAMSRI.HARAN THOMAS GEORGESRI.ISAAC THOMASSMT.RACHEL ABRAHAM RESPONDENT/S: THE ASSITANT COMMISSIONER OF INCOME TAXCIRCLE-1 (S), THIRUVANANTHAPURAM - 695 014. BY ADVS.SRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENTSRI.K.M.V.PANDALAI, INCOME TAX DEPARTMENT THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 27.08.2021,ALONG WITH ITA.16/2018, 17/2018, THE COURT ON THE SAME DAY DELIVEREDTHE FOLLOWING: I.T.A. No.15, 16 & 17/2018 IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM FRIDAY, THE 27 DAY OF AUGUST 2021 / 5TH BHADRA, 1943 ITA NO. 16 OF 2018 AGAINST THE ORDER IN ITA 102/2016 OF I.T.A.TRIBUNAL,COCHIN BENCH,ERNAKULAM APPELLANT/S: BRAHMOS AEROSPACE THIRUVANANTHAPURAM LTDAIRPORT ROAD, CHACKAI BEACH P.O., THIRUVANANTHAPURAM - 695007, (PAN:AABCK 2217K), REPRESENTED BY ITS MANAGING DIRECTOR, MR. RAMAN PRABHATH. BY ADVS.SRI.JOSEPH MARKOSE (SR.)SRI.V.ABRAHAM MARKOSSRI.ABRAHAM JOSEPH MARKOSSRI.P.G.CHANDAPILLAI ABRAHAMSRI.HARAN THOMAS GEORGESRI.ISAAC THOMASSMT.RACHEL ABRAHAM RESPONDENT/S: THE ASSISTANT COMMISSIONER OF INCOME TAXCIRCLE -(1), THIRUVANANTHAPURAM - 695014. I.T.A. No.15, 16 & 17/2018 BY ADVS.SRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENTSRI.K.M.V.PANDALAI, INCOME TAX DEPARTMENT THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 27.08.2021,ALONG WITH ITA.15/2018 AND CONNECTED CASES, THE COURT ON THE SAME DAYDELIVERED THE FOLLOWING: I.T.A. No.15, 16 & 17/2018 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM FRIDAY, THE 27 DAY OF AUGUST 2021 / 5TH BHADRA, 1943 ITA NO. 17 OF 2018 AGAINST THE ORDER IN ITA 101/2016 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: BRAHMOS AEROSPACE THIRUVANANTHAPURAM LTD.,AIRPORT ROAD, CHACKAI BEACH PO, THIRUVANANTHAPURAM-695007.(PAN:AABCK 2217K), REPRESENTED BY ITS MANAGING DIRECTOR,MR. RAMAN PRABHATH. BY ADVS.SRI.JOSEPH MARKOSE (SR.)SRI.V.ABRAHAM MARKOSSRI.ABRAHAM JOSEPH MARKOSSRI.P.G.CHANDAPILLAI ABRAHAMSRI.HARAN THOMAS GEORGESRI.ISAAC THOMASSMT.RACHEL ABRAHAM RESPONDENT/S: THE ASSISTANT COMMISSIONER OF INCOME TAXCIRCLE-1(1), THIRUVANANTHAPURAM.695014. OTHER PRESENT: I.T.A. No.15, 16 & 17/2018 SC CHRISTOPHER ABRAHAM THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 27.08.2021,ALONG WITH ITA.15/2018 AND CONNECTED CASES, THE COURT ON THE SAME DAYDELIVERED THE FOLLOWING: J U D G M E N T [ITA Nos.15/2018, 16/2018, 17/2018] S.V. Bhatti, J. Heard learned Senior Counsel Mr Joseph Markos and learned Standing Counsel Mr Christopher Abraham for parties. 2.BrahMos Aerospace Thiruvananthapuram Ltd,Thiruvananthapuram/Assessee is the appellant. The Assistant CommissionerofIncomeTax,Circle-1(1), Thiruvananthapuram/Revenue is the respondent in the subjectthree appeals. 2.1The appeals are at the instance of the assessee under Section 260A of the Income Tax Act, 1961 (for short, 'the Act'), being aggrieved by the rejection of its claim on the income fromthe nature of interest received by the assessee in DRDO/ISRO J U D G M E N T [ITA Nos.15/2018, 16/2018, 17/2018] S.V. Bhatti, J. Heard learned Senior Counsel Mr Joseph Markos and learned Standing Counsel Mr Christopher Abraham for parties. 2.BrahMos Aerospace Thiruvananthapuram Ltd,Thiruvananthapuram/Assessee is the appellant. The Assistant CommissionerofIncomeTax,Circle-1(1), Thiruvananthapuram/Revenue is the respondent in the subjectthree appeals. 2.1The appeals are at the instance of the assessee under Section 260A of the Income Tax Act, 1961 (for short, 'the Act'), being aggrieved by the rejection of its claim on the income fromthe nature of interest received by the assessee in DRDO/ISRO accounts (for short ‘FD A/cs’). The details of the AssessmentYears etc are stated in the following tabular form: 2.2The circumstances surrounding the controversy and the arguments on the fact and the law are substantially similar in all the three appeals. The learned counsel have treated ITANo.15/2018 as the lead case for referring to the circumstances,the conclusion recorded by the authorities under the Act andhave stated that the other two appeals could be disposed of by referring to the circumstances and contentions considered inITA No.15/2018. ITA No. 15/2018 3.For the purpose of appreciating the case of theassessee on the interest earned from FD A/cs as non-computable income and the objections taken thereto by theRevenue resulting in the conclusions assailed in the appeal, wefind it necessary to refer to a few circumstances about theassessee and the preceding circumstances enabling the assesseeto receive the amount covered by the Fixed Deposit Receipts(FDRs). 3.1The assessee is a 100% subsidiary of BrahMosAerospace Thiruvananthapuram Limited (BATL), and Indo-Russia Joint Venture Company in which DRDO under theMinistry of Defence, Government of India holds 50.50% shares I.T.A. No.15, 16 & 17/2018 -9- and NPO Mashinostroyenia (for short, ‘NPOM’) a StateEnterprise of Russian Federation holding 49.50%. The holdingcompany of the assessee, it is stated, is engaged in the strategicbusiness of design, development and supply of SupersonicCruise Missiles and other critical equipment and relatedsystems for the Armed Forces of the Nation. 