Interest earned on temporary parking of funds intended to be used for Metro Rail Project not taxable: ITAT

The Income Tax Appellate Tribunal (ITAT) bench in the case of Bangalore Metro Rail Corporation Ltd. V/s. DCIT held that the income generated out of the earlier release of State Government for its project would have to be converted into State’s equity towards the project and the same cannot be counted as income of BMRCL. Thus, there is no profit motive as the entire fund entrusted and the interest accrued therefrom has to be utilized only for the purpose of scheme. Thus, it has to be capitalized and cannot be considered as revenue receipts.

In this matter, the assessee is a wholly-owned company of Government of Karnataka. It was established with the approval of the Government of India, for the implementation of a rail-based mass rapid transit system which was called as “Bangalore Metro Rail Project” in five years in five stages. Further, the cost of the project was to be financed by both the Union and the State Governments. During the previous year relevant to AY 2009-10, the funds received by the assessee which were not immediately required for execution of the project were invested in Fixed Deposit and Mutual Funds. In Income Tax Return filed on 29.09.2009 for Assessment Year 2009-10, the assessee claimed the interest and dividend earned as exempt.

The assessee explained that:

(a) The corporation is a special purpose vehicle to implement the metro Rail project.
(b) The assessee had taken requisite permission and approval to invest the surplus funds.
(c) The funds were invested in Fixed Deposits of Banks which earned interest until they are required for implementation of the project.
(d) The assessee relied upon the case of Karnataka Urban Infrastructure Development & Finance Corporation (hereinafter referred to as KUIDFC) 155 Taxman 228 (Kar). The submissions made by the assessee were however not accepted by the AO.

The AO was of the view that the decision of the Hon’ble Karnataka High Court relied upon by the Assessee in the case of KUIDFC was distinguished by the AO by pointing out that KUIDFC after implementation of urban infrastructure would not commercially exploit the infrastructure developed whereas the Assessee would after the creation of BMRCL would commercially exploit the facility by charging for travel from the commuters. The AO also observed that in the case of KUIDFC there was no profit motive. According to the AO though the ultimate goal of the Assessee is to develop infrastructure, the said infrastructure facility will be ultimately used for commercial purpose. Hence, the interest income was brought to tax by Assessing Officer.

On appeal by the assessee, the CIT (A) confirmed the order of the Assessing Officer.

Aggrieved by the decision passed by CIT (A), the assessee preferred appeal before tribunal. ITAT in its order dated 19.04.2022 allowed the appeal filed by assessee and held that interest income brought to tax by assessing officer is not taxable. It relied on various judgments and Government order passed on 25.03.2008. Government order stated as follows:

“The income generated out of earlier release of State Government to BMRC1., before the commencement of BMRCL, project would have to be converted into State’s equity towards the project and therefore cannot be counted as income of BMRCL. Further release as equity would be made to BMRCL only after adjusting this income.”