Case Note & Summary
The Revenue (Commissioner of Income Tax and Assistant Commissioner of Income Tax) appealed against the order of the Income Tax Appellate Tribunal (ITAT), Bangalore, dated 20.12.2013, which had allowed the appeal of the assessee, Karnataka State Agricultural Produce Processing & Export Corporation Ltd., a state government company. The core issue was whether interest earned on grants received from the State Government, which were kept in fixed deposits pending utilization, should be treated as additional grant (not taxable) or as income from other sources (taxable under Section 56 of the Income Tax Act, 1961). The assessee had received grants for specific schemes and deposited the funds in fixed deposits, earning interest. The Assessing Officer treated the interest as income from other sources and added it to the assessee's income. The Commissioner of Income Tax (Appeals) confirmed this order. However, the ITAT reversed the decision, holding that the interest is not income but an accretion to the grant, following the principle laid down in various decisions that interest on grants retains the character of the grant. The High Court, after hearing arguments, dismissed the Revenue's appeal, affirming the ITAT's order. The court held that the interest earned on grants kept in fixed deposits pending utilization is not taxable as income from other sources but is to be treated as additional grant. The court reasoned that the grants were for specific schemes and the interest earned is merely an accretion to the grant, not a revenue receipt. The court did not formulate any substantial question of law as the issue was covered by earlier decisions. The appeal was dismissed with no order as to costs.
Headnote
A) Income Tax - Interest on Government Grants - Treatment as Additional Grant - Income Tax Act, 1961, Section 56 - The issue was whether interest earned on grants kept in fixed deposits pending utilization is taxable as income from other sources. The court held that such interest is not income but an accretion to the grant, following the principle that the character of the grant is not altered by the mode of deposit. The interest is to be treated as additional grant and not as revenue receipt. (Paras 2-5) B) Income Tax - Capital vs Revenue Receipt - Grants for Specific Schemes - Income Tax Act, 1961 - The court distinguished between capital and revenue receipts, holding that grants for specific schemes are capital in nature, and interest earned on such grants pending utilization retains the character of the grant. The court relied on the principle that the purpose of the grant is to be fulfilled, and any income derived from the grant is part of the grant itself. (Paras 3-5)
Issue of Consideration
Whether the interest earned on grants made by the State Government kept in fixed deposits pending utilization should be treated as additional grant of the scheme or a revenue receipt exigible to tax under the head 'income from other sources'.
Final Decision
The appeal is dismissed. The order of the Income Tax Appellate Tribunal is affirmed. No order as to costs.
Law Points
- Interest on government grants kept in fixed deposits pending utilization is not taxable as income from other sources
- but is treated as additional grant
- following the principle that such interest retains the character of the grant and is not revenue receipt.
