Taxability of grant-related interest turned on remittance or adjustment obligations, with real income requiring factual verification.

Interest earned on fixed deposits and savings bank balances from unutilised Smart City project grants was examined as to whether it constituted taxable income from other sources or did not accrue as real income. The Tribunal noted that Central Government grant interest was required to be remitted to the Consolidated Fund of India under the General Financial Rules, 2017, while State Government grant interest was to be adjusted against future grants or dealt with under governing instructions. As the assessee lacked unfettered dominion over the interest, the Tuticorin Alkali principle was held distinguishable. The matter was remanded to verify actual remittance or adjustment, and no addition was to be made if such compliance was established.

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Issues: Whether interest earned on fixed deposits and savings bank balances out of unutilised government grants received for implementation of the Smart City project was taxable as income from other sources, or whether such interest did not accrue as income because the funds were required to be remitted back or adjusted against future grants.

Analysis: The assessee was a nodal implementing agency for the Smart City scheme and the grants received from the Central and State Governments were parked in bank deposits pending utilisation. The material placed before the Tribunal showed that, in respect of Central Government grants, the interest was required to be remitted to the Consolidated Fund of India under Rule 230(8) of the General Financial Rules, 2017, and in respect of State Government funds the interest was adjusted against future grants or otherwise dealt with in accordance with the governing instructions. On these facts, the Tribunal held that the principle in Tuticorin Alkali was distinguishable because the assessee did not have unfettered dominion over the interest and the question whether any real income had accrued required verification of actual remittance or adjustment.

Conclusion: The issue was sent back to the Assessing Officer for verification of whether the interest had been remitted to the Government or adjusted against grants, and if so, no addition was to be made on the interest earned on the deposits.

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