Case Law Details
Maharashtra Airport Development Company Vs National Faceless Assessment Centre (ITAT Mumbai)
Mumbai ITAT Holds MADC as “State” u/Art. 12: Interest on FDs & State Grants Immune from Tax u/Art. 289
Assessee, Maharashtra Airport Development Company Ltd (MADC), a special purpose company incorporated by Government of Maharashtra for development of airports, MIHAN & allied infrastructure, challenged taxation of interest income of ₹3.65 crore on fixed deposits & grant-in-aid of ₹174.03 crore received from State Government. Tribunal admitted an additional legal ground relying on NTPC vs CIT holding that pure question of law can be raised at any stage.
Following earlier co-ordinate bench decisions in Assessee’s own case for AYs 2007-08 & 2016-17, Tribunal held that MADC is an instrumentality/agent of the State within meaning of Article 12 of the Constitution. Applying Article 289(1), Tribunal ruled that income of a State is exempt from Union taxation except where derived from trade or business. Since interest on fixed deposits was assessed by AO itself as “income from other sources” & not from trade or business, Article 289(2) exception was held inapplicable. Accordingly, interest income on FDs was held not taxable & addition deleted; consequential grounds on nexus, s.57 deduction & CWIP adjustment were rendered academic.
On grant-in-aid, Tribunal followed binding precedents in Assessee’s own case holding that grants received from Government of Maharashtra for land acquisition, rehabilitation & infrastructure development are not income u/s 2(24)(xviii) but funds received by Assessee as an arm of the State for discharging statutory functions, with complete governmental control & utilisation restrictions. Grant-in-aid was therefore held not taxable. Appeal partly allowed.
Key Takeaway:
Entities functioning as an arm or agent of the State enjoy constitutional tax immunity; interest on FDs & State grants cannot be taxed merely by invoking s.2(24)(xviii) when Article 289 applies.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The assessee has filed the present appeal against the impugned order dated 01.02.2024, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2021-22.
2. In this appeal, the assessee has raised the following grounds: –
“1. a) The order passed u/s. 143(3) r.w.s. 144B of the IT Act by the National Faceless Assessment Center, Delhi (“the ld. Assessing Officer”) is without jurisdiction, invalid and bad in law and against the principles of natural justice.”
2. a) The Id. CIT(Appeal), National Faceless Appeal 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. Wiithout 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 2(b), the Id. CIT(A) erred in facts and law in not allowing deduction of interest expense u/s. 57(iii) against the above interest income on Fixed Deposits of Rs. 3,65,72,861/- assessed under ‘income from other sources.
d. The Id. CIT(A) and Id. Assessing Officer failed to appreciate that one to one nexus per se is not relevant for allowing the deduction of interest expense u/s. 57(iii) of the Act.
e. Without prejudice to ground no. 2(c) and 2(d), the Id. CIT(A) failed to appreciate that the Liabilities side of the Balance Sheet of the appellant reflects both interest bearing funds and interest free funds which indicates that mixed pool of funds have been used by the assessee towards investment in Fixed Deposits and therefore, for the purpose of computing deduction of interest expenditure u/s. 57 (ii) of the Act, the principle of ‘Proportionate Theory’ ought to have been applied by apportioning the ‘interest expense on borrowed funds’ towards ‘interest income on Fixed deposits’ based on the proportion of the ‘investment in fixed deposits’ to the ‘Total Assets sourced from common pool of funds.
f. Without prejudice to Ground ho. 2(a) to 2(e), the “Capital Work in Progress” / “Cost of the Project ought to be restated / increased to the extent of addition of interest income on Fixed Deposits of Rs. 3,65,72,861/- upheld as ‘Income From Other Sources’ which was otherwise reduced by the assessee from “Capital Work in Progress” in its Balance Sheet.
3. a) On facts and circumstances of the case, the Id. CIT(A) ought to have appreciated that the grant received during the year from the Government of Maharashtra amounting to Rs. 1,74,03,00,000/- towards Land acquisition, rehabilitation, infrastructural development, etc. is a capital receipt, not liable to tax, as 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.
b. The Id. CIT(A) failed to appreciate that, in view of clause (1) of Article 289 of the Constitution of India, since the appellant is a State within the meaning of Article 12 of the Constitution of India, the Grant received by the appellant from the Government of Maharashtra which is for achieving the objects of development of the Government only and not for carrying 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 Grant-in-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. 2(a) to 2(f), raised in assessee’s appeal, pertain to the addition made on account of interest income received by the assessee on fixed deposits.