3.2The assessee is engaged in the fabrication and supplyof critical components and system requirements to variousDefence establishments, ISRO, BARC etc which are finallyrequired for the Defence, Space and Nuclear programmes of theNation. The assessee claims to have served in many critical andstrategic areas of the country like RFQ and TPM forBARC/IGCAR, Liquid Engines and Cryogenic Engine Systems andsubsystems for ISRO. Briefly stated, the establishment,existence and continuation of the assessee are for the benefit of Defence, ISRO, Department of Atomic Energy, and otherOrganisations of the Country in the strategic sectors. TheKerala Hitech Industries Ltd, a Kerala Government Undertaking,was engaged in job work for ISRO. The said Company hasaccumulated huge losses and the Kerala Government in the year2007 handed over Kerala Hitech Industries Limited to theassessee. After the takeover of the facilities of Kerala HitechIndustries Limited at Thiruvananthapuram by the appellant,DRDO and ISRO have availed the services of assessee-companyfor establishing facilities at the premises of the assessee for thebenefit and utility of respective organization. In the subjectappeals, we are concerned with a sum of Rs.50 crorestransferred or made available by DRDO and a sum of Rs.25crores by ISRO to the assessee account, through its holdingcompany, which were deposited in FD A/cs. 3.3In October 2008 a Memorandum of Understanding(MoU) between the DRDO, Ministry of Defence, Government ofIndia and assessee were entered into. In terms of the said MoUthe DRDO recognized/empowered the assessee to act as theimplementing agent of DRDO in the Integrated Guided MissileDevelopment Programme for achieving the indigenouscapability to launch operational Missiles and support theMissile Programmes by manufacturing and delivering MotorCases, Nozzles, Booster Motors, Control system Components,Reaction Control Systems, Propellant Tankages, Gas Bottles etc.Considering the strategic importance of the project and the rolethe assessee has undertaken to play as the implementing agentof DRDO in the Integrated Guided Missile DevelopmentProgramme, DRDO had transferred Rs.50 crores to set up a I.T.A. No.15, 16 & 17/2018 Missile Integration Complex at the factory premises of the assessee at Thiruvananthapuram. It is contextual to advert tothe role of the assessee as custodian of funds under subject MoUto appreciate the case of the assessee and the Revenue withregard to the interest earned from FD A/cs. Article 5.4 of theMoU reads thus: “The Company may exercise the option to take the equipmentat original value less depreciation (charged as per reducingonbalance method as per Companies Act, 1956; Schedule 14), the mutual agreement after a period of 10 years after”.installation and commissioning of equipment (emphasis supplied) 3.4DRDO in terms of MoU had transferred a sum of Rs.50crores for utilization by the assessee as stipulated in the MoU.The letter dated 28.03.2008 of DRDO, Government of India,refers to maintaining a separate bank account of joint venture company, and that the assessee shall maintain and renderseparate accounts of the Government funds committed under this.sanction, which would be subject to audit by the C&AG The holdingCompany videletter dated 16.10.2008 transferred Rs.50 crorestogether with interest to the assessee. The holding companywas called upon to conform to the requirement of maintainingseparate accounts and the transferred fund will have to beaccounted for. To complete the narration of the obligationsunder MoU with DRDO the following two dates are referred to.On 27.06.2016 the infrastructure provided by the assessee forand on behalf of DRDO was also taken over by the assessee. On31.03.2017 the assessee returned to DRDO the balance unspentamount, together with interest, from Rs.50 crores transferred infavour of the Missile Integration Facility project during theFinancial Year 2007-08 at BATL. I.T.A. No.15, 16 & 17/2018 3.5On 11.06.2008 an MoU, between Vikram SarabhaiSpace Centre (VSSC), ISRO and the assessee, was entered intoenabling the assessee to act as implementing agent for theSatellite Launch Vehicle programme and Mars Orbit Mission ofISRO among other objectives. ISRO for the purpose ofestablishment of facility or enhancement of capabilities, of bothtechnical and plant and machines, transferred Rs.25 crores tothe account of the assessee. The conditions agreed between theassessee and the ISRO are substantially identical to theconditions with which the MoU was entered into between theassessee and DRDO in October 2008. Hence for brevity, we avoidreferring to these conditions once