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Sar Infracon Pvt. Ltd. v. Income Tax Officer, Ward-4(2)

Income Tax Appellate Tribunal

Feb 15, 2013

Judgment

Subsequent
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Tribunal Summary — ITA Nos. 1079 & 1080 Ahd/2010

Factual and Procedural Background

These consolidated appeals were filed by the assessee (ITA Nos. 1079 & 1080 Ahd/2010) against orders of the Commissioner of Income-tax (Appeals)-IV, Surat dated 23-11-2009 for assessment years 2005-06 and 2006-07 respectively. The assessee is a private limited company (a Special Purpose Vehicle) engaged in development of SEZ and related infrastructure for the diamond industry. The company received a central government grant and a contribution from Gujarat Hira Bourse (GHB), which were deposited by the assessee in escrow/fixed deposit accounts and on which interest accrued.

For assessment year 2005-06 the assessment was under section 143(3) read with section 147 of the Income-tax Act, while for 2006-07 the assessment was under section 143(3). The Assessing Officer (A.O.) added interest of Rs. 21,22,253 for A.Y. 2005-06 and Rs. 1,25,44,938 for A.Y. 2006-07 to the assessee's income, holding the interest to be taxable income. The CIT(A) confirmed these additions. The assessee appealed to the Tribunal contending that the interest did not belong to it but to Central Government and Gujarat Hira Bourse and relying on documentary terms of the grant, accounting entries, audit remarks and precedent authorities.

Legal Issues Presented

Whether the interest earned by the assessee on amounts received as Central Government grant and contribution from Gujarat Hira Bourse and kept in escrow/fixed deposits is chargeable to tax as the assessee's income, or whether such interest belongs to the Central Government and/or Gujarat Hira Bourse and is not assessable as the assessee's income?
Whether the Commissioner of Income-tax (Appeals) erred in confirming the addition without properly considering the relevant High Court decisions cited by the assessee (including Gujarat Municipal Finance Board v. DCIT) and without properly construing their ratios?
Whether the copy of computation and final accounts of Gujarat Hira Bourse (filed by the assessee) was admissible and ought to have been taken into consideration by the CIT(A) under para 4 of Rule 46A of the Income-tax Rules, 1962?

Arguments of the Parties

Appellant's Arguments

The amounts received by the assessee were a conditional grant from the Central Government (under IIUS) and a contribution from Gujarat Hira Bourse. These funds were to be kept in escrow/FDs and could not be used by the assessee except for the specified sub-projects and subject to prior approvals; they therefore did not belong to the assessee.
The grant letters and scheme conditions expressly treated interest earned on the central grant as forming part of the central grant limit and imposed restrictions, including repayment obligations if the project did not materialize; accordingly the interest belonged to the grantor/contributor and not to the assessee.
The assessee treated accrued interest as a liability in its balance sheet and had not taken the interest into computation of income; documents (including audit report, communications, ledger entries and GHB accounts) showed that interest was to be refunded or was the property of GHB/Central Government.
The assessee relied on several judicial decisions (including Gujarat Municipal Finance Board v. DCIT and Gujarat Power Corporation Ltd. v. ITO) to argue that interest on such conditional grants/contributions should not be treated as the assessee's income where the assessee is only a custodian/trustee for the donors.
The copy of computation and final accounts of Gujarat Hira Bourse (produced to show GHB treated the interest as its income) was admissible and should have been considered by the CIT(A) under Rule 46A(4) because it had been called for by the predecessor authority.

