2012 (9) TMI 1074 - AT - Income Tax

Summary

Issues Involved:
1. Accrued interest on funds lent to local bodies and Mega City/IDSMT Funds Programme.
2. Claim of exemption u/s 10(23G).
3. Deduction u/s 36(1)(viii) on interest from short-term deposits.

Summary:

Issue 1: Accrued Interest on Funds Lent to Local Bodies and Mega City/IDSMT Funds Programme

The Department and the assessee filed appeals against the CIT(A) orders for various assessment years. The primary issue was the addition of accrued interest on funds lent by the assessee to local bodies and under the Mega City/IDSMT Funds Programme. The CIT(A) had deleted the addition of Rs. 1,52,71,188/- on account of accrued interest from IDSMT, relying on the Karnataka High Court's decision in CIT v. Karnataka Urban Infrastructure Development & Finance Corpn. (284 ITR 582), which stated that interest earned on such funds, being utilized for public welfare projects, is not taxable. The Tribunal upheld the CIT(A)'s decision, confirming that the interest earned is not taxable as it is used for the implementation of government schemes.

Issue 2: Claim of Exemption u/s 10(23G)

The assessee's claim for exemption u/s 10(23G) was disallowed by the CIT(A) and upheld by the Tribunal. The Tribunal noted that the issue had already been decided against the assessee in previous years (AY 2003-04 and 2004-05) and that the assessee had not obtained the necessary approval from the CBDT for claiming the exemption. Therefore, the claim for exemption u/s 10(23G) was denied.

Issue 3: Deduction u/s 36(1)(viii) on Interest from Short-Term Deposits

The assessee's claim for deduction u/s 36(1)(viii) on interest from short-term deposits was disallowed by the CIT(A) and upheld by the Tribunal. The Tribunal reasoned that interest income from short-term deposits cannot be treated as business income and must be classified as "Income from other sources." The Tribunal cited the Supreme Court's decision in Pandian Chemicals Ltd. v. CIT (262 ITR 278) to support its conclusion that such interest income is not eligible for deduction u/s 36(1)(viii).

Conclusion:

All seven appeals filed by the assessee and the Revenue were dismissed, and the order of the CIT(A) was confirmed. The Tribunal upheld the CIT(A)'s decisions on all issues, including the non-taxability of interest earned on government funds used for public welfare projects, the denial of exemption u/s 10(23G), and the disallowance of deduction u/s 36(1)(viii) on interest from short-term deposits.