2016 (11) TMI 119 - HC - Income Tax

Treatment to grant and the interest earned thereon as income of the Appellant-society - Appellant guided by the directions of the Government of Karnataka - Held that - When the assessee is to act as a custodian of the Government money released to the assessee by way of a grant and the interest thereon is also to be utilised as per the terms and conditions of the grant, the view taken by the Tribunal cannot be sustained for two reasons. One is that such cannot be termed as income of the assessee and another is that even if the addendum is issued by the Government for controlling the utilization of the amount of interest on the deposit at the later date the character of the money would remain the same and addendum can be termed as only by way of a clarification. It was not a matter where the question was to be considered with the retrospectivity as observed by the Tribunal. When the assessee is held as a custodian and the full command for utilization of the money including interest earned thereon remains with the Government, same cannot be termed as income of the assessee. The impugned order passed by the Tribunal is set aside and the questions are answered in favour of the assessee

Summary

Issues:
1. Treatment of grant and interest earned as income of the appellant-society.
2. Justification of rejecting the plea of the appellant regarding the grant and interest.
3. Interpretation of the Government order and its impact on the appellant's case.

Issue 1: Treatment of grant and interest earned as income:
The case involved the appellant-society receiving grants from the Government for specific purposes, with the money remaining in the bank until utilized, accruing interest. The assessing officer considered the interest earned as income of the appellant, leading to appeals. The Tribunal, based on a previous decision, held that there was no diversion of income by overriding title, as the appellant acted as a custodian under government control. The Tribunal dismissed the appellant's plea, concluding that the income was for the stated objects and activities of the society. The Court agreed that the appellant had no liberty to utilize the interest as desired, confirming that the interest earned cannot be considered income of the appellant.

Issue 2: Rejection of plea regarding grant and interest:
The Tribunal's decision was based on the understanding that even after an addendum by the Government specifying conditions for grant utilization, the appellant's actions were deemed as an application of income, not diversion by overriding title. The Tribunal rejected the appellant's grounds, consistent with the view taken in similar cases. The Court concurred, stating that the appellant, acting as a custodian with government control over fund utilization, did not have the income diverted by overriding title. Consequently, the Court set aside the Tribunal's decision and ruled in favor of the appellant, allowing the appeals.

Issue 3: Interpretation of the Government order:
The Court referred to a previous case involving a nodal agency for a mega-city scheme, where interest earned on government funds was not considered income of the assessee. Drawing parallels, the Court emphasized that when the appellant acts as a custodian of government money, with interest utilization controlled by the government, such funds cannot be termed as income. The Court highlighted that even with subsequent addendums by the government, the nature of the funds remained unchanged, and any control measures were clarifications rather than altering the fund's character. The Court concluded that the interest earned under such circumstances should not be treated as income of the appellant, ruling in favor of the appellant and against the revenue department.

In summary, the High Court of Karnataka ruled in favor of the appellant-society, holding that the interest earned on grants from the government, controlled and utilized as per government directions, cannot be classified as income of the appellant. The Court emphasized the custodial role of the appellant and the government's authority over fund utilization, rejecting the notion of diversion of income by overriding title. The decision aligned with previous case law and highlighted the importance of government control in determining the nature of funds and interest earned.