2010 (4) TMI 49 - HC - Income Tax

Interest received on sub-loan Interest . KFW Germany had entered into an agreement with the Government of India for financing housing schemes for economically weaker sections. Consequently funds were made available to the Government of India and the same were canalised through the assessee HUDCO . The assessee in turn gave loans to suitable agencies such as NGOs which were to be selected by the assessee on the criteria prescribed by KFW Germany the interest thereon would be taxable in the hands of the assessee. held that The assessee never became the owner of the funds given to it under the project agreement. Nor could the assessee use the funds for anything other than the specified purposes and in the specified manner - interest earned on sub-loans granted by the assessee did not become its income - Decision in favor of assessee against the revenue

Summary

Issues:
1. Taxability of interest received on sub-loans in the hands of the assessee.

Analysis:
1. The appeal in question was filed by the revenue challenging the order of the Income-tax Appellate Tribunal related to the assessment year 1997-98. The case involved an agreement between KFW Germany and the Government of India for financing housing schemes, with funds channeled through the assessee. The revenue contended that the interest on sub-loans should be taxable for the assessee. However, the tribunal ruled in favor of the assessee, stating that the funds were not owned by the assessee but were received by it as a canalizing agency. The tribunal emphasized that the assessee had no ownership rights over the funds and could only use them for specified purposes and in a specified manner, as per the agreement governed by German laws. The interest earned on sub-loans was also subject to the same restrictions. The tribunal's decision was influenced by a previous ruling of the court in a similar case.

2. The High Court, comprising Justices Badar Durrez Ahmed and V.K. Jain, upheld the tribunal's decision, finding no grounds to interfere. The court noted that the tribunal had correctly followed the precedent set by a previous judgment of the court. It was concluded that no substantial question of law arose for consideration, leading to the dismissal of the appeal. The judgment was delivered on April 15, 2010, by Justices Badar Durrez Ahmed and V.K. Jain.