again. Under the above saidMemorandums of Understanding the assessee received in itsaccount a sum of Rs.75 crores in the previous year ending on31.03.2008. The assessee for better management of the fundskept at its disposal by DRDO/ISRO under separate accounts deposited the said sum with nationalized banks. The assesseeearned interest on the Fixed Deposit amount of Rs.75 croreskept and maintained by it as custodian of DRDO and ISRO. Theaccount in the assessee books of account is separate and thedeposit since is made by the assessee, the Banks have effectedTDS and issued a TDS certificate in favour of the assessee duringthe Assessment Years – 2009-10, 2010-11 and 2011-12. deposited the said sum with nationalized banks. The assesseeearned interest on the Fixed Deposit amount of Rs.75 croreskept and maintained by it as custodian of DRDO and ISRO. Theaccount in the assessee books of account is separate and thedeposit since is made by the assessee, the Banks have effectedTDS and issued a TDS certificate in favour of the assessee duringthe Assessment Years – 2009-10, 2010-11 and 2011-12. 3.6On 26.09.2009, the assessee filed tax return for theAssessment Year 2009-10 declaring total loss of Rs.1,21,56,832/-.The assessment was completed videorder dated 23.12.2011determining Nil income. The Revenue initiated proceedingsunder Section 147 and issued notice under Section 148 to theassessee on the ground that the assessee has not offered asincome the interest collected from Fixed Deposits accounts ofthe funds received from DRDO/ISRO Facilities. The interest received in the subject Assessment Year is as follows: “(i) Interest on DRDO Facilities Fund: Rs.5,35,19,890(ii) Interest on ISRO Facilities Fund:Rs.1,13,57,345Total : Rs.6,48,77,235==============” The assessee, in response to the notice, stated that the funds from which the interest was realised belonged to theDepartments of Government of India. The funds were receivedfor creating facilities for the Departments. The funds earnedinterest. As per the MoU, the assets would belong to therespective Departments and not to the assessee-Company. Theassessee, in required categorical terms, stated that the interestearned on Fixed Deposits is from the accounts of DRDO and ISROFacilities, does not belong to the assessee. The interest shall notbe treated as income of the assessee-Company. The AssessingOfficer through Annexure-A order dated 30.03.2014 rejected thecase of the assessee by recording the following findings: “(i)The income appearing in the accounts is in the nature ofinterest only. (ii) The interest income so received is not an income which isexempt, hence, taxable. (iii) Against such interest income, TDS has duly been made. (iv) Assessee claimed credit for tax deducted by way of TDS. (v) Corresponding income on which credit is claimed does notform part of total income. (vi) Had the income belonged to ISRO/DRDO, it would havebeen deposited in the Govt. A/c directly. Considering the above parameters, it can be comfortablyconcluded that the income received by the assessee is theincome of the assessee only and it should have been offeredaccordingly. In view of the same, interest income of Rs.64877235/- is brought to tax accordingly.” 4.The assessee filed appeal before the Commissioner of Income Tax and the Commissioner dismissed the appeal. The I.T.A. No.15, 16 & 17/2018 assessee aggrieved thereby filed ITA No.100/Coch/2016 beforethe Income Tax Appellate Tribunal, Cochin Bench. TheTribunal, through its order dated 01.12.2017 in Annexure-D,dismissed the appeal. Hence the Tax Appeal at the instance ofthe assessee. 4.1The Tribunal paraphrased the conclusions recordedby the Assessing Officer and the Commissioner of Income Taxand further recorded that the MoUs, between the Departmentsand the assessee, do not direct or enable assessee to deposit thesurplus funds of the Government Departments in the FixedDeposit accounts, and a stipulation that the interest earned onthese deposits would belong to ISRO and the DRDO. TheTribunal referred to a situation that there could have been acase of diversion of income by an overriding title, i.e., the titleof DRDO/ISRO with regard to the interest. Further, there is no 4.1The Tribunal paraphrased the conclusions recordedby the Assessing Officer and the Commissioner of Income Taxand further recorded that the MoUs, between the Departmentsand the assessee, do not direct or enable assessee to deposit thesurplus funds of the Government Departments in the FixedDeposit accounts, and a stipulation that the interest earned onthese deposits would belong to ISRO and the DRDO. TheTribunal referred to a situation that there could have been acase of diversion of income by an overriding title, i.e., the titleof DRDO/ISRO with regard to the interest. Further, there is no diversion of interest income by an overriding title in favour ofDRDO/ISRO. The record