Project-related interest and welfare allowed as business-related, with CSR disallowance not applying retrospectively.

Interest earned on bank deposits out of advances received for project implementation was treated as project-related and, under the governing arrangement, had to be adjusted towards project cost; it was therefore not assessable as income in the assessee's hands. Expenditure on community development and welfare activities was allowed as business expenditure because it had a business nexus with the assessee's project operations. Explanation 2 to section 37(1) concerning CSR expenditure was held to apply prospectively, so it did not deny deduction for the relevant assessment year. The result was relief to the assessee on both issues.

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Issues: (i) whether interest earned on bank deposits out of advances received for project implementation was assessable as income in the assessee's hands; (ii) whether expenditure incurred on community development and welfare activities was allowable as business expenditure under section 37(1).

Issue (i): whether interest earned on bank deposits out of advances received for project implementation was assessable as income in the assessee's hands

Analysis: The interest had arisen on funds received for onward utilisation in specified projects, and the governing arrangement required such interest to be adjusted towards project cost. The identical issue had already been decided in the assessee's favour in earlier years and the higher courts had upheld that view.

Conclusion: The interest income was not assessable in the assessee's hands and the deletion of the addition was sustained, in favour of the assessee.

Issue (ii): whether expenditure incurred on community development and welfare activities was allowable as business expenditure under section 37(1)

Analysis: The expenditure was incurred in the area where the assessee carried on its projects and was found to have a business nexus. The disallowance could not be supported by Explanation 2 to section 37(1) because that provision relating to corporate social responsibility expenditure was held to operate prospectively and the relevant assessment year preceded its insertion.

Conclusion: The expenditure was allowable as business expenditure and the disallowance was deleted, in favour of the assessee.

Final Conclusion: The Revenue's appeal failed and the assessee's appeal succeeded, resulting in relief to the assessee on both contested issues.

Ratio Decidendi: Interest on funds received for a specified project is not taxable where the governing arrangement requires it to be applied towards project cost, and Explanation 2 to section 37(1) of the Income-tax Act, 1961 does not apply retrospectively to deny deduction for pre-insertion CSR-related expenditure.

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