Ita/423/2016 Of M/S. Karnataka v. The Income-Tax Officer

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 8 DAY OF FEBRUARY, 2017 PRESENT THE HON’BLE MR.JUSTICE JAYANT PATEL| AND THE HON'BLE MR.JUSTICE A.N.VENUGOPALA GOWDA INCOME TAX APPEAL NO.423/2016 BETWEEN: M/s. KARNATAKA MUNICIPAL DATA SOCIETY|MRC, 6 FLOOR, 1-4 IT PARKRAJAJINAGAR INDUSTRIAL ESTATEBANGALORE- 560 010.REPRESENTED BY ITS SECRETARY|Dr. VISHAL R., AGED ABOUT 39 YEARSS/O. SRI R. NARASIMHA. APPELLANT (BY Ms. JINITHA CHATTERJEE FOR|SRI S.PARTHASARATHI, ADV.) | AND" THE INCOME-TAX OFFICERWARD 2 (2)(2)BANGALORE - 560 003. RESPONDENT (BY SRI K.V. ARAVIND, ADV.) THIS ITA IS FILED UNDER S.260-A OF INCOME TAX ACT|1961, ARISING OUT OF ORDER DATED 29.04.2016 PASSED IN)ITA NO.1485/BANG/2015, FOR THE ASSESSMENT YEAR 2012-2013,|PRAYINGTO,|1)FORMULATETHE|SUBSTANTIAL.QUESTIONS OF LAW; 2) ALLOW THE APPEAL AND SET-ASIDE|THE ORDER OF THE ITAT DATED 29.04.2016 BEARING ITA NO.|1485/BANG/2015 FOR THE ASSESSMENT YEAR 2012-13, ETC. THIS ITA COMING ON FOR ADMISSION THIS_ DAY,JAYANT PATEL J.,PASSED THE FOLLOWING: ORDER The appellant — assessee has preferred tnis appeal| against the order dated 29.04.2016 passed by the Tribunalin ITA No.1485/Bang/2015. 2D The questions of law raised are as under: “a) Whether in law, the authorities below are.justified in treating the grant and the interest earnedthereon as income of the Appellant-society on thepeculiar facts and circumstances of the case and alsowhen the Appellant was clearly guided by the directionsof the Government of Karnataka with regard to both thegrant as well as the interest earned on the unspentmoney kept with banks? D) Whether in law, the authorities below are)justified in rejecting the plea of the Appellant and.treating the grant and the interest earned thereon as.income of the Appellant when admittedly the funds wereheld by the Appellant in the capacity of custodian only|and the funds and interest were to be utilized as per the|directions of the Government of Karnataka alone?. c) Whether in law, the authorities below are)justified in interpreting the order of the Government of.Karnataka dated 02.02.2010 as an after thought without.understanding the true objects and spirits behind the.formation of the Appellant as well the aforesaid| Government order: the Government order having only.made it clear what was intended right from the creation of the Appellant-society?”. 3.We nave heard Ms. Jinitha Chatterjee, for SriS. Parthasarathi, learned counsel appearing for theappellant and Mr. K.V. Aravind, learned counsel appearing|for the respondent. 4The learned counsel appearing for both thesides are on an agreement on the point that the questions|raised in the present appeal are already covered by the.decision of this Court dated 05.10.2015 in ITA Nos.103-104/2016 and allied matters.| 5.We may record that this Court in the abovereferred decision in ITA Nos.103-104/2016 and alliedmatters nad observed tnus: “As common questions are to be considered, theyare considered simultaneously. — 2 |Assessee has preferred all appeals byraising following questions of law: ~(a)Whether in law, the authorization below are justified intreating the grant and the interest earned thereon as income.of the|Appellant-societyOn|the|peculiar|factsand circumstances of the case and also when the Appellant was|clearly guided by the directions of the Government of Karnataka with regard to both the grant as well as interest|earned on the unspent money Kept with banks? (b) Whether in law, the authorities below are justified in|rejecting the plea of the Appellant and treating the grant and|the interest earned thereon as income of the Appellant when|admittedly the funds were held by the Appellant in the|Capacity of custodian only and the funds and interest were to be utilized as per the directions of the Government of Karnataka alone?| ~(a)Whether in law, the authorization below are justified intreating the grant and the interest earned thereon as income.of the|Appellant-societyOn|the|peculiar|factsand circumstances of the case and also when the Appellant was|clearly guided by the directions of the Government of Karnataka with regard to both the grant as well as interest|earned on the unspent money Kept with banks? (b) Whether in law, the authorities below are justified in|rejecting the plea of the Appellant and treating the grant and|the interest earned thereon as income of the Appellant when|admittedly the funds were held by the Appellant in the|Capacity of custodian only and the funds and interest were to be utilized as per the directions of the Government of Karnataka alone?