Revenue's / Respondent's Arguments

The A.O. and the CIT(A) treated interest earned on the escrow/FDs as income of the assessee because the interest was not specifically excluded in the approval letter and the funds were lying with the company as idle money from which the assessee earned income.
The A.O. relied upon the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (227 ITR 172) to hold that interest earned on short-term deposits prior to commencement of business (even if out of term loans) is taxable as income from other sources.
The CIT(A) held the Gujarat Municipal Finance Board decision distinguishable, and observed that Section 10(20A) was not applicable w.e.f. 01.04.2003 to GHB/Chamber of Commerce. The assessee did not prove that accrued interest had been returned to GHB or Central Government and the assessee had accepted credit of TDS; as per Section 198 TDS deducted would be deemed income received for computing the assessee's income.
The Revenue urged confirmation of the additions made by the lower authorities on these bases.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Gujarat Municipal Finance Board v. DCIT (1996) 221 ITR 317	That interest received in respect of Grant-in-Aid cannot be treated as income of the assessee where Government directive treats interest as part of the grant-in-aid.	The Tribunal held this decision squarely applicable to the assessee: it supported the view that the interest here belonged to the grantor/contributor and not to the assessee acting as custodian.
Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (227 ITR 172, SC)	Interest earned on short-term deposits prior to commencement of business (from borrowed funds) is taxable as income from other sources and not available to reduce interest payable or be capitalized.	The A.O. and CIT(A) relied on this authority to treat the interest as taxable; the Tribunal distinguished it as concerning interest earned from borrowed funds pre-operations, not grant funds held in trust/escrow.
CIT v. Bokaro Steel Ltd. (236 ITR 315)	Referenced by the assessee in support of its position regarding characterization of certain interest receipts.	The decision was relied upon by the assessee; the Tribunal considered the body of authorities relied upon in forming its conclusion that the interest belonged to the contributors.
CIT v. Kamal Co-operative Sugar Mills Ltd. (243 ITR 2)	Referenced by the assessee in support of its position regarding characterization of interest receipts.	Relied upon by the assessee; the Tribunal considered it within the set of authorities supporting the assessee's position.
Bongaigaon Refinery & Petrochemicals Ltd. v. CIT (251 ITR 329)	Referenced by the assessee as relevant authority on interest receipts.	Included among the cases relied on by the assessee; considered by the Tribunal in assessing the legal position.
Commissioner of Income-Tax v. Saraswati Kunj Co-Operative H.B. Society (2006) 157 Taxmann 166 (Del)	Referenced by the assessee (Delhi decision) on characterization of interest.	Part of the corpus of authorities cited by the assessee; the Tribunal took into account the line of authorities relied upon.
SLP No. CC 4976 of 2007 (2008) 167 Taxmann 0045 (SLP-12) (SC)	Reported Special Leave Petition reference cited by the assessee.	Cited by the assessee among other authorities; considered in overall assessment of precedents.
Rajkot Dist. Gopalak Co-operative Milk Producers Union Ltd. (204 ITR 290)	Referenced by the assessee in support of its contention regarding trust/custodian treatment of funds.	Relied upon by the assessee and taken into consideration by the Tribunal.
Gujarat Power Corpn. Ltd. v. ITO (A.Y. 1992-93)	Authority holding interest on amounts received from Government (share capital) was held to be interest of the Government and treatable as held in trust for the Government.	The Tribunal treated this decision as squarely applicable and supportive of the assessee's position that the interest belonged to the grantor/promoter and not to the assessee.
Gujarat Narmada Valley Fertilizers Co. Ltd. v. ITO (1982) (referenced)	Referenced in the context of case law relied upon by High Court and Tribunal decisions concerning interest on funds provided by government/promoters.	Referred to in the discussion of precedents (specifically in the Gujarat Power Corpn. analysis) and considered in the Tribunal's assessment of authority.
Commissioner of Income-Tax, Bombay City I v. Tanubai D. Desai (1972) 84 ITR 713	High Court authority referenced for principles on treatment of interest/ownership in similar contexts.	Referenced by the assessee and considered by the Tribunal when evaluating the body of jurisprudence on the issue.