5. During the hearing, by referring to Ground No.2(a), the learned Authorized Representative (“learned AR”) submitted that as 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 assessee. The learned AR submitted that similar addition on account of interest income earned on fixed deposits maintained by the assessee came up for consideration before the Co-ordinate Bench of the Tribunal in assessee’s own case for the assessment years 2007-08 and 2016-17, wherein the Co-ordinate Bench of the Tribunal agreed with the submissions of the assessee and held the assessee to be a State being an instrumentality/agent of the State, resulting in its interest income earned on fixed deposits not chargeable to tax as per Article 289 of the Constitution of India.
6. From the perusal of the record, we find that this issue has been raised for the first time by the assessee in the present appeal before us and was not raised by the assessee in its appeal before the learned CIT(A). Though this fresh issue should have been raised by way of an application seeking admission of an additional ground, the assessee has raised the same in the main appeal filed before us. During the hearing, the learned AR orally prayed that the issue raised in Ground No.2(a) of the present appeal be considered as an additional ground, as the same has raised a legal issue, which goes to the root of the matter, and the same may be admitted for adjudication. It is undisputed that, being a legal issue, it can be raised at any stage of the proceedings provided the relevant material for its adjudication is on record. After considering the submissions and perusing the material on record, we are of the view that the issue raised by way of Ground No.2(a) is a legal issue, which can be decided on the basis of the material available on record. 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 development of other airports such as Shirdi, Amravati, Solapur, Karad, Dhule, Chandrapur, and Phaltan, as per the government resolution. The assessee was formed with equity participation from CIDCO, MIDC, NIT, MSRDC, SICOM, NMC. The post of Chairman of the assessee is held by the sitting Chief Minister of the Government of Maharashtra, and all other Board Members are Senior Officers of the State Government of Maharashtra, who are appointed on an ex officio basis.
9. For the year under consideration, the assessee filed its return of income on 11.03.2022, declaring a total loss of Rs.20,58,17,877/-. The return filed by the assessee was selected for scrutiny under CASS, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee has maintained fixed deposits with certain banks and has earned interest income of Rs.3,66,25,480/-, which was not offered to tax but was carried to the work in progress. Accordingly, the assessee was asked to furnish the details. In response, the assessee submitted that it has earned interest on fixed deposits/current accounts with banks and these fixed deposit funds were not placed out of surplus funds. It was further submitted that the interest on fixed deposits / current account is inextricably linked to the main business activity of the assessee, and therefore, is being treated as business income and the same has been reduced from the cost of the project by the assessee except an amount of Rs.52,619/- received pertaining to Shirdi Project, which is credited to the Profit & Loss Account. The assessee submitted that, following the consistent method of accounting, the interest paid on borrowing is added to the cost of the project by debiting the same to the work in progress. On the same line, interest earned on short-term fixed deposits, which has resulted in a reduction in the cost of projects undertaken, is reduced from the cost of the project.
10. The Assessing Officer (“AO”), vide order dated 26.12.2022 passed under section 143(3) and section 144B of the Act, after noting that this issue is reckoning in nature, held that the interest income has been treated as income from other sources in the case of the assessee till the assessment year 2007-08 by the Tribunal. The AO further held that in assessee’s 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.
12. We have considered the submissions of both sides and perused the material available on record. We find that while deciding the similar issue, as raised by the assessee in Ground No.2(a) before us, the Co-ordinate Bench of the Tribunal in assessee’s own case in Maharashtra Airport Development Company Ltd. vs. ACIT, in ITA No.520/Mum/2019, for the assessment year 2007-08, vide order dated 27.09.2024, after taking into consideration the provisions of Article 12 and 289 of the Constitution of India as well as the main objects, shareholding structure and the purpose for the constitution of the assessee held that the assessee fall within the definition of State as per the provisions of Article 12 read with Article 289 of the Constitution of India and thus the interest income earned on fixed deposits is not chargeable to tax. The relevant findings of the Co-ordinate Bench, in the aforesaid decision, are reproduced as follows: –
“6. To deal with this additional ground, we appraise ourselves with Article 289 of the Constitution of India which is reproduced as under:
“(1) The property and income of a State shall be exempt from Union taxation.
2. Nothing in clause (1) shall prevent the Union from imposing, or authorizing the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried 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.
3. Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of Government.”
6.1. From the above, we note that Article 289 exempts state income or property from taxation. On plain reading of above article, it is clear that Union can (i) itself impose or authorize to impose (ii) any tax to such extent, as parliament may by law provide (iii) in respect of a trade or business of any kind carried on or on behalf of Government of a state. Further, Article 289 (2), which is the exception to 289(1), it is important to note that parliament by law provide to tax the property or income in relation to only trade or business of any kind carried 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 tests to determine as to when a Corporation should be said to be an instrumentality or agency of the State. The tests laid down by the Hon’ble Apex Court are summarized as under:
1. If the entire share capital of the corporation is held by the Government, IR would go a long way towards indicating that the corporation is an instrumentality or agency of the Government.
