Government grant transfers and temporary deposit interest both retained business character, supporting depreciation and business income treatment.

A Government grant conveying buildings, plant and machinery took effect according to its tenor, because the Government Grants Act excludes the Transfer of Property Act from such grants; ownership therefore passed without registration under section 54, and depreciation was allowable. Interest earned on short-term deposits made from surplus business funds pending use in the business retained its commercial character, because temporary deployment incidental to business activity is part of business operations; the interest was therefore assessable as business income.

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Issues: (i) Whether depreciation was allowable on buildings, plant and machinery transferred by the Government without registration under the Transfer of Property Act; (ii) Whether interest earned on short-term deposits made out of business funds was assessable as business income.

Issue (i): Whether depreciation was allowable on buildings, plant and machinery transferred by the Government without registration under the Transfer of Property Act.

Analysis: The transfer was pursuant to a Government grant. Under the Government Grants Act, the provisions of the Transfer of Property Act do not apply to Government grants, and the terms of the grant operate according to their tenor notwithstanding any contrary rule of law. Ownership therefore passed to the assessee on the Government transfer itself, without the need for registration under section 54 of the Transfer of Property Act.

Conclusion: Depreciation was allowable and the issue was decided in favour of the assessee.

Issue (ii): Whether interest earned on short-term deposits made out of business funds was assessable as business income.

Analysis: The funds placed in short-term deposits were surplus business funds pending their use in the assessee's business. The character of business is of wide amplitude, and where temporary deployment of business funds is incidental to business activity, the resulting interest retains the character of business income rather than income from other sources.

Conclusion: The interest on short-term deposits was assessable as business income and the issue was decided in favour of the assessee.

Final Conclusion: The reference was answered against the Revenue on both questions, confirming the assessee's entitlement to depreciation and treatment of the deposit interest as business income.

Ratio Decidendi: A Government grant conveying property is effective according to its tenor without compliance with the Transfer of Property Act, and interest earned on temporary deposits of business funds is business income when the deposits are incidental to the assessee's business operations.

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