Court's Reasoning and Analysis

The Tribunal examined the documentary record (grant letters, scheme conditions, audit remarks, ledger entries and communications) and the judicial authorities cited by the parties. The key analytical steps and findings recorded in the opinion are:

Factual inquiry: The Tribunal accepted that the Central Government had given approval under the Industrial Infrastructure Upgradation Scheme (IIUS) and that Central Government and Gujarat Hira Bourse (GHB) provided funds (Central grant and contribution) which were deposited in escrow/FD accounts by the assessee. The scheme and grant letters contained conditions restricting the use of the funds and provided that interest earned on the central grant would form part of the central grant limit; if the project did not materialize the funds (with interest) were to be returned.
Characterisation of the assessee's role: On the basis of the scheme conditions and documentary material, the Tribunal concluded that the assessee was a custodian of the funds and had no entitlement to use or appropriate the funds (including the interest) except as permitted by the grant conditions. The Tribunal treated the assessee as holding the funds on behalf of the Central Government and GHB in the specific factual matrix before it.
Precedent analysis: The Tribunal found the decisions relied upon by the assessee (notably Gujarat Municipal Finance Board v. DCIT and Gujarat Power Corpn. Ltd. v. ITO) to be squarely applicable, inasmuch as those cases supported the proposition that interest on conditional grants/contributions could be treated as belonging to the grantor/promoter where the grant instrument or scheme directed that the interest formed part of the grant or was payable to the grantor.
Distinguishing Revenue authorities: The Tribunal distinguished the Revenue's reliance on Tuticorin Alkali Chemicals & Fertilizers Ltd. (Supreme Court), observing that Tuticorin concerned interest earned from investment of borrowed funds prior to commencement of business and addressed the taxability of such interest as revenue in the hands of the borrower. The Tribunal held that Tuticorin was not on point where the funds originated as conditional grants/contributions and the assessee was acting merely as custodian.
On Section 198/TDS and other points: The Tribunal noted that the assessee had claimed credit for TDS and had not included the interest as income, and that lower authorities had referred to Section 198. However, the Tribunal's primary conclusion was driven by the documentary condition that interest formed part of the grant/contribution and the assessee's custodian role; therefore the additions confirmed by the CIT(A) were not justified on the facts before the Tribunal.
Conclusion of analysis: Considering (i) the scheme conditions and grant letters showing restrictions and the treatment of interest, (ii) the accounting/audit entries and GHB documentation indicating that interest was to be treated as belonging to the contributors, and (iii) applicable precedents favoring the assessee's characterization, the Tribunal allowed the appeals for both assessment years.

Holding and Implications

Holding: The Tribunal allowed the assessee's appeals for both assessment years and held that the additions of interest confirmed by the CIT(A) were not justified on the facts of these cases.

Direct consequences for the parties:

The additions confirmed by the CIT(A) are set aside for both years. Specifically, the Tribunal disallowed the A.O.'s additions of interest of Rs. 21,22,253 for A.Y. 2005-06 and Rs. 1,25,44,938 for A.Y. 2006-07.
The Tribunal concluded that the interest earned on the escrow/FD accounts belonged to the Central Government and Gujarat Hira Bourse (as per the terms of the grant/contribution) and not to the assessee which acted as custodian, on the facts before it.

Broader implications: The opinion rests its decision on the particular facts, documentary conditions of the grant/scheme and the application of existing authorities. The Tribunal did not state that it was creating a new legal principle; rather it applied and distinguished precedents to the facts at hand. No express pronouncement was made that a new precedent is being laid down beyond the factual application in these appeals.

Show all summary ...

