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TMI Blog2025 (2) TMI 389X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia and interest received on State Govt. fund is adjusted in the subsequent grant.
We are sending back this issue to the AO for carrying out verification in the light of the above judgment and the AO has to ascertain whether the interest income has been remitted back either to the Central Govt. and/or State Govt according to the interest received on the fund following the necessary guidelines. He has also to ascertain that the assessee has not received any benefit as revenue in nature on such interest income. After verifying if it is found that the entire interest income has been remitted back to the Central Govt. / State Govt., then there should be no addition on both the interest income earned on its deposits (FD and SB A/c). X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 and claimed refund of Rs. 4,92,53,130 and again filed revised return on 26.10.2018 by claiming loss and refund. The case was selected for scrutiny and statutory notices were issued to the assessee. The AO noted that while in the revised return the assessee claimed a loss and refund, however in the original return of income, income was shown at a sum of Rs. 13,11,44,889. He further observed that the assessee has received interest on FD of Rs. 13,20,64,775 and interest on SB a/c. of Rs. 69,82,761 which was not offered to tax as per revised return filed by the assessee. In this regard the assessee was asked to explain. The reply submitted by the assessee was not accepted by the AO and relying on the judgment of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. [1997] 93 Taxman 502 (SC)/[1997] 227 ITR 172 (SC). The assessee was issued show cause notice u/s. 142(1) under which section the interest income is exempt. The assessee submitted that interest income is out of money given by the Govt. of India for the purpose of implementation of Smart City scheme and relied on the judgment in the case of Karnataka Urban Infrastructure Development & Finance Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the Companies Act and interest income earned on its FDs and SB A/c is taxable u/s 56 of the Act and there is no any provision in the Act for granting exemption to the assessee and the decision relied by the AO in the case of Tuticorin Alkali Chemicals and Fertilizer Ltd. (supra) is squarely applicable in the present facts of the case. There is no doubt that the assessee is a nodal agency of Central Govt. and State Govt. for developing Smart City and receiving grants from the Govt. from time to time and the idle funds were kept in the Bank and the assessee has earned interest on such fund. Therefore, the interest is taxable as income from other sources u/s. 56. The ld. CIT(Appeals) has gone on different footing, therefore he requested that the order of the AO should be upheld. 8. On the other hand, the ld. AR has filed written submissions which reads as under:- "2. The issue in this appeal relates to the taxability of the interest earned the Respondent: assessee on funds parked in the bank account pending utilisation of the same for the smart city project for which grants were given by the Central as well as State Government of Karnataka. 3. In course of hearing of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Page 14 of these submissions] showing year wise receipt of grants received from Government of India and Government of Karnataka, the amount spent, the balance unspent, the interest earned thereon for assessment years 2015-16 to AY 2023-24. In the said statement, the Respondent has shown the payment / adjustment of interest against future grants. 8. It is submitted that in terms of the aforesaid Rule 230[8] of the General Financial Rules, 2017, the Respondent assessee has also remitted the Interest to the Government of India and Government of Karnataka based on the extent of grant received to which the interest relates, immediately after finalization of the accounts. In support of the same, the Respondent assessee is producing the following documents showing the refund made as under: [a] Copy of covering letter dated 17/06/2022 in which a sum of Rs. 27,47,69,041/- was remitted vide ch.No.235712 dated 17/06/2022 [copy placed at Page 15 to 18 of these submissions]; [b] Copy of covering letter dated 25/03/2022 in which a sum of Rs. 2,21,67,774/- was remitted vide ch.No.097051 dated 25/05/2023 [copy placed at Page 19 to 21 of these submissions]; [c] Copy of covering letter dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed the original return of income 30/10/2017 along with the computation of total income, financials and Audit report in Form No.3CA and 3CD. 92 111 AO & CIT[A] 3. Copy of the First Revised return of income Filed on 30/03/2018 along with the computation of total income and Audit report in Form 3CA and 3CD. 112 126 AO & CIT[A] 4. Copy of the Second Revised return of Income filed on 26/10/2018 along with the computation of total income and financials. 127 138 AO & CIT[A] 5. Copy of the Notice U/s 142[1] of the Act dated 17/07/2019. 139 140 AO 6. Copy of the reply dated 07/08/2019 response to the above notice. 141 143 AO 7. Copy of the Notice u/s 142[1] of the Act dated 30/07/2019 144 145 AO 8. Copy of the reply dated 07/08/2019 along with the annexures in response to the above notice u/s. 142(1) of the Act. 146 170 AO 9. Copy of the Notice U/s 142[1] of the Act dated 21/08/2019. 171 172 AO 10. Copy of the letter dated 27/09/2019 issued by the learned Assistant Commissioner of Income-tax, Circle - 1[1], Davangere. 173 175 AO 11. Copy of the reply dated 19/11/2019 in response to the above letter. 176 178 AO 12. Copy of the Written Subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the grant and interest received on such deposits and details of the remittances are given. He also referred to page 28 of PB. 11. Considering the rival submissions, we note that assessee has been formed for implementation of the Smart City Scheme by the Central Govt. as well as State Govt of Karnataka. Grants are parked in the bank account until the same is used for the designated purpose of Smart City project and interest on such deposits in the case of Central Govt. funds is immediately returned to the Central Govt. as per Rule 230(8) of GFR, 2017 and interest is remitted to the State Govt. based on the extent of grant received to which the interest relates immediately after finalization of the accounts. On going through the documents, we note that there is no category of income to the assessee because the interest receive on Central fund is adjusted to the Consolidated Fund of India and interest received on State Govt. fund is adjusted in the subsequent grant. Hence the judgment in the case of Tuticorin Alkali Chemicals and Fertilizer Ltd. (supra) relied on by the ld. DR is distinguishable and not applicable in the case on hand, since interest income earned on FD and SB A/c. ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter, interest earned on short term deposits cannot be treated as income of the assessee, when the assessee in strict sense of the term has no dominion over such income. It is not the case of the Department that the Central Grant received is also income of the assessee. Therefore, if the interest income is adjusted against future grant, it partakes the character of the grant itself and cannot be treated as income of the assessee. However, these factual aspects need to be verified to ascertain whether the interest has not later been refunded back to the Government or has been adjusted against any future grant released to the assessee. In these facts and circumstances, we are inclined to remit the issue back to the file of the Assessing Officer for proper verification and fresh decision. We do so accordingly and direct the Assessing Officer to verify whether the interest earned on short term deposits has been refunded to the Government or has been adjusted against any future grant released to the assessee, and decide the issue accordingly, in accordance with law and after giving reasonable opportunity of hearing to the assessee. However, we make it clear that since the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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