The appellant, Howrah Improvement Trust, received grants from the Government of West Bengal for infrastructure projects within the district of Howrah. The trust maintained separate accounts for general-purpose funds and specific-purpose funds. While the general-purpose fund was treated as income and subjected to income tax, the specific-purpose fund was considered corpus and not offered as income under Section 11(1)(d) of the Income Tax Act.
During the assessment proceedings, the Assessing Officer disallowed a portion of the grants that were directly credited to the balance sheet, arguing that they did not qualify as corpus donations. The Assessing Officer maintained that without an express direction from the government specifying the funds as corpus, they should be treated as income and subjected to taxation. Additionally, the Assessing Officer noted that the trust did not apply the income in the year received and failed to follow the provisions of Section 11(1) and Section 11(2) regarding income utilization.
However, the ITAT Kolkata disagreed with the Assessing Officer’s stance. The trust had utilized the grants for their designated infrastructure projects and refunded any unutilized funds back to the government. The ITAT emphasized that the grants did not form part of the trust’s corpus, were not donations, and did not qualify as income under Section 11. The nature and purpose of the grants justified their direct crediting to the balance sheet without routing them through the profit and loss account.
Conclusion: The ITAT Kolkata’s decision in the case of Howrah Improvement Trust vs. DCIT resulted in the deletion of the addition of government grants as corpus or income. The trust’s utilization of the grants for specific infrastructure projects, the absence of an express direction to treat the funds as corpus, and the refund of unutilized funds were crucial factors in determining that the grants did not constitute income. This ruling provides clarity on the tax treatment of government grants in similar cases.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The present appeal has been preferred by the assessee against the order dated 27.05.2019 of the Commissioner of Income Tax (Appeals)-25, Kolkata (hereinafter referred to as the ‘CIT(A)’) passed u/s 250 of the Income Tax Act (hereinafter referred to as the ‘Act’).
2. The brief facts of the case are that the assessee, Howrah Improvement Trust, is the State Level Nodal Agency of Government of West Bengal constituted under Howrah Improvement Trust Act for construction of Roads, Bridges, Sewerage Systems, Buildings, Playgrounds, Auditoriums, Construction of Buildings for Educational Institutions etc on behalf of Government of West Bengal within the district of Howrah. The Trust functions under Urban Development Department of Government of West Bengal. The Trust receives specific earmarked grants from Government of West Bengal through Urban Development Department for implementation of various infrastructural projects within the district of Howrah. The accounts of the Trust are to be maintained as per Government Rules and audit is done by CAG. The assessee-Trust is also registered u/s 12AA of the Act vide order issued by the ld. Commissioner of Income Tax (Exemption) dated 21.05.2016.
During the previous year relevant to the assessment year under consideration, the assessee received general-purpose fund and specific purpose fund from the Government of West Bengal. The general-purpose fund, which was granted to the assessee primarily for funding the administrative expense such as payment of salary, bonus etc., was duly credited to the Income & Expenditure Account of the assessee-appellant and the same was offered to income tax for the relevant assessment year in the statement showing computation of total income of the appellant. The specific purpose fund such as fund granted to the assessee-appellant for construction of fly over or flood shelter or school building etc. was directly taken to the Balance Sheet as it constituted capital/corpus of the Trust and hence, the same was not offered to tax as income of the Trust as per the provisions of section 11 (1)(d) of the Act.
3. During the assessment proceedings, the Assessing Officer observed that an amount of Rs.25,01,5352/- was directly credited to balance sheet without routing the same through profit and loss account. The Assessing Officer observed that as per of section 12(1) and section 1 1(1)(d) of the Act, the voluntary contributions made with a specific direction that the contribution shall form part of the corpus of the trust can be treated as corpus donation and the same will not be treated as income of the trust/institution. However, any other donation/grant is not a corpus donation. He further observed that in the instant case, there was no express direction either from the Government of West Bengal or Government of India that the funds received by the assessee would form part of the corpus of the assessee-institution. He further observed that the basic nature of the grant, was that it was meant for application and not for keeping with the assessee’s corpus. He further observed that the assessee did not apply the income in the year in which the same was received. If the assessee wished to apply any income of this year in the next year then it must take recourse to explanation 2 to section 11(1) of the Act by exercising option. If it wanted to defer the application of receipts beyond one year then it must set apart such income for specific purpose u/s 11(2) of the Act by furnishing Form 10. In absence of such option, the assessee has to apply 85% of its entire income received during the year within the year itself, to avail exemption u/s 11 of the Act. Any shortfall in applying 85% of income, was squarely taxable in absence of option vide Explanation 2 to section 11(1) or claim of set apart vide section 11(2) of the Act. In this instant case, no such option was exercised or Form 10 was submitted. The Assessing Officer therefore, added back the Government grant received by the assessee of Rs.25,01,54,352/- as income for the year under consideration.
4. The ld. CIT(A) also confirmed the additions so made by the Assessing Officer.
5. Being aggrieved, the assessee has come in appeal before us. The ld. counsel for the assessee has submitted that the aforesaid grants were given to the assessee by the State Government/Central Government for specific infrastructure projects. That the assessee has used the aforesaid grants for those specific purposes only and further that the unused grants have been paid back/refunded to the Government. The ld. counsel, therefore, has submitted that the aforesaid grants received by the assessee did not constitute income of the assessee. The assessee only an executing agency of the infrastructure projects for which specific grants were given by the Government. Therefore, the same did not constitute income of the assessee and hence was not routed through profit and loss account. The ld. counsel, in this respect, has relied upon the decision of the Hon’ble Punjab and Haryana High Court in the case of ‘CIT vs. State Urban Development Society’ passed in ITA No.210 of 2011 vide order dated 19.10.2011.
6. The undisputed facts are that the grants were given to the assessee for implementation of various infrastructure schemes. That the grants received by the assessee/state agency did not belong to the assessee. The grants did not form corpus of the assessee nor it was income of the assessee u/s 11 of the Act. Such grants were not the donations or voluntary contribution u/s 12 of the Act. It has also been held time and again that the entries in the books of accounts do not decide the nature of the receipts. The assessee was not authorized to utilize the said grants for any other purposes other than for which such grants were received by the assessee. The unutilized grants have been refunded back by the assessee to the Government. The assessee has also furnished the details of the funds received by the assessee for specific infrastructure projects, the details of utilization of such funds for those specific infrastructure projects. In view of this, the grants received by the assessee for specific infrastructure projects which has also been utilized for those specific purposes only and since the assessee was not authorized to use the said grants for any other purpose and further that the unused funds have been returned to the Government, therefore, the aforesaid grants, in our view, do not constitute the income of the assessee. Therefore, the lower authorities are not justified in making/confirming the impugned additions and the same are accordingly ordered to be deleted.
7. In the result, the appeal of the assessee stands allowed.
Kolkata, the 12th May, 2023.