T.R Meena, A.M:— These two appeals are filed by the Assessee in ITA Nos. 1079 & 1080.Ahd/2010, which have been emanated from the orders of the learned CIT(A)-IV, Surat, dated 23-11-2009 for both A.Ys 2006-2007 & 2007-2008. These appeals were heard together and are being disposed of by way of this common order for the sake of convenience. The effective grounds of appeals are as under:

Grounds of ITA No. 1079.Ahd/2010 (A.Y 05-06)

“(I) Addition of Rs. 21,22,253/- in respect of Interest:—

(1) On the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in confirming addition of interest of Rs. 21,22,253/- which did not belong to the appellant but belonged to the following:—

Central Government Rs. 16,25,244/- Gujarat Hira Bourse Rs. 4,97,009/-

(2) The appellant submits that the order of the learned Commissioner of Income-tax (Appeals) is required to be cancelled as he has not taken into consideration and dealt with the judgements of the Gujarat, Mumbai & Delhi High Courts nor discussed why they were not applicable to the facts of the case.

(3) The appellant further submits that the learned Commissioner of Income-tax (Appeals) has not at all property construed the ratio of the judgements and was not justified in not giving deduction based on the above.

(4) The Learned Commissioner of Income-tax (Appeals) further erred in not considering the copy of computation and final accounts of Gujarat Hira Bourse for the year ended 31.03.2008 by treating as additional evidence when this evidence was called for by the predecessor of the Commissioner of Income-tax (Appeals) and, therefore, admissible as per para 4 of Rule 46A of the Income-tax Rules, 1962 and ought to have been taken into consideration.”

Grounds of ITA No. 1080.Ahd/2010 (A.Y 06-07)

“(I) Addition of Rs. 1,25,44,938/- in respect of Interest:—

(1) On the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in confirming addition of interest of Rs. 1,25,44,938/-_which did not belong to the appellant but belonged to the following:—

Central Government Rs. 96,07,045/- Gujarat Hira Bourse Rs. 29,37,893/-

The amount of interest is different in both the years.

2. The assessee company filed return of income both the years on declaring income at Nil filed on 31.03.2006 & 23.03.2007 respectively. The asseessee is a Private Limited Company engaged in development of SEZ, Diamond Training Institution and other such infrastructure to promote the diamond industry to a worldwide level. In A.Y 05-06, the scrutiny assessment was made u/s. 143(3) r.w.s 147, whereas in A.Y 06-07 u/s. 143(3) of the IT Act. In A.Y 05-06, the appellant received interest from Bank of India to the extent of Rs. 21,22,253/- on which TDS has been deducted by the Bank at Rs. 4,32,939/-. Similarly, in A.Y 06-07, this interest was Rs. 1,25,44,938/- on which TDS deducted at Rs. 25,59,075/- The assessee was given reasonable opportunijtyl of being heard by the A.O during the course of assessment proceeding in both the years, which was replied by the appellant vide letter dated 15.07.2008, in both the years on identical submissions. It was contended before the A.O as well as CIT(A) that the company is a Special Purpose Vehicle (SPV) promoted under the Industrial Infrastructure Upgradation Scheme (IIUS) of Central Government for carrying out the infrastructure development in industrial cluster. The SPV was initial planned to develop infrastructure for SEZ project at Surat promoted by Cujarat Hira Bourse (GHB, a section 25 company promoted by Surat Diamond Association). The Central Government had released grant against the contribution made by GHB. The copy of letter of grant to GHB and IIUS is attached herewith as Annexure-1 alongwith this reply before the A.O As per the mandate laid down under the scheme GHB and Central Government paid their respective for the project to assessee company. The said fund were kept under Escrow Accounts/FDs with banks by the assessee company during the years under consideration as it neither has any entitlements over the funds nor has authority to spend the same without approval of Central Governemnt. The subjected fund in an event if the project is not getting materialized has to be returned by assessee company to GHB and Central Government. Moreover, the letter of Central Government also provided condition that “The interest earned on the central grant already released would form part of the central grant limit of Rs. 50 crore. The copy of the letter of Central Government was annexed as Annexure-2 before the A.O alongwith reply. In 2006-2007 GHB moved away from the project and handed over the company to South Gujarat Chamber of Commerce (SGCC) with the condition to redeem its contribution alongwith reimbursement of the interest money placed in FD out of its contribution. It was claimed before the A.O that the appellant was custodian of money of Central Government and GHB/SGCC. It had no entitlement either to contribution, grant or to interest earned on the subjected money placed in Bank FD. The appellant contended before the A.O that this interest earned on the grant and contribution not earned by it as grant and contribution is alongwith interest was either belonged to Central Government or GHB. There was a rider on this grant/contribution. He further placed reliance on Hon'ble Gujarat High Court decision in case of Gujarat Municipal Finance Board v. DCIT (1996) 221 ITR 317, 336, wherein the Hon'ble Gujarat High Court has categorically held that interest received in respect of Grant in Aid cannot be treated as income of the assessee in view of the specific directive of the Government that interest earned will be treated as part of Grant - in Aid. Thus, it was argued before the A.O, the interest accrued on money kept with bank during the pre-construction period cannot be treated as income of the assessee. Alternatively, it was argued that the appellant is a custodian of the grant/contribution. It had no power to use/spend the money on its own. The project in the year under consideration could not take off as the notification for declaring the SEZ was not received from Central Government as well as there were number of hitches in allotment of land by GIDC and other Government approvals. Thus, the funds remain idle in bank not intentionally but due to the compulsion and circumstances beyond the control of assessee. The accrual of interest thereon was not the case of accrual of interest on money lying idle but it is the case of accrual of interest on the money which due to restrictive compulsions could not be used for the project during the period under consideration. The appellant further relied upon following cases:

