Conditional grant funds in escrow: interest held not taxable where the assessee lacked unrestricted dominion over project monies.

Interest earned on conditional grant and contribution funds kept in escrow accounts and fixed deposits was treated as part of the project funds and not as income in the assessee's hands. The governing approval restricted use of the amounts to the sanctioned infrastructure project, required any interest on the released grant to fall within the grant limit, and left the assessee without unrestricted dominion over either principal or interest. On those facts, the interest was held not exigible to tax in the assessee's hands, and the addition was deleted.

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Issues: Whether interest earned on grant and contribution amounts kept in escrow accounts and fixed deposits, which were subject to governmental restrictions and repayable with interest if the project did not materialise, was taxable in the assessee's hands.

Analysis: The amounts were received as conditional grant and contribution for a specified infrastructure project, and the governing approval required that the funds be used only for the sanctioned purpose. The interest earned on the released grant was also to form part of the grant limit. The assessee held the money only as a custodian, with no unrestricted dominion over either the principal or the interest. The factual setting was therefore distinguishable from cases involving deployment of borrowed funds for earning interest. The interest was treated as part of the project funds and, on the facts, was not exigible as income in the assessee's hands.

Conclusion: The interest income was not taxable in the assessee's hands, and the addition was deleted.

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