discloses that the interest received bythe assessee was shown as income in the books of account of theassessee-Company and tax deducted at-source was claimed bythe assessee in the returns of income filed by the assessee forthe respective Assessment Years. The Tribunal, to appreciatewhether the interest income is computable to the assessee orDRDO/ISRO observed that if at all it is the income of DRDO/ISROthe interest ought to have been directly credited to theaccounts of DRDO/ISRO. The Tribunal noted that the funds,together with the interest, have been returned to DRDO may nothold good for the return of funds together with interest wassubsequent to the previous year in which the interest wasearned by the assessee and, therefore, constitutes the income ofthe assessee. With the above consideration and conclusion, theTribunal dismissed the appeal filed by the assessee. I.T.A. No.15, 16 & 17/2018 5.Senior Advocate Mr Joseph Markos makes no bonesin assailing the orders under appeal. He argues that there aretwo ways to look at the findings recorded by the Tribunal andthe authorities under the Act, firstly, convince the Court on theinherent illegality or infirmity in the orders in Annexures-A, Band D, and, another way is to convince the Court, for thepurpose of Section 260A of the Act, that the interest incomereceived by the assessee was not forming part of the income ofthe assessee under any one of the sources and computation ofinterest as income is illegal. For the said purpose it is statedthat the undisputed documents relied on by the assessee, if areindependently considered by this Court, then a conclusion isinevitable that the funds and the interest earned on the FD A/csdo not belong to the assessee in any other manner. Therecognition of entries in books of account of the assessee arerelevant, but is subject to acceptable and irrefutable material the assessee could demonstrate to claim exclusion of interestincome from computation of the assessee. The consideration ofinterest income by the Tribunal and authorities have gone byform, but not by substance of the matter in issue. He arguesthat the assessee is discharging a few of the functions entrustedto it by DRDO/ISRO, Government of India. The functionsdischarged by the assessee are matters of security and secrecy.The projects entrusted to the assessee need to be taken up andimplemented as desired by the respective departments of theGovernment at short notice also. With a view to avoidingbureaucratic delays in sanction of amount, resulting in delay inexecution of the project etc, the amount has been kept with ortransferred to the assessee as a custodian of the amount of therespective Government Departments. The facilities executed orare to be executed by the assessee are for the national benefitand importance. The amount in FD A/cs was and would be the amount of DRDO/ISRO, and the sanction in favour of assessee isto utilise the transferred fund for the execution of projects orDRDO/ISRO and utilisation of fund since is on Treasury account,was made subject to C&AG audit. amount of DRDO/ISRO, and the sanction in favour of assessee isto utilise the transferred fund for the execution of projects orDRDO/ISRO and utilisation of fund since is on Treasury account,was made subject to C&AG audit. 5.1Ex post facto, it is a matter of accounting that theamount together with interest has been returned to therespective Departments. Hence, he argues that the assesseeunder the respective MoUs was under obligation to maintainseparate accounts and return the balance unspent amounttogether with interest to the respective Departments. Theassessee has accordingly returned the balance unspent amountto DRDO/ISRO. The assessee is called upon by the respectiveDepartments to claim refund of TDS, for neither DRDO nor ISRO,being Government Departments, is not under any obligation topay income tax. The refunded TDS was directed to the returned I.T.A. No.15, 16 & 17/2018 -23- to the respective Departments. Therefore, he contends thatafter the entire amount was returned, upon receipt from theDepartment the income tax if is levied on the assessee, theassessee would be paying tax on an element which does notconstitute income from any standpoint of view and also that theassessee would be made to pay through its nose towards incometax for unearned income. The findings are more recordedwithout appreciating the niceties involved right from the dayon which the amount has been entrusted as a fund in favour ofthe BATL-holding Company and, therefore, in favour of theassessee. 