| (C)Whether in law, the authorities below are justified ininterpreting the order of the Government of Karnataka dated|02.02.2010 as an after thought without understanding the true|objects and spirits behind the formation of the Appellant as well the aforesaid Government order: the Government order|nNaving only made it clear wnat was intended right from thecreation of the Appellant-society ?” 3.)The short facts of the case appears to be}that as 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 andinterest may accrue thereon. In the assessmentproceedings, 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: “4.4.1. We nave heard the rival submissions of|both the learned Authorised representative for theassessee and the learned Departmental Representativefor revenue and perused and carefully considered thematerial on record including the decision of the co-ordinate bench in the assessee’s case for AssessmentYear 2009-10 (supra). We find that identical issueswere before the co-ordinate bench of this Tribunal orconsiderationintne|assesseeS|OWT)CaSC2forAssessment Year 2009-10. In its order in IITANo.1843/Bang/2013 dated 9.5.2014 the co-ordinatebench adjudicated these issues in favour of Revenueand against the assessee holding as under at paras 12to 14:-) “12. We have given a careful consideration to the rivalsubmissions. At pages 58 & 59 of the assessee’s paperbook are copies of the English translation of theGovernment Order dated 1/7.1.2009 releasing grants tothe assessee society for the year 2008-09. The orderin vernacular is placed at pages 60 to 61 of theassessee’s paper book. The operative portion of theGovernment Order reads thus:-“Government|Order.No.UDD|15|SEC2008Bangalore, dated 17.01.2009| As explained in the Preamble, Government hasreleased a sum of Rs.2/74.00 lakhs to Directorate ofMunicipal Administration for the Operational Cost ofRs.77.00 lakhs for the year 2008-09 to KarnatakaMunicipal Data Society and to reimburse a sum ofRs.197.00 lakhs, which was released for the year2007-08. This grant should be incurred for the year 2008-09under the Account Head ~3604-00-193-0-01" (100)(plan).| In the Government Order, Director, Directorate ofMunicipal Administration has been authorized to drawfrom State Huzur Treasury and to recover a sum ofRs.197.00 lakhs, which was released to KarnatakaMunicipal Data Society for the year 2007-08, and theremaining amount of Rs.77.00 Lakhs to KarnatakaMunicipal Data Society for the Operational Cost andpay througn cheque. | As explained in the Preamble, Government hasreleased a sum of Rs.2/74.00 lakhs to Directorate ofMunicipal Administration for the Operational Cost ofRs.77.00 lakhs for the year 2008-09 to KarnatakaMunicipal Data Society and to reimburse a sum ofRs.197.00 lakhs, which was released for the year2007-08. This grant should be incurred for the year 2008-09under the Account Head ~3604-00-193-0-01" (100)(plan).| In the Government Order, Director, Directorate ofMunicipal Administration has been authorized to drawfrom State Huzur Treasury and to recover a sum ofRs.197.00 lakhs, which was released to KarnatakaMunicipal Data Society for the year 2007-08, and theremaining amount of Rs.77.00 Lakhs to KarnatakaMunicipal Data Society for the Operational Cost andpay througn cheque. | 13.It is seen from the above Government Order|that the purpose for which the grant is to be utilizedand the utilization of interest income out of the grantnave not been specifically spelt out. However, in theaddendum dated 2.2.2010, this lacunae has been filedup. This was done apparently after the rejection of theassessee’s application for grant of registration u/s. 12Aof the Act, pursuant to order of the DIT (E) dated22.1.2010. This addendum reads tnus:-| “Preamble: Government has released a total sum ofRs.299 lakhs as under, for meeting the expenditure oftne Karnataka Municipal Data Society; 1)|Government Order No.15 SFC 2008 dated|0Q7/03/2008 Rs.197 laknN2)|Government Order No.15 SFC 2008 dated|17/01/2009 Rs. 7/7 lakhs|3)Government Order No.15 SFC 2008 dated|2//08/2009 