2013 (12) TMI 1668 - AT - Income Tax

Interest from Government Grant FDs Exempt from Taxation, Tribunal Rules in Favor of Excluding Income.

The Tribunal determined that the interest income earned on government grants parked in FDs should not be treated as taxable income. It found the Karnataka ... Grant from government received - Interest earned on unutilised portion kept in FD - AO and CIT(A) claims interest income is revenue in nature and to be treated as income from ‘other sources’ and brought to tax - Whether grant in aid given by the Government is capital receipt of revenue receipt - HELD THAT- In the case [1996 (5) TMI 71 - GUJARAT HIGH COURT], it was held that interest received in respect of grant in aid cannot be treated as income of the assessee in view of the specific directive of the Government that interest earned will be treated as part of grant in aid. Thus the interest income received on grant in aid parked in FD pending utilization is not chargeable to tax. The opinion of Expert Advisory Committee of ICAI that the aforesaid amount should be capitalised and not treated as income will be applicable. Decision in favor of assessee. Issues Involved:1. Whether the interest earned on government grants parked in fixed deposits (FDs) is taxable as income from 'other sources'.2. Applicability of the Karnataka High Court decision in the case of KUIDFC to the present case.3. Admissibility of additional evidence submitted by the assessee.Summary:Issue 1: Taxability of Interest Earned on Government GrantsThe assessee, a government-owned company, received a grant of Rs. 10 crores from the Karnataka State Government for infrastructural development. The grant was kept in FDs, and the interest earned was capitalized in the books of accounts. The AO treated the interest income of Rs. 1,05,43,773 as income from 'other sources' and brought it to tax. The assessee argued that the interest should be capitalized as part of the grant, citing the opinion of the Expert Advisory Committee of ICAI and the threat of the government to reclaim the grant if not utilized. The CIT(A) upheld the AO's decision, distinguishing the assessee's case from the KUIDFC case and citing Supreme Court decisions in Tuticorin Alkali & Chemicals Ltd. v. CIT and others.Issue 2: Applicability of KUIDFC DecisionThe assessee contended that the Karnataka High Court's decision in CIT v. Karnataka Urban Infrastructure Development & Finance Corporation (KUIDFC), which held that interest earned on government funds parked in banks is not taxable, should apply. The CIT(A) distinguished the KUIDFC case on the grounds that KUIDFC was engaged in welfare activities without profit motives, unlike the assessee. The Tribunal disagreed, stating that both entities are government-owned and engaged in welfare activities, thus the KUIDFC decision is applicable.Issue 3: Admissibility of Additional EvidenceThe assessee submitted additional evidence, including letters from the Government of Karnataka directing that interest earned on grants should be treated as part of the grant. The Tribunal admitted these documents, noting their relevance to the issue at hand.Conclusion:The Tribunal held that the interest income earned on the government grant parked in FDs should not be treated as taxable income. The decision of the Karnataka High Court in the KUIDFC case was deemed applicable, and the additional evidence supported the assessee's position. The appeal by the assessee was allowed, and the interest income was not brought to tax.Result:The appeal by the assessee is allowed.