5.2The findings recorded by the Tribunal and theauthorities are beyond the admitted circumstances of the caseand suffer from patent illegality and failure to appreciate theMoU etc., is a substantial question of law. By referring to the overriding title adverted to by the Tribunal he argues that theconcept of overriding title does not arise in the fact situation ofthe present appeal. For, throughout the implementation of theproject, the asset which is acquired for the establishment of thefacility, the fund received from DRDO/ISRO, the residue,everything continues to be with the assessee. Till the exerciseof the option for purchasing the assets/facilities, as providedfor under the MoUs, the DRDO/ISRO were the owners of capitalassets and the funds in FD A/cs. Upon transfer of the facilitiesfor consideration, the assets became the capital assets ofassessee. The transfer of interest periodically does not arise,inasmuch as what has been agreed is a continuing project at thehands of the assessee. He prays for setting aside the ordersunder appeal and relieve the assessee from illegal and avoidableincome tax liability imposed by the orders under appeal. Hecites the decision in Commissioner of Income Tax v. Karnataka I.T.A. No.15, 16 & 17/2018 Urban Infrastructure Development and Finance Corporation[1]insupport of his argument that once it is not in dispute that thefunds belong to the State exchequer and the assessee had tochannelize them for the objects for which the funds are kept atthe disposal of the assessee, the interest accrued on the bankdeposits made by the assessee could not be treated as income ofthe assessee or could be subject to computation of income. 5.3He further points out the inconsistency of approachin the order of the Tribunal under appeal, by relying on thejudgment in ITA No.07/Coch/2016 of ITAT Cochin in the case ofVizhinjam International Seaport. In ITA No.07/Coch/2016 theTribunal has appreciated substantially similar circumstances,and the addition of income made by the Assessing Officerreceived by the assessee towards interest from deposits made ofthe funds received from the Government was held as He further points out the inconsistency of approach unsustainable. In spite of the said decision being brought to thenotice of the Tribunal, the Tribunal ought not to have taken theview assailed in the appeals. 5.3He further points out the inconsistency of approachin the order of the Tribunal under appeal, by relying on thejudgment in ITA No.07/Coch/2016 of ITAT Cochin in the case ofVizhinjam International Seaport. In ITA No.07/Coch/2016 theTribunal has appreciated substantially similar circumstances,and the addition of income made by the Assessing Officerreceived by the assessee towards interest from deposits made ofthe funds received from the Government was held as He further points out the inconsistency of approach unsustainable. In spite of the said decision being brought to thenotice of the Tribunal, the Tribunal ought not to have taken theview assailed in the appeals. 4.Learned Standing Counsel Mr Christopher Abrahamsustains the orders under appeal by inviting our attention tothe very conclusion recorded, on one hand by the primary andappellate authorities and on the other confirming order by theTribunal in continuation thereof. He does not dispute that theassessee is the subsidiary of BATL and the funds have emanatedfrom DRDO and ISRO, Government of India. According to him,the recognition of interest in the books of account of theassessee, as has been rightly held by the Assessing Officer, couldmake all the difference for determining whether interestincome constitutes computable income of the assessee or not.The TDS was received by the assessee, the Tribunal has taken I.T.A. No.15, 16 & 17/2018 note of the effect of the concept of overriding title, and for allthe reasons recorded in the orders under appeal, he prays fordismissing the appeal. 5.The appellant raises the following substantialquestions of law: “1)Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding thatthe interest received from banks on deposits of surplusfunds received by the Appellant from DRDO/ISRO, bothGovernment of India Departments, for setting upspecific projects on their behalf and returned to theDRDONSRO is to be assessed in the hands of theAppellant? 2)Whether on the facts and in the circumstances of thecase interest on deposits out of funds provided by theDRDO/ISRO, both Government of India Departments, for specific projects is taxable? 