Income or capital – A. Y. 2008-09 – Fund allotted to Government Company for a scheme – Specific direction that the interest on the amount should be utilised for the scheme – Interest is not assessable as income

The assessee is a company fully owned by the Government of Karnataka engaged in trading in agricultural produce. The Government of Karnataka sanctioned Rs. 10 crore for improvement of infrastructure in order to encourage the farmers for development of horticulture sector and to promote exports. The grant of Rs. 10 crore was kept in fixed deposits by the assessee till utilisation for the desired projects. The Government of Karnataka had specifically directed that the interest earned on fixed deposits should be treated as additional grant of the scheme and not to be treated as “income of the assessee”. The Assessing Officer assessed the interest as income from other sources. The Tribunal deleted the addition.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“There was no profit motive as the entire fund entrusted and the interest accrued therefrom from deposits had to be utilized only for the purpose of the scheme originally granted. The whole of the fund belonged to the State exchequer and the assessee had to channelise them to achieve the objects of centrally sponsored scheme of infrastructural development as specified in the Government order. Hence, interest on all these fixed deposits had to be considered as capitalised and not revenue receipts to be treated as income.”