2013 (6) TMI 159 - AT - Income Tax

Addition of interest in the assesee s income - Whether interest received in respect of Grant in Aid can be treated as income of the assessee or not? - As per appellant he was custodian of money of Central Government and GHB/SGCC. It had no entitlement either to contribution, grant or to interest earned on the subjected money placed in Bank FD. The appellant contended before the A.O. that this interest earned on the grant and contribution not earned by it as grant and contribution is alongwith interest was either belonged to Central Government or GHB. There was a rider on this grant/contribution. He further placed reliance on Hon ble Gujarat High Court decision in case of Gujarat Municipal Finance Board v. DCIT 1996 (5) TMI 71 - Gujarat High Court , wherein the Hon ble Gujarat High Court has categorically held that interest received in respect of Grant in Aid cannot be treated as income of the assessee in view of the specific directive of the Government that interest earned will be treated as part of Grant. Held that - The appellant was a custodian and Government of India had prohibited grant as well as interest from any use, except the purposes given in the approval letter. In case of project is not materialized the same has not be repaid to the respective agencies with interest. The case laws cited by the appellant i.e. Gujarat Municipal Finance Board v. DCIT (supra), are squarely applicable. It is true that the appellant had been granted refunds on the basis of TDS Certificate, even though, income earned by way of the interest earned on FDs had not been disclosed as income but the appellant has to refund the grant/contribution with interest to the Government of India and GHB. Thus, we have considered view that in both the years, the CIT(A) was not justified in confirming the addition. Accordingly, appeals in both years are allowed.

Summary

Issues Involved:
1. Addition of interest income for A.Y. 2005-06 and A.Y. 2006-07.
2. Applicability of judgments from Gujarat, Mumbai, and Delhi High Courts.
3. Admissibility of additional evidence under Rule 46A of the Income-tax Rules, 1962.
4. Taxability of interest earned on funds held in Escrow Accounts/FDs.

Detailed Analysis:

1. Addition of Interest Income:
The primary issue revolves around the addition of interest income amounting to Rs. 21,22,253/- for A.Y. 2005-06 and Rs. 1,25,44,938/- for A.Y. 2006-07, which the Assessee contends did not belong to it but to the Central Government and Gujarat Hira Bourse (GHB). The Assessee argued that these funds were held in Escrow Accounts/FDs and were not under its control for personal use. The Assessee claimed that the interest earned should be treated as part of the grant and not as taxable income.

2. Applicability of High Court Judgments:
The Assessee argued that the learned Commissioner of Income-tax (Appeals) (CIT(A)) erred by not considering relevant judgments from the Gujarat, Mumbai, and Delhi High Courts, which support the claim that interest on grants should not be treated as income. Specifically, the Assessee cited the Gujarat High Court's decision in Gujarat Municipal Finance Board v. DCIT, which held that interest on grants should be treated as part of the grant itself and not as income.

3. Admissibility of Additional Evidence:
The Assessee contended that the CIT(A) erred in not considering additional evidence, specifically the computation and final accounts of Gujarat Hira Bourse for the year ended 31.03.2008, which were admissible under Rule 46A of the Income-tax Rules, 1962. The Assessee argued that this evidence was crucial in establishing that the interest income did not belong to it.

4. Taxability of Interest Earned:
The Assessing Officer (A.O.) and CIT(A) held that the interest earned on the Escrow Accounts/FDs was taxable under the head "income from other sources." They relied on the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT, which held that interest earned on short-term deposits before the commencement of business is taxable. The CIT(A) distinguished the Assessee's case from the Gujarat Municipal Finance Board case, noting that the latter involved a statutory body acting on behalf of the government, whereas the Assessee was a private entity.

Judgment:
The Tribunal found in favor of the Assessee, concluding that the interest earned on the Escrow Accounts/FDs should not be treated as taxable income. The Tribunal noted that the Assessee was merely a custodian of the funds, which were to be used strictly as per the terms of the grant and returned to the respective parties if the project did not materialize. The Tribunal also found that the case laws cited by the Assessee, particularly the Gujarat High Court's decision in Gujarat Municipal Finance Board v. DCIT, were applicable. The Tribunal distinguished the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., noting that it involved borrowed funds, whereas the Assessee's case involved grants.

Conclusion:
The Tribunal allowed the Assessee's appeals for both assessment years, holding that the CIT(A) was not justified in confirming the addition of interest income. The interest earned on the grants was not taxable as it was to be refunded to the Central Government and GHB if the project did not proceed.