Business income from idle statutory funds supports deduction for non-refundable grants made in the course of statutory operations.

Interest earned by a statutory corporation on temporarily unutilised funds retained in a common fund was treated as business income because it was integrally linked to its core activity of deploying funds by way of loans and grants. The credit of that income to a common fund did not change its revenue character. Non-refundable grants made under the governing statute were held to be an essential business expenditure, and the source of funds used was immaterial. The payments were incurred wholly and exclusively for business purposes, so deduction under the Income-tax Act was allowed. The doctrine of diversion by overriding title did not apply because no grantee had a superior title to the funds before receipt.

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Issues: Whether interest income generated from idle statutory funds retained in a common fund was chargeable as business income and whether grants disbursed from such interest income were allowable as revenue expenditure under Section 37(1) of the Income-tax Act, 1961.

Analysis: The Corporation's only business was to receive funds and deploy them by way of loans and grants for its statutory objects. Interest earned on temporarily unutilised funds was integrally linked to that business activity and therefore fell under the head of profits and gains of business or profession, not under the residuary head of income from other sources. Once that income was treated as revenue receipt, the mere fact that it was credited to a common fund did not convert it into a capital receipt. The disbursement of non-refundable grants was itself an essential part of the Corporation's business under the governing statute. The source of the funds used for such grants was immaterial, and the payments were not a mere application of income but expenditure incurred wholly and exclusively for business purposes. The principle of diversion by overriding title did not apply, as no grantee had a superior title to the funds before they reached the Corporation.

Conclusion: The grants disbursed from the interest income were allowable as revenue expenditure, and the assessee succeeded.

Final Conclusion: The appeals were allowed and the assessee's claim for deduction of the grants was upheld, while the contrary findings of the tax authorities and the High Court were set aside.

Ratio Decidendi: Where a statutory corporation's only business is to deploy received funds by way of loans or grants, interest earned on unutilised funds is business income, and non-refundable grants made in the course of that business are deductible as revenue expenditure if incurred wholly and exclusively for business purposes.

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