5.1At the outset let us refer to the decisions relied on bythe assessee and examine to what extent the ratio laid down inthose cases would be applicable to the case on hand, and havepersuasive force on us in appreciating the fact in issue betweenthe parties. In the Karnataka Urban Infrastructure Developmentand Finance Corporation(supra), the Karnataka High Court wasdealing with the order of Tribunal in ITA No.868/Bang/2000dated 03.11.2004 setting aside the orders of Assessing Authorityas well as the CIT (Appeals) holding that the income earned bythe assessee therein to the tune of Rs.4,66,75,814/- cannot betreated as income liable to tax under the Act at the hands ofKarnataka Urban Infrastructure Development and FinanceCorporation/assessee. The assessee in the said decision isM/s.Karnataka Urban Infrastructure Development andFinancial Corporation, a fully owned State Government Company. The assessee was appointed as a nodal agent toimplement the mega-city scheme worked out by the PlanningCommission of the Ministry of Urban and Employment for thedevelopment of urban infrastructure in Bangalore city. TheCentral Government provided funds to the assessee forimplementing the scheme. The money so received from theGovernment of India was parked by the assessee in various bankdeposits during the un-utilized period as has been done by theassessee in the present case. The FDRs earned interest and thesaid interest was included in the income of the assessee. TheDivision Bench taking note of the undisputed and admittedcircumstances in the said case, observed that the assessee is anodal agency for the implementation of a mega-city schemeworked out by the Planning Commission. The funds are madeavailable by the State and the Central Governments. The fundsare utilized by the nodal agency as per the schemes approved by the Central and State Governments. In the implementation ofthe work as the nodal agency, there is no profit motive as thefunds entrusted and the interest accrued therefrom anddeposits in banks though in the name of the assessee have to beapplied only for the purpose of welfare of the Nation/State asprovided in the guidelines. After all, the interest earned wasagain utilized for the implementation of the mega-city schemeas permitted under the scheme. Therefore, while computingthe total income of the assessee for any previous year, theinterest accrued on the bank deposits cannot be treated asincome of the assessee as the interest is earned out of themoney given by the Government of India and the Governmentof Karnataka only for the purpose of implementation of mega-city scheme. By independently examining the circumstancesand appreciating the finding recorded by the Tribunal, theDivision Bench dismissed the appeal filed by the Revenue. The decision appreciates the claim of assessee that the substance ofthe receipt of transferred funds is an aspect for reckoning. 6.The decision of Karnataka Urban InfrastructureDevelopment and Finance Corporationwas relied on by anotherDivision Bench in Commissioner of Income Tax v. Karnataka UrbanInfrastructure Development and Finance Corporation[2]. Commissionerof Income-Tax v. Delhi State Industrial Development[3]is a case wherethe development authority treated the interest earned from thedeposits made by the assessee of the funds transferred by theGovernment as income of the assessee. The assessee investedthe funds in banks and earned interest. Delhi State IndustrialDevelopment, as assumed by the Revenue in the case on hand,separated the fund from interest earned thereon and claimedinterest as income from other sources. The C&AG audited theaccounts of the assessee and pointed out the mistake in treating 2(2009) 315 ITR 301 (Karn)3(2007) 295 ITR 419 (Del)3(2007) 295 ITR 419 (Del) the interest on deposits as income of assessee and advised the assessee that the funds made available by the Government donot belong to the assessee, therefore the interest earned byinvesting surplus funds in the bank do not belong to theassessee. The assessee, i.e., Delhi State Industrial Development,has rectified the mistakes and has remitted the interest to therespective accounts of the Government. The Revenue treatedthe interest as income earned by the assessee and made theassessment. The view taken by the Department was set aside bythe ITAT, Delhi Bench and the same was challenged by theRevenue before the Delhi High Court. The Delhi High Courtconfirmed the view taken by the Tribunal and dismissed theappeal filed by the Revenue. 7.Another interesting case is Infrastructure DevelopmentAuthority v. Commissioner of Income Tax (TDS)[4]. The lis, in this 7.Another interesting case is Infrastructure DevelopmentAuthority v. Commissioner of Income Tax (TDS)[4]. The lis, in this case, arises in a writ petition filed by the implementing agencyfor appropriate orders including to set aside the order made bythe Commissioner refusing to grant relief under Section 197 ofthe Act. The Patna High Court after considering the role of theassessee therein, the nature of funds at the disposal of theassessee issued the following directions to the assessee: “Prima facie, this court finds merit in the claim of thepetitioner that the interest income over money belonging tothe State of Bihar cannot be subjected to income-tax or TDS bythe income-tax authorities. However, since the assessmentorders have not been passed in respect of the petitioner for therelevant years, hence this court would not like to give adefinite and positive finding over the issues involved, at thisstage. Hence, the orders contained in annexures 3 and 4 arequashed and the matter is remitted back to the concernedauthority of the Income-tax Department, i.e., AssistantCommissioner of Income-tax, TDS Circle, Patna for passingfresh order in accordance with law and after due application of mind to all relevant facts, some of which have been noticed inthis order. The said authority should pass a fresh order inrespect of the petitioner's application under section 197 of theAct without any delay and preferably within one month fromtoday. Till then no coercive action shall be taken to realise taxdeduction at source in respect of interest income which thepetitioner may receive.” 