2013 (12) TMI 1202 - HC - Income Tax

Whether interest income earned on FDR is not taxable - unutilized interest was received, on the amount of grant received from the State Government, and kept in FDRs by the assessee - Held that - On the directions of the State Government, the assessee kept the unutilized grant in the bank. The interest accrued on such deposit did not form part of the profit and loss account of the Corporation, but will be treated as part of the grant-in-aid given by the State Government. The letter of the State Government dated 3.4.1980, was relied upon by the CIT (Appeals) in granting the relief - Decided against Revenue.

Summary

Issues:
Whether interest income earned on FDR is taxable?

Analysis:
The case involved a subsidiary company of a state corporation that filed a voluntary return, later revised, showing interest income from FDRs and savings accounts. The dispute arose when the assessing authority taxed the interest income earned on unutilized grants kept in FDRs by the assessee. The assessee argued that as per state government instructions, the interest should not be accounted for in the profit and loss account. The Commissioner of Income Tax (Appeals) referred to a Tribunal judgment and upheld the assessee's claim that such interest cannot be taxed as revenue gain. The Tribunal affirmed the decision of the Commissioner.

In a separate case cited by the revenue, the High Court held that interest earned on grants/aid, if kept in fixed deposits, would be taxable unless there was a stipulation that it would accrue to the state government. The Supreme Court dismissed the Special Leave Petition filed by the state corporation, granting liberty to seek clarification from the High Court if there was any material to support their contention.

The High Court, in the present case, noted that the interest accrued on the unutilized grant deposited in the bank did not form part of the corporation's profit and loss account but was considered part of the grant-in-aid given by the state government. Relying on the state government's instructions from 1980, the CIT (Appeals) granted relief to the assessee. Consequently, the Court ruled in favor of the assessee corporation, directing the revenue to proceed accordingly based on the state government's directives and the relief granted by the CIT (Appeals).