i. CIT v. Bokaro Steel Ltd. (236 ITR 315)

ii. CIT v. Kamal Co-operative Sugar Mills Ltd. (243 ITR 2) &

iii. Bongaigaon Refinery and Petrochemicals Ltd. v. CIT (251 ITR 329)

iv. Commissioner Of Income-Tax v. Saraswati Kunj Co-Operative House Building Society (2006) 157 Taxmann 166 (Del)

v. SLP No. CC 4976 of 2007 (2008) 167 Taxmann 0045 (SLP-12) (SC).

The A.O considered the reply of the assessee and also analyzed the case laws cited by the appellant before him. He observed that interest earned on the Escrow Accounts/FDs has not been specified in the approval letter. The money was lying with the company as idle and income has been earned. Whatever case law cited by the appellant before him, has been distinguished by him. He further relied in case of Tuticorin Alkali Chemcials & Fertilizers Ltd. v. CIT 227 ITR 172 (SC) and held that interest earned by the assessee before commencement of business on short term deposits with Banks out of term loans secured from financial institutions is income chargeable under the head “income from other sources” and would not go to reduce the interest payable by the assessee which would be capitalized after the commencement of commercial production. The fact that the company has not commenced business does not mean that if it is not chargeable under the head “profits and gains of business”, its income from any other source will not be taxed. Company having chosen to invest its idle capital fruitfully the fruits of such investment will clearly be of revenue nature. The fact that company will have to pay interest is irrelevant because the company is free to use the interest received in any way it likes and there is no diversion at source. Unless it can be shown as exempt u/s. 10, the interest received is taxable income. No adjustment can be allowed unless permitted by the I.T Act howsoever desirable it may be from the point of view of equity. Finally, he made addition of Rs. 21,22,253/- in A.Y 05-06 and Rs. 1,25,44,938/- in A.Y 06-07.