8.The ITAT, Cochin Bench in M/s.Vizhinjam International Seaport Ltd v. The Income Tax Officer, Ward 2(4), Trivandrum[5]hastaken a similar view while appreciating the character of interestreceived by the assessee, whether constitutes income or not.Keeping the above decisions in perspective, let us examine thecircumstances which have bearing on appreciating whether theinterest received by the assessee could form part of the incomeof the assessee or the assessee is merely a custodian of the fundsof DRDO/ISRO for implementation of Government projects. 9.In the case on hand, we prefer to appreciate whetherthe interest earned from the investment made by the assesseewhether constitutes income of the assessee or the assessee is amere recipient as custodian of the respective Departments, byexamining the documents which have bearing on the issue. Forwe are convinced that the Revenue and the Tribunal haveneither considered the MoUs in right perspective nor, ifconsidered, concluded the issue with unavailable conclusion.This is both a perverse finding warranting correction underSection 260A of the Act. A bare reading of MoU entered intobetween the DRDO/ISRO and the assessee would, firstly disclosethat the MoUs were entered into for augmentation of plant andmachinery facilities for DRDO for projects called MissileIntegration Complex and for Satellite Launch Programme andMars Orbit Mission. Under the respective MoUs, the assesseewas the custodian of the funds of the respective Government Departments. The MoUs refer to the scope of the respectiveDepartment’s obligation and the role the assessee had to playduring the implementation of the MoU as its authorised agent. The funds, when transferred in favour of the holding Companyof the assessee, the holding Company was called upon tomaintain a separate account for the transferred amount. And itwas made clear that the amount so transferred would be subjectto the audit by C&AG. The assessee was implementing either ashort term requirement or a long term requirement which theassessee may not be willing to share with anyone, including theIncome Tax Department. For either of the purposes, the on-hand resources are important as much as technical layouts forcommissioning the projects. 9.1The endeavour of DRDO/ISRO could be appreciated that the expertise and wherewithal of the assessee are 9.1The endeavour of DRDO/ISRO could be appreciated that the expertise and wherewithal of the assessee are augmented and utilized by respective Departments forenhancing the facilities for the projects implemented by theseDepartments. In the scheme of things or in the implementationof the respective projects, the dynamics of the projects may callupon swift implementation of the task entrusted to the assesseeby DRDO/ISRO. The purchase of plant and machinery,enhancement of equipment facility etc are decided byDRDO/ISRO. Resultantly, the assessee was required to be thecustodian of the funds received from respective GovernmentDepartments for carrying out the designs. The assessee insteadof investing the amount in its credit account has invested themin Fixed Deposits in a separate account and earned interest onthat. This treatment in the books of account of assesseeadheres to the condition with which the funds were transferred.The DRDO and ISRO have called upon the assessee to return theunspent amount together with not only the interest accrued therein but also claim refund from Income Tax Department theTDS amount as well, and, upon receipt from the Department,transfer to DRDO/ISRO. From the documents which are notdisputed by the Revenue, it is very clear that the assessee wasmerely allowed to operate the funds for the exclusive benefit ofrespective Government Departments and funds do not belong tothe assessee. The assessee will not have any claim over thefunds it was holding for and on behalf of DRDO/ISRO. 9.2Further, the respective MoUs provide for the transferof facility acquired through the assessee at a given point of timesubject to assessee paying the value of equipment so purchasedby the assessee in the execution of obligation under respectiveMoUs. From this circumstance, it is very clear that the facilitiesestablished at Thiruvananthapuram continued to be with therespective