Rs. 25 lakhs. However, the Government has not specified thepurposes for which the grant is to be utilized norquantified the amounts to be utilized against suchpurposes. It is felt necessary to issue an addendum tothe above Government orders specifying the conditionsof the grants released. After careful consideration thefollowing addendum. Addendum to GO No.UDD/15/SFC/ 2008Bangalore, Dated 02-02-2010 As explained In the preamble it Is here by directedthat the amounts aggregating Rs.299/- lakhs grantedto Society be utilized by the Society after priorapproval of the Government for specific purpose. TheGovernment also reserves the right to direct Society touse the funds in a manner it may deem fit. The SocietyShall hold the money as a custodian for theGovernment. It shall create a fund out of the grantmoney and any accrued interest and utilize the fundsfor assisting the member bodies in implementation ofe-Governance. If any asset is created out of this fundSnall belong to the Government. Utilization certificate shall be submitted to Governmentafter spending the funds. Further in case the amount isunspent the same snail vest In such an tnstitution orbody which Government prescribes together with anyaccretion tnereto.| 14|It can thus be seen from the abovethat the addendum, if at all, would operate only for theprevious year relevant to A.Y.2010-11 and not to anearlier period viz., A.Y.2009-2010. In other wordsduring tne previous year relevant to A.Y.2009-10,there were no restrictions whatsoever on the use of the grant by the assessee. It cannot therefore be saidthat there was diversion of income by overriding title.Whatever the assessee does out of the grant and theinterest accrued on the grant can only be said to beapplication of income and it cannot be said that therewas diversion of income by overriding title. Takingnote of the above factual position for the A.Y.2009-10,the plea of the assessee that there was diversion ofincome by overriding tithe cannot be _ acceptedAccordingly, the order of the CIT (Appeals) isconfirmec. ...... the grant by the assessee. It cannot therefore be saidthat there was diversion of income by overriding title.Whatever the assessee does out of the grant and theinterest accrued on the grant can only be said to beapplication of income and it cannot be said that therewas diversion of income by overriding title. Takingnote of the above factual position for the A.Y.2009-10,the plea of the assessee that there was diversion ofincome by overriding tithe cannot be _ acceptedAccordingly, the order of the CIT (Appeals) isconfirmec. ...... 4.4.2. Following the aforesaid decision of the co-ordinate|bench|Of|this.TribunalInTTANo.1843/Bang/2013|dated09.05.2014|inthe|assessee’s own case for Assessment Year 2009-10, wehold that in the factual matrix of the case, it is clearthat|even)afterthe|Addendumof GOK|dated20.2.2010, whatever the assessee does out of thegrant and interest accrued can only be said to beapplication of income for the stated objects andactivity of the assessee society and therefore rejectthe assessee's plea that there was diversion of incomeby overriding title. Consequently, the grounds at S.Nos. 1 to 4 raised by the assessee are dismissed.| Similar is the view taken Dy the Tribunal in the other|matters. Under these circumstances, appeals before|this Court. 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 acustodian 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|contro! 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 ofCOMMISSIONER OF INCOME TAX AND| ANOTHER VSKARNATAKAURBANINFRASTURCTURE DEVELOPMENT AND FINANCE.CORPORATIONin its decision reported at(2006)284ITR OG58wherein of course, Tribunal had held that it is.not an income of the assessee put the revenue was in.appeal before this Court. In the said decision, this Court|at para 4 observed thus: “4, Tne material on record snows tnat the very|purpose of constitution of the assessee was to act as anodal agency for implementation of mega-city schemeworked out by the Planning Commission. Both theCentral and the State Governments are expected toprovide requisite finances for implementation of theSaid project. The funds from the Central and StateGovernments will flow directly to the specialisedInstitutions/nodal agencies as grant and the nodalagency will constitute a revolving