Interest On Unspent Government Grants Cannot Be Treated As Separate Income: ITAT Chandigarh

The Income Tax Appellate Tribunal (ITAT) has recently held that interest earned on unspent government grants parked in fixed deposits retains the same character as the grants themselves.

It cannot be treated as an independent source of income while determining whether an educational institution is substantially financed by the government.

A Chandigarh tribunal comprising Judicial Member Laliet Kumar and Accountant Member Manoj Kumar Aggarwal allowed the appeal filed by Hydro Engineering College Society.

It directed the Assessing Officer to grant exemption under Section 10(23C)(iiiab). The tribunal also set aside the consequential penalty after allowing the quantum appeal.

The tribunal observed, "In our considered opinion, the interest accrued on the grant was merely incidental to these grants and would bear the same colour and character as that of the sourced grants. The same would not constitute an independent source of income for the assessee"

It further held, "On these facts, the inevitable conclusion would be that the assessee was fully financed by the Government and the condition of Rule 2BBB stood fully satisfied. Accordingly, we direct Ld. AO to grant impugned exemption u/s 10(23C)(iiiab) as claimed by the assessee and accept the returned income of the assessee."

Hydro Engineering College Society was formed to establish and run an engineering college in Bilaspur, Himachal Pradesh. The State Government allotted land for the project. Construction funds were provided by the Government as well as NTPC and NHPC. During the relevant assessment year, the college was still under construction and had not started generating income.

The society temporarily parked unspent grant money in fixed deposits until it was required for the project. Interest accrued on those deposits.

The Assessing Officer denied the exemption after concluding that government grants accounted for 49.89% of the society's total receipts. This was below the 50% threshold prescribed under the Income Tax Rules. Treating the interest income as a separate source of income, the officer assessed about ₹9.88 crore as business income. The Commissioner (Appeals) upheld the assessment.

On examining the society's accounts, the tribunal noted that its receipts comprised government grants, contributions from NTPC and NHPC for establishing the college, and interest earned on unspent grant money. It found that the society had no other independent source of funding or income.

The tribunal concluded that the interest arose only because the unspent grants had been temporarily invested. It therefore retained the same character as the grants and could not be treated separately while deciding whether the institution was substantially financed by the government.

Allowing the appeal, the tribunal directed the Assessing Officer to grant the exemption and accept the society's returned income. Since the quantum appeal succeeded, it held that the consequential penalty under Section 270A would not survive.

For Assessee: Senior Advocate Vishal Mohan Singh, along with Parveen Sharma, Authorised Representative (Virtual).

For Revenue: Manav Bansal, CIT-DR.