Taxability of scheme-fund interest, TDS credit and MAT adjustments clarified under income-tax rules and section 115JB

Interest earned on deposits made from unutilised LIS funds was treated as belonging to the Government where the scheme grant and accrued interest were expressly refundable on demand, so it was not taxable in the assessee's hands. TDS credit for that interest could not be denied merely because the income was not assessable in the assessee's hands; credit followed the deductee record under Rule 37BA, subject to verification against double credit. For MAT purposes under section 115JB, only items specifically authorised by the statutory explanation could be adjusted, so the interest and provident fund-related additions were deleted, while the provision for non-moving, obsolete and unserviceable material required factual verification. Interest under section 234A was not leviable because the original return was filed within time.

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Issues: (i) Whether interest earned on deposits made out of unutilised LIS funds was taxable in the assessee's hands; (ii) Whether credit of tax deducted at source on such interest could be denied merely because the corresponding income was held not taxable in the assessee's hands; (iii) Whether the disputed additions could be included while computing book profit under section 115JB and whether the provision for non-moving, obsolete and unserviceable material required factual verification; (iv) Whether interest under section 234A was leviable when the original return was filed within time but a revised return was filed later.

Issue (i): Whether interest earned on deposits made out of unutilised LIS funds was taxable in the assessee's hands.

Analysis: The funds were earmarked for a specific government scheme and the interest accrued on the unutilised amounts was treated as belonging to the Government. The material on record showed that the Government expressly stated that the unutilised LIS grant and the interest thereon belonged to it and was refundable on demand. The interest was therefore not an income of the assessee, but an amount held on behalf of the Government.

Conclusion: The issue was decided in favour of the assessee and the interest was held not taxable in its hands.

Issue (ii): Whether credit of tax deducted at source on such interest could be denied merely because the corresponding income was held not taxable in the assessee's hands.

Analysis: Rule 37BA of the Income-tax Rules, 1962 provides credit to the deductee on the basis of the deductor's information, and also contemplates transfer of credit to another person only where a declaration is furnished. The assessee was the deductee in the TDS return and the credit appeared in its Form 26AS. The rule does not prescribe denial of credit merely because the income is not ultimately taxable in the hands of the deductee, though verification was needed to rule out double credit.

Conclusion: The issue was decided in favour of the assessee, subject to verification by the Assessing Officer to ensure that no double credit is granted.

Issue (iii): Whether the disputed additions could be included while computing book profit under section 115JB and whether the provision for non-moving, obsolete and unserviceable material required factual verification.

Analysis: Book profit under section 115JB can be adjusted only by items specifically enumerated in the statutory explanation. The addition relating to interest on unutilised LIS funds could not survive once it was held not taxable in the assessee's hands, and the corresponding adjustment for book profit also had to be deleted. The disallowance relating to belated provident fund payment did not fall within the specified adjustments under the MAT provision. By contrast, the amount claimed for non-moving, obsolete and unserviceable material required verification of its true character, namely whether it was a mere provision or an ascertained liability.

Conclusion: The interest addition and the provident fund-related adjustment were deleted for MAT purposes, while the issue relating to non-moving, obsolete and unserviceable material was remanded for verification.

Issue (iv): Whether interest under section 234A was leviable when the original return was filed within time but a revised return was filed later.

Analysis: Section 234A links interest to delay in furnishing the return under section 139(1) or the other specified returns, and does not make the filing of a revised return under section 139(5) the trigger for levy. Since the original return had been filed within the prescribed time, the statutory condition for charging interest was not satisfied.

Conclusion: The issue was decided in favour of the assessee and the interest under section 234A was directed to be deleted.

Final Conclusion: The Revenue's challenge to the deletion of the LIS interest addition failed, the assessee obtained relief on TDS credit and on interest under section 234A, and the MAT computation was corrected by deleting the impermissible adjustments while remanding the factual issue concerning the provision for non-moving, obsolete and unserviceable material.

Ratio Decidendi: Where scheme funds and the interest earned on their temporary deployment are shown to belong to the grantor Government, such interest is not taxable as the recipient's income; TDS credit follows the deductee record under Rule 37BA, and MAT adjustments can be made only for items specifically authorised by the statutory explanation.

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