2. Existence of deep and pervasive State control may afford an indication that the corporation is a State agency or instrumentality.
3. Whether the Corporation enjoys monopoly status which is State conferred or State protected.
4. If the functions of the corporation are of public importance and closely related to governmental functions. It would be a relevant factor in classifying the corporation as an instrumentality or agency of the Government
5. If a department of a Government is transferred to a corporation, it would be a strong factor supporting this inference of the corporation being an instrumentality or agency of the Government.
7.2. After applying the cumulative effect of all the relevant factors mentioned above, if the body is found to be an instrumentality of the agency of the Government, it would be an authority included in term “State” under Article 12 of the Constitution of India. However, the tests indicated by the Hon’ble Apex Court in the case of Som Prakash Rekhi are merely indicative and not absolute and thus, have to be applied discretely. If any body or organisation falls within the criteria as laid down by the Hon’ble Apex Court, it can be considered that it falls within the term “State”.With the above understanding, we look at the status and structure/set up of the assessee. The assessee, Maharashtra Airport Development Company Limited (‘MADC’) was constituted
8. as a company under the Companies Act, 1956 in the year 2002 by the Government of Maharashtra (‘GoM’) as a special purpose company to develop Multi-modal International Hub Airport at Nagpur (‘MIHAN’) and aviation infrastructure in the State of Maharashtra to provide the regional air connectivity and operationalizing certain government schemes. MADC is governed under the Maharashtra Regional and Town Planning Act, 1966 (for short, “MRTP Act”) and as per section 160 of MRTP Act, assessee shall be dissolved once the purpose 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 encourage overall growth of aviation sector in the State and to ensure planned development around airports.
8.3. The shareholding structure as well as constitution of Board of the assessee is pictorially represented as under for better understanding:
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9. On the above stated factual status/setup of the assessee, we note that identical additional ground was raised by the assessee before the Co-ordinate Bench of ITAT in its appeal for Assessment Year 2012-13 and 2015-16 in ITA No. 3682/Mum/2017 and ITA No.522/Mum/2019, respectively, which was admitted and adjudicated upon to hold that assessee is an arm of the State, thus an instrumentality of the State. The relevant observations and findings of the Co-ordinate Bench in this respect are reproduced below for ready reference.
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 assessee company was formed with equity participation from various government companies namely CIDCO, MIDC, NIT, MSRDC, SICOM & NMC which are owned and controlled by Government of Maharashtra; that the entire management and functional control of the assessee company is that of Chief Minister of Government of Maharashtra and all other board persons are senior officers of the State Government of Maharashtra, that grant-in-aid was received by the assessee company from Government of Maharashtra in order to carry out statutory functions and its activities are for the development of the state in general and for the benefit and welfare of the general public in particular; that it is also not in dispute that the assessee company is appointed by the State Government as a special planning authority under section 40(IB) of the Maharashtra Regional Town Planning (MRTP) Act, 1966; that it is also not in dispute that the assessee company being a special 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 proposals of the assessee company are sent to the state government for approval as required under section 115 of the MRTP Act.
(v) that the assessee company is required to submit the timely reports/returns etc. to the state government from time 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, undischarged 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, notwithstanding anything contained in sub-section (2) require the work of developing and disposing of land in the area of a new town to be done by any such-corporation, company or subsidiary company aforesaid as an agent of the State Government, and thereupon, such corporation or company shall, in relation to such area, be declared by the State Government by notification in the Official Gazette, to be the New Town Development Authority for that area.”
viii. that the co-ordinate Bench of the Tribunal in case of City and Industrial Development Corporation of Maharashtra Ltd. us. ACIT (2012) 25 com 333 (Mum.) while deciding the identical issue in case of City and Industrial Development Corporation (CIDCO) which is also a subsidiary company under the control and supervision of State Government into business of construction of residential and commercial structures as well as development of infrastructure in towns and any development project completed by the CIDCO 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 assessee company is also appointed as a town planning authority under sub section 3A of section 113 of MRTP Act for acquisition of land for development of airports, repair and maintenance of airports and for rehabilitation of the project affected persons (POP), 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. CITIA) 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 Le. 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 record and candidly admitted by the Ld. A.R. for the assessee that other income derived by the assessee company from its project is not claimed as exempt.
xiv. that the contention of the Ld. D.R. for the Revenue that when the assessee company itself is paying taxes on its business income the grant-in-aid received by the assessee on which profit is to be earned is also business income is not sustainable in view of what has been discussed in the preceding paras.
xv. that even Article 289(1) of the Constitution of India itself says about the income from trade etc. but the grant-in- aid received by the assessee company from State of Maharashtra for the purpose of land acquisition, development of airports, repair and maintenance of airports is not a trade activity, hence not taxable to the income tax.