3. Being aggrieved by the orders of the A.O, the assessee carried the matter before the CIT(A), who has confirmed the addition by considering the reply of the assessee, dated 21.04.2009 & 10.08.2009 Ld. CIT(A) observed that as per letter dated 24.11.2004 of department of Industrial Policy and Promotion of Ministry of Commerce and Industry, Government of India had conveyed the approval of the Government of India for upgradation of infrastructure facilities at Gems and Jewellery cluster, Surat under the Industrial Infrastructure Upgradation Scheme (IIUS), 2003, at the tentative cost of Rs. 85 crores, which was in confirming of grant from the Central Government and contribution by the user Industry. The project was to start within the time of six months and was to be completed within 24 months. Certain conditions also laid down by the Central Government. The initial grant was given by the Central Government at Rs. 16.70 crore and contribution from GHB was Rs. 5.56 crores. Both the funds were made available to the appellant company, which were deposited in the Escrow Account/FD account. The appellant earned interest on both funds as mentioned above. He supported the findings of the A.O that in case of company had not commenced its business did not mean that the interest earned on FDs was not chargeable to tax under the head “profit and gain”, its income from any other source will not be taxed. This income was also not exempted u/s. 10 and was taxable. He also found Hon'ble Gujarat High Court decision in case of Gujarat Municipal Finance Board v. DCIT (supra), distinguishable as this Board was constituted under the Gujarat Municipal Finance Board Act, 1979. The Government of Gujarat discharges its duty through the Board. Thus, the proposition given in the case of Gujarat Municipal Finance Board v. DCIT (supra) is not applicable in case of appellant. The Board is to be act on behalf of the Government of Gujarat. Further, he also analyzed Section 10(20A) of the IT Act. Without prejudice to the various findings given by the ld. CIT(A), it was held that w.e.f 01.04.2003, the GHB/the Chamber of Commerce cannot be said to be an authority as mentioned in Section 10(20A). The appellant had shown interest earned on these FDs in the books of account. The appellant also failed to prove that the amount on accrued interest had been returned to the, GHB or the trust formed by the Chamber of Commerce. The appellant had claimed the refund on the basis of TDS Certificate received by it from the Bank. As per Section 198, TDS deducted shall for the purpose of computing the income of the assessee, being deemed to the income received. Finally, after discussing all the facts and case laws of the assessee, he confirmed the addition in both the years.

4. Now the assessee is before us. Ld. Counsel for the appellant submitted that the appellant received a grant from Central Government and contribution from GHB which had been deposited in Escrow account/FDs as per the terms and conditions of the Central Government. He also filed paper book which include Audit Report, copy of return, copy of reply before the CIT(A), copy of letter of Central Government dated 20.02.2007, conveying an “in principle approval” of grant of Rs. 50 crorews, leter by Central Government to Gujarat Hira Bourse, copy of communications between assessee and Gujarat Hira Bourse & ledger of assessee in the books of Gujarat Hira Bourse and argued that the assessee is a custodian on behalf of both the parties and in case of project is not materialized the grant alongwith the interest is to be refunded to the respective parties. He drawn our attention page no. 53 of the paper book which is reply to the CIT(A), page no. 71 which is copy of letter dated 24.11.2004 Ministry of Commerce Industry, Department of Industrial Policy & Promotion, approval for upgradation of infrastructure facilities at Gems & Jewellery cluster, Surat, Gujarat for under Industrial Infrastructure Upgradation Scheme (IIUS), 2003. He further drawn our attention in item nos. 1, 4, 6, 9 & 10 as per this approval, the grant of Central Government by the Government of India would be utilized only for sub-project mentioned in this letter. Any deviation there from would require the approval of the Government of India in writing. The next installment shall be released before getting utilization certificate and depend upon the contribution made by the promoter. As per page no. 51, the interest earned on the central grant already released would form part of the Central Grant Limit of Rs. 50 crore. Thus, it was contended that interest earned on the Escrow/FDs Accounts was grant as per Government of India letter dated 20.02.2007 GHB released its contribution alongwith the interest vide letter dated 26.07.2008 As per page no. 15 of the paper book, the appellant had shown interest earned on Escrow account/FDs is a liability in the balance sheet in both the years, Rs. 21.22 lacs for A.Y 0506 & Rs. 1.46 crore in A.Y 06-07. On page no. 101, the appellant placed the income and expenditure account of GHB wherein interest from appellant has considered additional income at Rs. 1,28,19,743/- in A.Y 08-09. The GHB has shown loan and advance in balance sheet for A.Y 08-09. The Hon'ble Gujarat High Court decision in case of Gujarat Municipal Finance Board v. DCIT (supra) is squarely applicable in case of appellant. He further also relied upon in case of Rajkot Dist. Gopalak Co-operative Milk Producers Union Ltd. (204-ITR-290). The Auditor of the appellant in A.Y 05-06 had made the remark as under:

