2015 (7) TMI 208 - AT - Income Tax

Appeal granted: Interest income for govt projects not taxable as part of grant

Gujarat State Police Housing Corporation Ltd Versus ACIT,

The Tribunal allowed the appeal, overturning the CIT(A)'s decision. It ruled that the interest income earned by the appellant, acting as a nodal agency ... Addition in respect of interest income - interest earned on the Central Government grant - Held that:- As relying on case of Sar Infracon Pvt. Ltd. [2014 (3) TMI 728 - GUJARAT HIGH COURT] and CIT Vs. Gujarat State Disaster Management Authority [2014 (2) TMI 789 - GUJARAT HIGH COURT ] in a situation when the assessee had received the grant from the Government of Gujarat as a nodal agency for constructing the houses for the Police Department and received interest on the temporary parking of funds on the instruction of the Government, therefore, the interest so earned being part of the grant should not be taxed as income in the hands of the assessee. The alleged interest income was earned with an overriding charge that the same should not be the income of the assessee but part of the grant. Hence, we hereby reverse the view of learned CIT(A) and allow this ground of the assessee. - Decided in favour of assessee. Issues Involved:1. Legality of the addition of Rs. 20,42,86,950/- as interest income.2. Consideration of submissions and evidence by CIT(A).3. Attribution of interest income to the appellant corporation.4. Taxability of the interest income in the hands of the appellant corporation.Issue-wise Detailed Analysis:1. Legality of the Addition of Rs. 20,42,86,950/- as Interest IncomeThe appellant contested the addition of Rs. 20,42,86,950/- as interest income, arguing it was 'wholly illegal, unlawful and against the principles of natural justice.' The Assessing Officer (AO) noted that the appellant, involved in construction for the Police Department, showed an income of Rs. 21,30,95,206/-, mainly comprising of interest income from ICDs. However, the appellant reported a 'Nil' return, asserting that any income received, including interest, was credited to respective accounts but transferred at the end of the year to the project cost, which was then transferred to the government account. The AO disagreed, citing systematic long-term investments in FDRs and the absence of interest in the grant account, concluding it was taxable in the appellant's hands.2. Consideration of Submissions and Evidence by CIT(A)The appellant argued that the CIT(A) erred in not fully considering the submissions and evidence provided. The CIT(A) upheld the AO's decision, reasoning that the appellant, a nodal agency, received grants parked in GSFS and placed in FDRs, earning interest. The CIT(A) noted the appellant paid interest on borrowings while transferring earned interest to WIP, which was not permissible under the Income-tax Act. The CIT(A) emphasized that the appellant's actions were based on government directives, not legislation overriding Section 56 of the IT Act.3. Attribution of Interest Income to the Appellant CorporationThe appellant contended that the interest income belonged to the government, not the corporation. They argued that as a nodal agency, the funds, including interest, were held in trust for police housing projects. The AO, however, noted that the deposits were in the appellant's name, and the interest was credited to their accounts, thus taxable as their income. The CIT(A) supported this view, stating the funds were parked in GSFS under government directives but were not exempt from taxation as per the Income-tax Act.4. Taxability of the Interest Income in the Hands of the Appellant CorporationThe appellant argued that the interest income should not be taxable in their hands, citing precedents where similar income was not taxed. They referenced cases like Karnataka Urban Infrastructure Development & Fin. Corpn. and Gujarat Power Corpn., where interest earned on grants was not considered taxable income. The Tribunal noted previous decisions, including those by the Hon'ble Gujarat High Court, which held that interest earned on government grants, temporarily parked, should not be taxed as income of the nodal agency. The Tribunal concluded that the interest income had an overriding charge and should be considered part of the grant, not taxable in the appellant's hands.ConclusionThe Tribunal allowed the appeal, reversing the CIT(A)'s decision. It held that the interest income earned by the appellant, a nodal agency for government projects, should not be taxed as it was part of the grant received from the government. The Tribunal's decision was based on the principle that the interest income had an overriding charge and was not the appellant's income but part of the government grant.