2011 (4) TMI 1332 - HC - Income Tax

Tribunal Decision: Grants not Income, Interest Non-Taxable

Commissioner of Income-tax -II, Chandigarh Versus The Punjab State E-Governance Society

The High Court upheld the Tribunal's decision that tied-up grants received by the appellant were not to be treated as income. The interest earned on fixed ... Nature of interest received on the amount of grant - grants-in-aid - taxable income of the society - The assessee received grants through State Government and interest from the banks on the deposits. The AO held that assessee failed to spend 85% of its income as required for exemption u/s 011. It was further held that tied-up grants were at par with voluntary contributions and were liable to be treated as income of the assessee. The AO also held that interest income was to be treated as taxable income being separate from the grants-in-aid. The CIT(A) set aside the additions holding that tied-up grants will not constitute income of the assessee. It was further held that interest received by the assessee was to be treated as part of the grant. HELD THAT:- it was held that grants-in-aid received from the Government for specific purpose cannot be treated as voluntary contribution or as taxable income of the society. In M/s Punjab Energy Development Agency [2009 (7) TMI 654 - PUNJAB & HARYANA HIGH COURT] it was held that interest received by the assessee on the amount of grant deposited in the bank was also in the nature of grant itself. Therefore, the view taken by the Tribunal is consistent with the view already taken by this Court. Issues:1. Whether tied-up grants received by the assessee should be treated as incomeRs.2. Whether the interest earned on fixed deposits from unspent grants should be taxed as incomeRs.Analysis:1. The appellant, a society promoting E-Governance, received grants and interest income. The assessing officer held that unspent grants and interest income were taxable. However, the CIT(A) and Tribunal ruled that tied-up grants need not be treated as income. The Tribunal noted that grants for specific purposes were shown as a liability, not income, in the balance sheet. The interest earned on unspent grants was to be adjusted against future installments, not taxable. The Tribunal's decision was in line with previous judgments regarding grants-in-aid not constituting taxable income.2. The interest income earned on fixed deposits from unspent grants was considered by the assessing officer as taxable income. However, the Tribunal disagreed, following the Terms & Conditions of the grant-in-aid which stated that interest earned should be adjusted against future installments of the grant. This approach was supported by a Karnataka High Court judgment emphasizing the non-profit motive behind such funds. The Tribunal's decision was consistent with previous rulings by the High Court regarding interest earned on grant deposits not being taxable income.In conclusion, the High Court dismissed the appeal as no substantial question of law arose, and the Tribunal's decisions were in line with previous judgments on similar matters.