9.1. Thus, from the perusal of the above, we note that it has been held that the assessee is an agent of the State 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 implementing the scheme.
10. Having considered the above findings of the Co-ordinate Bench of ITAT in assessee’s own case as well as in other decisions referred above, we are in agreement with the same to hold the assessee to be a State, being an instrumentality / agent of the State, thereby resulting in its interest income earned on fixed deposits not chargeable to tax. Further, we note that clause (2) of Article 289 provides an exception and authorises the Union to impose a tax in respect of the income derived by the Government of a State from trade or business carried out by it or on its behalf. In this respect, it is undisputed fact that Id. Assessing Officer has himself assessed the interest income on fixed deposits under the head “income from other sources”. The said interest income thus, cannot be said to be derived from trade or business carried out by the assessee. Accordingly, clause(2) of the Article 289 is inapplicable. Since the assessee is held to be a State, or a surrogate of the State or an agent, performing the functions of the State and/or on behalf of the State of Maharashtra, whereby its income is not chargeable to tax within the meaning of clause(1) of the Article 289, all the other grounds of appeal raised by it in Form no.36 including the revised one and other additional grounds are rendered academic in nature and therefore not adjudicated upon. In terms of our above stated findings, even the grounds raised by the Revenue in its appeal relating to Id. CIT(A) not fulfilling the conditions of Rule 46A of the Rules are rendered infructuous.”
13. Thus, having carefully perused the aforesaid decision, we are of the considered view that the issue raised in Ground No.2(a) by the assessee is squarely covered by the decision of the Co-ordinate Bench of the Tribunal in the assessee’s own case cited supra for the assessment year 2007-08. We further find that following the similar findings, the Co-ordinate Bench of the Tribunal in assessee’s own case for the assessment year 2016-17, in ITA No.37/Mum/2024, vide order dated 09.09.2025, decided the similar issue in favour of the assessee and deleted the addition on account of interest income earned from fixed deposits. Accordingly, respectfully following the decisions of the Co-ordinate Bench rendered in assessee’s own case cited supra, we are of the considered view that interest income earned 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 contribution made by the State Government towards land acquisition, rehabilitation and infrastructure development for various purposes is as per the budgetary approval process of the Government of Maharashtra and therefore is in the nature of Promoters’ Contribution. The assessee submitted that all the contributions made by the State Government are with an earmarked objective and are used as per the direction of the Government of Maharashtra, and their utilisation can only be as per the directions that may be issued by the Government from time to time.
17. The AO, vide order passed under section 143(3) read with section 144B of the Act, disagreed with the submissions of the assessee and held that the Grant-in-Aid received by the assessee, Government of Maharashtra, is not towards equity or share capital. The AO held that the basic nature of the assessee’s business is that of a developer, wherein the assessee acquires land, develops it in the form of SEZ – non SEZ / Airports and then sells / gives it on long-term lease in lieu of revenue, and to acquire such land and to rehabilitate people, the assessee receives Grant-in-Aid from the Government of Maharashtra. Thus, the AO held that the Grant-in-Aid for acquisition of land, which in turn is sold to earn revenue, is offered for taxation. Therefore, it was held that the Grant-in-Aid received by the assessee is of a revenue nature. In this regard, the AO also placed reliance on the provisions of section 2(24)(xviii) of the Act, whereby with effect from 2016-17, all the assistance, grants, whatever name called, received from the Central Government, State Government, etc., in whatever form, are treated as income. Accordingly, the AO treated the Grant-in-Aid amounting to Rs.174,03,00,000/- received by the assessee from the Government of Maharashtra as income of the assessee.
18. The learned CIT(A) vide impugned order, dismissed the ground raised by the assessee on this issue and upheld the addition made by the AO. Being aggrieved, the assessee is in appeal before us.
