2014 (2) TMI 789 - HC - Income Tax

Charitable Institution - Grant from Government - Whether the grant from the Government of Gujarat constitute the income of the assessee as per provisions of Section 11(2) of the Act Held that - The decision in Gujarat Municipal Finance Board Vs. DCIT (Assessment) 1996 (5) TMI 71 - GUJARAT High Court followed - The Tribunal held that the grants are sanctioned the assessee only for the project under Rehabilitation Programme and same cannot be treated as assessee s income - grant given by the State Government to another entity which was to spend grants only for the stated purpose cannot be considered as voluntary contribution nor can the same be assessed under section 12 of the Act as income of recipient - the funds were made available to the Corporation for implementing the scheme in a particular manner - The Tribunal committed no error in holding that the grant in question fulfills the requirement of section 11(d)(1) read with section 12(1) of the Act Decided against Revenue. Deletion of Interest Income - Whether the Tribunal is correct in deleting the addition of interest income Held that - The decision Gujarat Municipal Finance Board Vs. DCIT (Assessment) 1996 (5) TMI 71 - GUJARAT High Court followed - Tribunal was of the view that the interest derives by investing the grant temporarily for interest is also not taxable - It did not confirm with the view of CIT (Appeals) that the assessee treated the grants given by the State Government as its income and therefore the interest earned by temporary investment of the grants cannot be exempted by holding that ratio in the said judgement is that any grant-in-aid cannot be considered as income - merely because the grant is treated as income by the assessee in its books, the interest does not become taxable the findings of the Tribunal upheld Decided against Revenue. Addition made on refund of grant to District Rural Development Agency Held that - The decision in CIT Vs. Ganga Charity Trust Fund 1985 (10) TMI 67 - GUJARAT High Court followed - for the purpose of applying the income of the trust for charitable purposes, income derived from the trust properly must be determined on commercial principles and in doing so, all outgoings including income-tax must be deducted and it is only from the surplus income in the hands of the trustee that the question of application of income can arise - the amount of Rs.13 crores, which was earlier assessed as income, refunded to DRDA constitutes a deduction while ascertaining the application of the income for the purpose of section 11(1)(a) of the Act the order of the Tribunal upheld Decided against Revenue.

Summary

Issues Involved:
1. Whether the grants from Government of Gujarat constitute the income of the assessee as per provisions of Section 11(2)?
2. Whether the Appellate Tribunal is correct in deleting the addition of interest income of Rs.9.82 crores, the same being the amount payable to Govt. of Gujarat, which is not object of the Trust?
3. Whether the Appellate Tribunal is correct in deleting the addition made on refund of grant to DRDA holding the same as application of income by the Trust?

Issue 1:
The first issue revolves around determining whether the grants from the Government of Gujarat should be considered as income of the assessee under Section 11(2) of the Income Tax Act, 1961. The Tribunal analyzed the purpose of the grants, which were specifically provided for the earthquake reconstruction and rehabilitation project. The grants were to be kept in a separate bank account with specific directions for utilization towards approved projects. The Tribunal concluded that these grants were not to be considered as the assessee's income, as they were solely designated for the assigned projects and could not be used for the assessee's expenses. Reference was made to a previous case where a similar grant was not treated as voluntary contribution or income of the recipient. The Tribunal's decision was upheld based on the detailed provisions and purpose of the grants, leading to the dismissal of the appeal.

Issue 2:
The second issue pertains to the deletion of interest income of Rs.9.82 crores by the Appellate Tribunal, which was earned by temporarily investing the grant payable to the Government of Gujarat. The Tribunal relied on a previous judgment to support its decision that such interest income should not be taxable. The Tribunal disagreed with the view that treating the grants as income in the books automatically makes the interest taxable. The High Court concurred with the Tribunal's reasoning, emphasizing that the interest earned from the temporary investment of grants should not be taxed, aligning with the Tribunal's decision on this matter.

Issue 3:
Regarding the addition made on the refund of grant to DRDA, the assessing officer questioned whether the refund could be considered an application of the trust's income. The Tribunal overturned the CIT (Appeals) decision, stating that once an amount is assessed as income in previous years, it cannot be added back as income in subsequent years. The Tribunal referred to legal principles from previous cases to support its decision, highlighting that the refunded amount should be considered a deduction while ascertaining the application of income for charitable purposes. The High Court found no error in the Tribunal's reasoning and upheld the decision, dismissing the appeal.