Interest Earned on Surplus Grants should not be Taxed as Income: ITAT [Read Order]

The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) has held that interest earned on surplus grants should not be taxed as income.

The tribunal ruled in favor of the Gujarat State Road Development Corporation Limited (GSRDC), which had challenged the decision of the assessing officer (AO) to tax the interest earned on surplus grants.

The assessee, Gujarat State Road Development Corporation Limited (GSRDC), is a company incorporated and its major goal is to design, build, maintain, and operate roads and other infrastructure in Gujarat.

The GSRDC received money from the state government to complete several road projects during the financial year under consideration. The GSRDC’s surplus grants were deposited with Gujarat State Financial Services (GSFS).

The surplus grants submitted with GSFS earned the GSRDC interest. The AO, during the assessment proceedings, treated the interest earned on the surplus grants as income of the GSRDC. The GSRDC challenged the AO’s decision before the ITAT.

The assessee submitted  that the company was required to deposit surplus grants with GSFS and could not use the interest for its own purposes. The company’s memorandum and articles of association stated that the surplus grants were deposited according to state government directives, and the company could not make profits from it.

The revenue contented that the assessee earned interest on surplus grants, which was a taxable receipt. The assessee received the grants and earned interest, making it part of their income. The availability of the grants was irrelevant, as they were still received and earned interest.

In the case of Gujarat Municipal Finance Board v. DCIT, the Gujarat High Court held that interest earned on grants from the state government should not be taxed as income. The court reasoned that the interest earned on the grants was not freely available to the company and could not be used for its own purposes.

In the case of SAR Infracon P.Ltd the Gujarat High Court held that interest earned on grants from the central government should not be taxed as income. The court reasoned that the interest earned on the grants was not freely available to the company and could not be used for its own purposes.

The Two Member Bench Comprising T.R. Senthil Kumar (Judicial Member) and Annapurna Gupta (Accountant Member) held that “In view of the above, the aforestated decisions of the Hon’ble jurisdictional High Court, will clearly apply to the present case and the interest received on the surplus funds by the assessee, therefore, cannot be treated as income of the assessee.

The addition therefore made to the income of the assessee by treating the interest on surplus funds as income of the assessee amounting to Rs.2,54,85,315/- is directed to be deleted.”

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