Commissioner Of Income-Tax -Ii, Chandigarh v. The Punjab State E-Governance Society

*** IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH Income Tax Appeal No.75of 2011 Date of decision: 21.4.2011 Commissioner of Income-tax -II, Chandigarh ...Appellant Versus The Punjab State E-Governance Society ...Respondent CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Ms. Urvashi Dhugga, Senior Standing Counsel for the appellant. **** ADARSH KUMAR GOEL, J (Oral). 1.This Appeal has been preferred by the assessee underSection 260A of the Income Tax Act, 1961 (for short “the Act”) againstorder dated 4.8.2010 passed by the Income Tax Appellate Tribunal,Chandigarh Bench 'B',Chandigarh in ITA No.681/Chandi/2009, for theassessment year 2006-07, raising following substantial questions of law:- “i)Whether in the facts and circumstances of the case andin law the ITAT was justified in upholding the decision ofld. CIT(A) and deleting the addition of Rs.10,80,40,212/-made by the A.O. on account of unutilized portion ofgrant received from the State Government? ii)Whether in the facts and circumstances of the case andin law the ITAT was justified in upholding the decision ofld. CIT(A) and deleting the addition of Rs.65,89,678/-made by the A.O. on account of interest earned on *** FDRs?” 2.The assessee is a society registered under the SocietiesRegistration Act, 1860 and is also registered under Section 12AA of the Actwith the Income Tax Department. Its object is to promote theimplementation of E-Governance using Information Technology in theState of Punjab. The assessee received grants through State Governmentand interest from the banks on the deposits. The assessing officer heldthat assessee failed to spend 85% of its income as required for exemptionunder Section 11 of the Act. It was further held that tied-up grants were atpar with voluntary contributions and were liable to be treated as income ofthe assessee. The assessing officer also held that interest income was tobe treated as taxable income being separate from the grants-in-aid. TheCIT(A) set aside the additions holding that tied-up grants will not constituteincome of the assessee. It was further held that interest received by theassessee was to be treated as part of the grant. This view has beenupheld by the Tribunal as follows:- “......The assessee received certain grants from theGovernment with a stipulation that such grants are to beutilized/applied only towards the stated purposes, which arepre-decided by the disbursing agency. The Commissioner ofIncome-tax (A) has also noted that unspent amount of suchgrants is required to be refunded to the disbursing agency.Such type of grants have not been considered by the assesseeas income in its Income & Expenditure Account but has beenshown in the Balance sheet. The other type of grants whichare received by the assessee as general grants do not carryany such restrictions and the same have been credited by the assessee as income in the Income & Expenditure Account.The issue presently is as to whether the grants received by theassessee for specific purposes constituted “income” within themeaning of sections 11 and 12 of the Act. It is also noticedthat un-disbursed/unspent amount of tied-up grants are shownas a liability in the balance sheet, whereas the unspentamount of the general grants remain as income with theassessee. The specific tied-up grants are not credited in theIncome & Expenditure Account and are taken directly into theliability side of the balance sheet of the assessee under thehead “project Fund Account” whereby the assessee ismaintaining separate account for each project for which thegrant is received.” xxxxxxxxx assessee as income in the Income & Expenditure Account.The issue presently is as to whether the grants received by theassessee for specific purposes constituted “income” within themeaning of sections 11 and 12 of the Act. It is also noticedthat un-disbursed/unspent amount of tied-up grants are shownas a liability in the balance sheet, whereas the unspentamount of the general grants remain as income with theassessee. The specific tied-up grants are not credited in theIncome & Expenditure Account and are taken directly into theliability side of the balance sheet of the assessee under thehead “project Fund Account” whereby the assessee ismaintaining separate account for each project for which thegrant is received.” xxxxxxxxx “12.We have considered the rival submissions carefully.The factual matrix on this issue lies in a narrow compass. Theassessee has earned interest income on fixed deposits placedin the banks. The FDRs were placed out of the unspentbalance of grants received from the Government for a specificpurpose. The interest income so earned has been taxed bythe Assessing Officer assessable in the hands of the assesseeas “income from other sources”. In this connection, theCommissioner of Income-tax (A) in para 10 of his order, hasreproduced clause (xii) of the Terms & Conditions governingthe grant-in-aid, which reads as under:- “The grantee institution should maintain separateaudited account for the project. If it is found expedient to keep a part or whole of the grant in a bank accountearning interest, the interest, thus earned should bereported to this Department. The interest so earned willbe treated as a credit to the grantee to be adjustedtowards future installment of the grant.” 13.From a perusal of the above, it is evident that theinterest earned by the assessee on unspent grants does notaccrue in the hands of the assessee as a beneficial owner.The same is to be adjusted against the future installments ofthe grant payable to the assessee. This factual matrix is notnegated and therefore we find no error in the approach of theCommissioner of Income-Tax (A) in holding that the statedinterest income is not assessable in the hands of theassessee. The Hon'ble Karnataka High Court, in somewhatsimilar circumstances, in the case of CIT Vs. Karnataka UrbanInfrastructure Development & Finance Corporation, 284 ITR582 (Kar) held as under:- “Held, that there was no profit motive as the entire fundentrusted and the interest accrued on the deposits in thebank, though in the name of the assessee, had to beapplied only for the purpose of welfare of the nation asprovided in the guidelines. The whole of the fundsbelonged to the State Exchequer and the assessee hadto channelise them to the objects of the centrallysponsored scheme of infrastructural development for themega city of Bangalore. The entire money was receivedfor a public purpose and the end scheme was implemented in accordance with the guidelines of theCentral Government. Therefore, in computing the totalincome of the assessee the interest accrued on the bankdeposits could not be treated as income.” 3.We have heard learned counsel for the appellant. 4.It is not disputed that identical issues have already been dealtwith by this Court vide order dated 12.12.2008 in ITA No.190 of 2008Commissioner of Income Tax, Chandigarh-II Vs. M/s Punjab StateSports Council, Chandigarh and order dated 31.7.2009 in ITA No.666of 2008 Commissioner of Income Tax, Chandigarh-II Vs. M/s PunjabEnergy Development Agency. In M/s Punjab State Sports Council,Chandigarh it was held that grants-in-aid received from the Governmentfor specific purpose cannot be treated as voluntary contribution or astaxable income of the society. In M/s Punjab Energy DevelopmentAgency it was held that interest received by the assessee on the amountof grant deposited in the bank was also in the nature of grant itself. 3.We have heard learned counsel for the appellant. 4.It is not disputed that identical issues have already been dealtwith by this Court vide order dated 12.12.2008 in ITA No.190 of 2008Commissioner of Income Tax, Chandigarh-II Vs. M/s Punjab StateSports Council, Chandigarh and order dated 31.7.2009 in ITA No.666of 2008 Commissioner of Income Tax, Chandigarh-II Vs. M/s PunjabEnergy Development Agency. In M/s Punjab State Sports Council,Chandigarh it was held that grants-in-aid received from the Governmentfor specific purpose cannot be treated as voluntary contribution or astaxable income of the society. In M/s Punjab Energy DevelopmentAgency it was held that interest received by the assessee on the amountof grant deposited in the bank was also in the nature of grant itself. 5.In view of the above, the view taken by the Tribunal isconsistent with the view already taken by this Court. No substantialquestion of law arises. The appeal is dismissed. (Adarsh Kumar Goel) Judge April 21,2011Pka (Ajay Kumar Mittal) Judge