Departments. It could be one situation, if such an arrangement is introduced by an assessee and the Departmenthas a reason to believe that such arrangement has beenintroduced only as a subterfuge or design to avoid payment oftax by the person who transfers the funds and the assessee whoreceives the fund and parks them in its name, however, claimsexemption from payment of Income Tax. In the case on hand,the assessee is a subsidiary of a Government Company. DRDO isa department in the Ministry of Defence. ISRO is also adepartment in the Central Government. The funds are thefunds of the respective Government Departments. Thereasoning of the Tribunal that the Fixed Deposit is notauthorised by DRDO/ISRO, suffers from lack of logic. Theassessee was entrusted with the fund for utilization for thebenefit of DRDO/ISRO. The assessee as a prudent custodiandoes something, resulting in interest to DRDO/ISRO, suchmeasure shall not result in taxation at the hands of the assessee. I.T.A. No.15, 16 & 17/2018 MoU deals with proper handling of funds subject to C&AG audit.This presupposed all steps necessary and authorised in favourof assessee. The concept of overriding title is inapplicable tocase on hand. Because, in the application of overriding title,deflection from the object i.e., assessee is made out in favour ofa third party to avoid tax implication. In the case on hand,there is no deflection, for, right through the funds transferredbelong to DRDO/ISRO, and, as a corollary, interest earnedbelongs to DRDO/ISRO. The Fixed Deposits are opened in thename of assessee, the Banks are correct in effecting TDS andissuing TDS certificate to the assessee. The assessee onceestablishing no tax liability on this component, the TDS isreferred to be made over to DRDO/ISRO. In the armchair ofrevenue, the above aspects sound atypical to taxation. TheGovernment Departments, since are not under obligation to payincome tax, the funds merely because are in the hands of the assessee and earn interest, the reasoning whichever way it isstated is not convincing to tax the interest income in assessee’sreturn and the Revenue looked at the transactions from thekaleidoscope of the letter of Income Tax Department butwithout appreciating the spirit of documents which havebearing on the adjudication of the issue. It is appropriate toobserve that an assessee is under obligation to pay tax on itsreal income or income derived from one source or the other bythe assessee, but not on every receipt recognized in the books ofthe assessee. 9.3As rightly pointed out by Senior Advocate Mr JosephMarkos, we have one option or the other to appreciate theorders under appeal before us. We prefer to examine the claimof the assessee that the interest received by it does not formpart of its income by referring to the undisputed and admitted documents on which the assessee is relying on, and we arrive atthe conclusion that the interest received by the assessee couldnot be treated as computable income of the assessee during thesubject Assessment Year. The circumstances in VizhinjamInternational Seaportare similar to the case on hand and there isinconsistency in approach by the Tribunal in the findingsrecorded in similar circumstances. The deliberation and theresultant view we are taking in this judgment are peculiar andparticular to the fact situation of the case on hand. Thecomputability of interest-income or any other source of incomeis specific to the particular case dealt with by theCourt/Tribunal/Revenue. In the instant case, the objection ofRevenue is not that the funds are parked by a true owner liableto tax, but parked with the assessee and thereby the obligationof tax is avoided through such an understanding. The burden insuch a claim is very heavy on the assessee to establish that the income is non-computable income of assessee. Reverting tocase on hand, the assessee, DRDO/ISRO are either GovernmentDepartments or Government Companies. The burden isdischarged by the assessee to not go by recognition of entries inbooks of account, but appreciate all the circumstances whiletreating whether the interest is computable or non-computableincome of the assessee. Hence, in the circumstances of the case,the interest income for the Assessment Year 2009-10 is non-computable income of assessee. The contrary findings recordedby the orders under appeal are illegal and unavailable. Hence,liable to be set aside and is set aside accordingly. For all the above reasons, the substantial questions areanswered in favour of the assessee and against the Revenue. ITA No.15/2018 is allowed. ITA Nos.16 and 17/2018 10.By following the aforementioned discussions and thereasons, the substantial questions framed in these two appealsare answered in favour of the assessee and against the Revenue. Income Tax Appeals are allowed. No order as to costs. Sd/- S.V.BHATTIJUDGESd/-VIJU ABRAHAMJUDGE jjj