Deduction for grant disbursements under income-tax law requires verification of actual utilisation and the nature of the funds

Expenditure by way of grants disbursed for objects and purposes authorised by an assessee's enabling statute may qualify for deduction under section 36(1)(xii) if it is not capital in nature. The Tribunal noted that non-refundable grants were said to be allowable only on actual utilisation and after Fund Utilisation Reports, while the Revenue treated the amounts as conditional loans under the grant terms. Because the factual position on whether the disbursements came from grants received in the relevant year and whether deduction was claimed only after actual use required verification, the matter was remanded to the Assessing Officer for fresh examination.

---

---

Issues: Whether the disallowance of deduction claimed in respect of grants disbursed to cooperative unions under section 36(1)(xii) of the Income-tax Act, 1961 was sustainable, and whether the matter required verification of the nature and source of the non-refundable grants.

Analysis: The claim turned on whether the amounts disbursed were expenditure incurred for the objects authorised by the assessee's enabling statute or were merely conditional grants / loans. The Tribunal noted the rival stand that non-refundable grants were allowable as deduction only when actually spent and after receipt of Fund Utilisation Reports, while the Revenue relied on the conditions in the grant agreement to contend that the amounts retained the character of conditional loans. The Tribunal found that the factual aspect whether the impugned disbursements were out of grants received in the relevant year and whether the non-refundable grants were claimed only upon actual utilisation required verification by the Assessing Officer. It also noticed that expenditure by way of disbursement of grants for objects and purposes authorised by the Act could be allowable under section 36(1)(xii), provided the expenditure was not capital in nature.

Conclusion: The disallowance was not finally sustained on merits; the issue was set aside and remanded to the Assessing Officer for fresh verification and adjudication.

---