Tuesday, June 17, 2014

Interest earned from investment of grant isn’t taxable if it is repaid to grantor or reduces future grants


Interest earned on investment of grant could not be said to have accrued to assessee if the Govt. had given instruction that such interest had either to be refunded back to it or had to be adjusted against future grants.

Facts:


a)The assessee-company was a Special Purpose Vehicle (‘SPV’), created for implementing the projects funded under the Industrial Infrastructure Up-gradation Scheme (IIUS) by the DIPP, Ministry of Commerce.

b)It had received grant from the Govt. and kept said amount in short-term deposits in bank. It earned interest income on such deposits. During assessment, the Assessing Officer (‘AO’) treated the impugned interest as income from other sources. On appeal, the CIT(A) upheld the order of the AO.

c)The aggrieved-assessee filed the instant appeal.

The Tribunal held as under:

1)The Central Government, through DIPP, had issued a letter to all the SPVs implementing the IIUS projects, giving certain instructions. The Government had given a clear instruction that interest on short-term deposits either had to be refunded back to the Government or had to be adjusted against the future grants to be released for implementing the project.

2)The interest earned on fixed deposits would be reduced from the grants. Therefore, the interest on short-term deposits would partake the character of grants, unless it was refunded back to the Government.

3)In either case, interest earned on short-term deposits could not be said to have accrued as income to the assessee. The instruction issued by the Government also made it mandatory that the SPV would not utilize the interest earned on the grant for any purpose.

4)The interest earned on short-term deposits could not be treated as income of the assessee, when the assessee had no domain over such income. If the interest income was adjusted against future grant, it would partake the character of the grant itself and it could not be treated as income of the assessee.

5)The AO was required to decide the instant issue after verifying whether the interest earned on short-term deposits had been refunded to the Government or had been adjusted against any future grant.- HYDERABAD PHARMA INFRASTRUCTURE & TECHNOLOGIES LTD. V. ADIT (International Taxation) [2014] 45 taxmann.com 339 (Hyderabad - Trib.)
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