INTEREST EARNED IN INFRASTRUCTURE DEVELOPMENT FUND IS NOT AN INCOME OF ASSESSEE IN PREVIOUS YEAR

[Mr. M. GOVINDARAJAN]

In ‘Commissioner of Income Tax (Appeals) V. Delhi Industrial Development’[2007 -TMI - 2464 - HIGH COURT, DELHI]. a scheme was formulated by the Delhi Administration for development of Narela Industrial complex. The assessee was to be in charge of development of the complex. A revolving fund was created for the management of financial resources. Separate books of accounts were maintained relating to the transaction with which the Narela revolving fund was concerned.  The Delhi State Industrial Development has developed some plots and was allotted in accordance with the scheme.   The surplus funds generated were deposited in the Narela revolving fund. The Delhi Development State Industrial Development appears to have utilized the fund by investing them in bank and earned interest. The Comptroller and Auditor General of India audited the accounts of the assessee and pointed out the mistake and advised the assessee that the funds in a Narela revolving fund did not belong to the assessee and, therefore, the interest earned by investing the surplus funds in banks also did not belong to the assessee. On this objection, the assessee reversed the entries in the subsequent years and deposited the amounts with the Delhi administration.The Assessing Officer has assessed the interest income as belong to the Delhi State Industrial Development. The Tribunal has held that the interest income does not belong to the Delhi State Industrial Development rather it belongs to the Delhi Administration.

In ‘Commissioner of Income Tax V. Karnataka  Urban Infrastructure Development and Finance Corporation [2006 -TMI - 9749 - KARNATAKA High Court]. the Appellate Tribunal found that the assessee was a nodal agency for implementation of the mega city scheme worked out by the Planning Commissioner and Ministry of Urban and Employment for Development of Urban Infrastructure to Bangalore city.  The funds deposited by the financial corporation relate to the State Government and it was holding such funds as a trustee on behalf of the Government.   The Department filed an appeal against the decision of the Appellate Tribunal.  The High Court upheld the decision of the Appellate Tribunal.

In ‘Saharanpur Development Authority V. Assistant Commissioner of Income Tax’ – (2011) 8 ITR (Trib) 263 (Delhi) the Assessing Officer during the course of assessment proceedings for the assessment year 2005-06 found that the assessee has not credit interest Rs. 20,49,239 in the income and receipt account.   A notice was issued to the assessee as to why this amount should not be added as taxable income as so was added in the last assessment year. After considering the assessee’s submission the Assessing officer brought the said amount to tax as income of the assessee as it was done by him the last assessment year 2004-05 which was upheld by the Commissioner of Income Tax (Appeals). On appeal before the Commissioner of Income Tax (Appeals) the assessee has no result in favour of him.  Therefore he filed an appeal before the Tribunal.  Before the Tribunal the assessee has taken the following grounds:

• That the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in upholding that the interest of Rs. 20,49,239 earned on the investment from the funds of ‘infrastructure development fund’ is taxable in the hands of the assessee despite the fact that neither the assessee has any power to spend these funds nor the same are held to be taxable in the hands of the assessee;
• That the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in deciding the appeal without considering the material and evidence produced before him;
• That the appellant denies its liability of interest charged under Section 234B of the Income Tax Act, 1961.

The assessee further submitted that in a similar case of his own the Tribunal reversed the order of the Assessing Officer and Commissioner who upheld the order of Assessing Officer.  In that case the Tribunal held that the interest amount earned on the infrastructure development fund is not an income of the assessee but it belongs to the Delhi Administration and it is not to be included in the assessee’s hand and deleted the addition by reversing the orders of the authorities below and deciding the issue in favor of the assessee.  

In the above said case the Tribunal pointed out that the assessee has no control over infrastructure development fund.   It is maintaining this account as a trustee.   The amount has to be used on the direction of a high powered committee under the Chairman of Commissioner,Meerut.   The assessing officer is treating the interest component as income of the assessee.   He has not taken cognizance of the principal amount.  The assessee has shown in his accounts the addition and interest as detailed below:

                        Addition                                   =          Rs. 1,71,17,597.60

                        Interest                                     =          Rs.   18,05,515.00

If the principal amount does not belong to the assessee because of overriding title of the Government then how interest income on the principal amount would belong to the assessee. 

In the present appeal the Tribunal held that the assessee had received the funds under the orders of the Government and it was required to use such funds as per the direction of high power committee.   It has no control over the funds.  More so the Assessing Officer has not brought to tax the principal amount he is only treating the interest income on such principal amount as income of the assessee.   In view of the discussion the Tribunal allowed the appeal.