fund with the help ofCentral and State shares out of which finance could beprovided to various agencies sucn as water, sewerageboards, municipal corporations, etc. Tne objective Is tocreate and maintain a fund for the development of “4, Tne material on record snows tnat the very|purpose of constitution of the assessee was to act as anodal agency for implementation of mega-city schemeworked out by the Planning Commission. Both theCentral and the State Governments are expected toprovide requisite finances for implementation of theSaid project. The funds from the Central and StateGovernments will flow directly to the specialisedInstitutions/nodal agencies as grant and the nodalagency will constitute a revolving fund with the help ofCentral and State shares out of which finance could beprovided to various agencies sucn as water, sewerageboards, municipal corporations, etc. Tne objective Is tocreate and maintain a fund for the development of infrastructural assets on a continuing basis and,therefore,the|aSSeSSCECIsanodalagencyformed/created by the Government of Karnataka asper the guidelines; there is no profit motive as theentire fund entrusted and the Interest accruedtherefrom on deposits in bank though in the name ofthe assessee has to be applied only for the purpose ofwelfare of the nation/States as provided in theguidelines; the whole Of the fund belongs to the StateExchequer and the assessee has to channelise them tothe|objectsOf|centrallysponsoredscnemeOf|infrastructuraldevelopment|formega-cityof Bangalore. Funds of one wing of the Government isdistributed to the other wing of the Government forpublic purpose as per the guidelines issued. Tnemonies so received, till it is utilised, is parked in aDank. The finding recorded by the Tribunal clearlyshows that the entire money in question is received forimplementation of the scheme which is for a publicpurpose and the said scheme Is Implemented as perthe guidelines of the Central Government and,therefore, the assessee is only acting as a nodalagency of Central Government for implementation ofthese projects. It is not the case of the Revenue thatthe assessee was carrying on any business or activitiesof its own while implementing the scheme in question.The unutilised money, during which the project couldnot be fully implemented, is deposited in a bank toearn interest. Tnat interest earned Is also again utilisedfor the implementation of the mega-city scheme whichis also permitted under the scheme. Therefore, incomputing the total income of the assessee for anyprevious year the interest accrued on bank depositscannot be treated as an income of the assessee as theinterest is earned out of the money given by the Governmentof India|for|tne|DUFDOSE|of implementation of mega-city scheme.” | JIf 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 thereonis also to be utilised as per the terms and conditions of the 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 moneywould remain the same and addendum can be termed as.only by way of a Clarification. It was not a matter wherethe.question|WadaCO be|consideredwithtne.retrospectivity as observed by the Tribunal. When the)assessee is held as a custodian and the full command for.utilization of the money including interest earned|thereon remains with the Government, same cannot betermed as income of the assessee. In view of the above, impugned order passed by|the Tribunal is set aside and the questions are answeredin favour of the assessee and against the revenue. |Appeals allowed accordingly.”| In view of the same reasons, the impugned orderpassed by the Tribunal is set aside and tne questions are.answered in favour of the assessee and against therevenue. The appeal shall stand allowed accordingly. I.A.No.1/2016 does not survive for consideration andis disposed of accordingly. Sd/-|JUDGE. In view of the above, impugned order passed by|the Tribunal is set aside and the questions are answeredin favour of the assessee and against the revenue. |Appeals allowed accordingly.”| In view of the same reasons, the impugned orderpassed by the Tribunal is set aside and tne questions are.answered in favour of the assessee and against therevenue. The appeal shall stand allowed accordingly. I.A.No.1/2016 does not survive for consideration andis disposed of accordingly. Sd/-|JUDGE. Sd/-JUDGE.