19. We have considered the submissions of both sides and perused the material available on record. We find that this issue is no longer res integra and has been decided in favour of the assessee by the Co-ordinate Bench of the Tribunal in preceding years. In Maharashtra Airport Development Company Ltd vs. DCIT, for the assessment years 2012-13, 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 assessee company was formed with equity participation from various government companies namely CIDCO, MIDC, NIT, MSRDC, SICOM & NMC which are owned and controlled by Government of Maharashtra; that the entire management and functional control of the assessee company is that of Chief Minister of Government of Maharashtra and all other board persons are senior officers of the State Government of Maharashtra; that grant-in-aid was received by the assessee company from Government of Maharashtra in order to carry out statutory functions and its activities are for the development of the state in general and for the benefit and welfare of the general public in particular; that it is also not in dispute that the assessee company is appointed by the State Government as a special planning authority under section 40(IB) of the Maharashtra Regional Town Planning (MRTP) Act, 1966; that it is also not in dispute that the assessee company being a special 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 and cannot function independently.
iv. that all the development proposals of the assessee company are sent to the state government for approval as required under section 115 of the MRTP Act.
v. that the assessee company is required to submit the timely reports/returns etc. to the state government from time 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-section (2), require the work of developing and disposing of land in the area of new town to be done by any such-corporation, company or subsidiary company aforesaid, as an agent of the State Government; and thereupon, such corporation or company shall, in relation to such area, be declared by the State Government, by notification in the Official Gazette, to be the New Town Development Authority for that area.”
viii. that the co-ordinate Bench of the Tribunal in case of City and Industrial Development Corporation of Maharashtra Ltd. vs. ACIT (2012) 25 com 333 (Mum.) while deciding the identical issue in case of City and Industrial Development Corporation (CIDCO) which is also a subsidiary company under the control and supervision of State Government into business of construction of residential and commercial structures as well as development of infrastructure in towns and any development project completed by the CIDCO 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 211 of 2009 (supra) vide 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 assessee company is also appointed as a town planning authority under sub section 3A of section 113 of MRTP Act for acquisition of land for development of airports, repair and maintenance of airports and for rehabilitation of the project affected persons (POP), 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 behalfof 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 record and candidly admitted by the Ld. A.R. for the assessee that other income derived by the assessee company from its project is not claimed as exempt.
xiv) that the contention of the Ld. D.R. for the Revenue that when the assessee company itself is paying taxes on its business income the grant-in-aid received by the assessee on which profit is to be earned is also business income is not sustainable in view of what has been discussed in the preceding paras.
that even Article 289(1) of the Constitution of India itself says about the income from trade etc. but the grant-in-aid received by the assessee company from State of Maharashtra for the purpose of land acquisition, development of airports, repair and maintenance of airports is not a trade activity, hence not taxable to the income tax.
25. In view of what has been discussed above, we are of the considered view that the Ld. CIT(A) has erred in treating the grant-in-aid received by the assessee company from State of Maharashtra as capital receipt rather utilization of the grant-in-aid by the assessee company for acquisition of land, development of airports, repair and maintenance of airports is the statutory functions of the assessee company as an agent of the State of Maharashtra, hence, not assessable to tax under Income Tax Act. So the Ground Nos.4, 9 & 13 in ITA No.3704/M/2017, ITA No.7259/M/2017 & ITA No.798/M/2019 for A.Y. 2012-13, 2014-15 & 2015-16 respectively of Revenue’s grounds and ground No.9 of ITA No.7259/M/2017 for A.Y. 2014-15 & ground No.13 of ITA No.798/M/2019 for A. Y. 2015-16 of Revenue are dismissed and ground Nos.1 & 3 and additional ground No.1, 2 & 3 raised by the assessee in ITA No.3682/M/2017 for A. Y. 2012-13 (Assessee’s appeal), additional ground No.1, 2 &3 raised by the assessee in ITA No.7258/M/2017 for A. Y. 2013-14 (Revenue’s appeal), additional ground No.1, 2 & 3 raised by the assessee in ITA No.7259/M/2017 for A. Y. 2014-15 (Revenue’s appeal) of assessee’s grounds are allowed.”
20. We find that following the aforesaid decision, similar findings were also rendered by the Co-ordinate Bench of the Tribunal in the assessee’s own case for the assessment year 2016-17 cited supra, and the addition on account of the Grant-in-Aid received by the assessee was directed to be deleted. Thus, respectfully following the decision cited supra rendered in assessee’s own case, we are of the considered view that Grant-in-Aid received by the assessee from the State of Maharashtra is not taxable in its hands. Accordingly, Grounds No.3(a) to 3(d) raised in the assessee’s appeal are allowed. In view of our aforesaid findings, Ground No.3(e) is rendered academic and, therefore, needs no separate adjudication.
21. In the result, the appeal by the assessee is partly allowed.
Order pronounced in the open Court on 31/12/2025
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