2015 (6) TMI 1151 - AT - Income Tax

Accrual of interest - Addition being interest on year marked funds (i.e. Development Fund & Infrastructure Development Fund) - assessment as income - Held that - CIT(A) has given too much of emphasis on how the monies are invested in a current account with District Co-operative Bank or in fixed deposits elsewhere. That is not material in the present context. What is material is that income from interest on these funds does not accrue to the assessee and even interest receipts are at the disposal only in accordance with Government directions on disposal of the funds relating to infrastructure development. The assessee does not get any unfettered discretion to use such interest earnings, but these earnings only add up to the corpus which can be used in terms of Government directives and for the purpose of infrastructure development. That aspect of the matter being undisputed it is of considered view that interest in question cannot be treated as income of the assessee. - Decided in favour of assessee.

Summary

Issues:
Challenge to correctness of order on interest income addition under Income Tax Act, 1961 for assessment year 2006-07.

Analysis:
The appeal challenged the correctness of the order dated 25th February, 2015 passed by the Commissioner of Income Tax (Appeals) [CIT(A)] regarding the addition of interest income on year marked funds. The matter was remitted to the CIT(A) by the Income Tax Appellate Tribunal (ITAT) with directions to redecide the issue on merit. The CIT(A) once again held the fixed deposit interest as taxable in the hands of the assessee, emphasizing the non-utilization of funds for city development. The CIT(A) confirmed the addition of interest earned on fixed deposits, considering it as a revenue receipt in the hands of the assessee. However, the ITAT, in the second round of proceedings, disagreed with the CIT(A) and directed the Assessing Officer to delete the addition of interest income. The ITAT emphasized that the interest earnings were subject to government directives and could only be used for infrastructure development, thus not constituting income of the assessee. Consequently, the ITAT allowed the appeal filed by the assessee, providing relief by directing the deletion of the impugned addition.

Conclusion:
The ITAT's judgment overturned the CIT(A)'s decision and ruled in favor of the assessee, highlighting that the interest income from fixed deposits, subject to government directions on infrastructure development fund disposal, did not constitute income of the assessee. The ITAT directed the Assessing Officer to delete the addition of interest income, granting relief to the appellant.