Article 289 immunity and grant-in-aid treatment: fixed-deposit interest and government assistance were held not taxable on the stated facts.

A body functioning as an instrumentality or agent of a State may claim constitutional immunity under Article 289(1) for its income, unless the income arises from trade or business carried on by or on behalf of the State under Article 289(2). On the stated facts, interest on fixed deposits was not taxable because it was not derived from any such trade or business. Grant-in-aid received for land acquisition, rehabilitation and infrastructure development was likewise not taxable, as it supported governmental and statutory functions; the alternative characterisation under section 2(24)(xviii) was not accepted.

---

---

Issues: (i) Whether interest earned on fixed deposits was chargeable to tax in the assessee's hands, and (ii) whether grant-in-aid received from the Government of Maharashtra was taxable as income.

Issue (i): Whether interest earned on fixed deposits was chargeable to tax in the assessee's hands.

Analysis: The assessee was treated as an instrumentality or agent of the State, carrying out public functions under the control of the Government of Maharashtra. On that basis, the income and property of the State were examined in the context of Article 289 of the Constitution of India. The exception in clause (2) was found inapplicable because the interest income was not derived from any trade or business carried on by or on behalf of the State.

Conclusion: The interest income on fixed deposits was held to be not taxable in the assessee's hands.

Issue (ii): Whether grant-in-aid received from the Government of Maharashtra was taxable as income.

Analysis: The grant was found to have been received for land acquisition, rehabilitation and infrastructure development in furtherance of governmental objects. Following the view that the assessee functioned as an arm of the State, the grant was held to partake of the character of assistance received for discharge of statutory and public functions and was not taxable in the assessee's hands. The alternative statutory characterisation under section 2(24)(xviii) was not accepted in the facts of the case.

Conclusion: The grant-in-aid was held to be not taxable in the assessee's hands.

Final Conclusion: The additions relating to fixed-deposit interest and grant-in-aid were deleted, while the remaining grounds were either not pressed or became academic, resulting in partial relief to the assessee.

Ratio Decidendi: A body functioning as an instrumentality or agent of a State is entitled to constitutional immunity under Article 289(1) for its income, unless the income is shown to arise from trade or business carried on by or on behalf of the State under Article 289(2). Grant-in-aid received for carrying out governmental and statutory functions, on the facts, is not taxable as income.

---