“During the period under consideration, the Company received Rs. 16.70 Crores as contribution in the form of conditional grant in aid from the Central Government and Rs. 5.56 Crores as contribution from Gujarat Hira Bourse in project account. As per the terms of IIU Scheme read with the sanction letter, these funds are strictly to be utilized for the purpose for which the same has been granted. Moreover, the funds can be utilized only after obtaining prior approval of the contributors including Central Government Authorities. Up to 31-03-2005, the funds were kept in separate Escrow account with the bank on which interest of Rs. 21.22 lacs has accrued which has also been added to project account alongwith the contributions being expandable for the project only.”

The appellant had not taken this income in computation of income under any head in both the years. Ld. Counsel for the appellant also filed copy of recent Hon'ble Gujarat High Court decision in case of Gujarat Power Corpn. Ltd. v. ITO for A.Y 1992-1993, wherein identical addition of interest were made by the A.O on money received on account of share capital from the Gujarat Government (promoter of the Company). The Government of Gujarat had instructed the Gujarat Power Corpn. Ltd. that interest accruing on such amount should be paid to the Government. The ld. A.O made addition on account of interest income. Hon'ble Gujarat High Court, after following Tribunal's decision on Gujarat Narmada Valley Fertilizers Co. Ltd. v. ITO, reported in (1982) and Hon'ble Bombay High Court decision in case of Commissioner Of Income-Tax, Bombay City I v. Tanubai D. Desai, reported in (1972) 084 ITR 713 as held that the appellant was holding the interest income as trustee of the Government of Gujarat. The Hon'ble Apex Court decision in case of Tuticorin Alkali Chemical and Fertilizers Ltd. (supra), was not applicable as the assessee had earned interest out of investment made from the borrowed funds prior to the commencement of the business. It was in this background, that the Hon'ble Apex Court held that such interest would be taxable and interest earned cannot be utilized to discharge liability for payment of interest. It was held that this was not a case of diversion of income by overriding title and that the deduction of set off against interest liability on the borrowed funds would not be permissible. Thus, the appeal is allowed in favour of the Revenue against the assessee by the Hon'ble Apex Court. At the outset, ld. Sr. D.R vehemently relied upon the order of the CIT(A) and A.O and argued that the appellant had taken credit on TDS deducted on interest in his return. As per Section 198, the appellant has to show the interest income in respective return. Thus, he argued for the confirmation of the order of the lower authorities.

5. We have heard the rival contentions and perused the materials on record. The appellant was a custodian and Government of India had prohibited grant as well as interest from any use, except the purposes given in the approval letter. In case of project is not materialized the same has to be repaid to the respective agencies with interest. The case laws cited by the appellant i.e Gujarat Power Corpn. Ltd. v. ITO (supra) & Gujarat Municipal Finance Board v. DCIT (supra), are squarely applicable. The case law cited by the CIT(A) is not applicable as in case of appellant, the money was received through grant whereas in case of Tuticorin Alkali Chemical and Fertilizers Ltd. (supra), the borrowed loan used for the earning the interest in pre-operation period. It is true that the appellant had been granted refunds on the basis of TDS Certificate, even though, income earned by way of the interest earned on FDs had not been disclosed as income but the appellant has to refund the grant/contribution with interest to the Government of India and GHB. Thus, we have considered view that in both the years, the CIT(A) was not justified in confirming the addition. Accordingly, appeals in both years are allowed.

6. In the result, assessee's appeals for both assessment years are allowed.