Interest on deposit of surplus grants as directed by State Government cannot be treated as income

ACIT Vs Gujarat State Road Development Corporation Ltd. (ITAT Ahmedabad)

ITAT Ahmedabad held that interest income earned by depositing surplus grants in a particular mode as per the directions of the State Government is also treated as part of the grants and hence it cannot be treated as income of the assessee.

Facts- The assessee is domestic company engaged in building infrastructure projects including roads. Its main objects, for which it has been incorporated, is to carry out construction and development of roads and do all work being handled by the Roads and Building department of the Government of Gujarat, under the BOT, BOOT or BOLT schemes or any other manner, and also to undertake projects outside Gujarat, develop and provide consultancy and construction services in connection with the infrastructure building activities.

AO made various additions towards unutilized grant; project development fee spread over 3 years; interest on deposits with GSFS and expenses of project for which no income was offered.

CIT(A) deleted all the additions made by the AO except that relating to the interest on deposits with GSFS and a part of expenses of project for which no income was offered. Accordingly, the appeal filed by the assessee was partly allowed by CIT(A). Aggrieved by the same, both the Revenue and the assessee have come up in appeal before us.

Conclusion- Held that the assessee was a mere nodal agency to implement certain schemes of the Government of Gujarat and the unspent grant remained property of the Government and had to be returned to the Government as and when demanded; that therefore, there was no question of treating the grant as income of the assessee.

Held that the Hon’ble jurisdictional High Court in the case of Gujarat Municipal Finance Board has categorically held that the grants given by the State Governments stipulating deposits of the surplus grants in a particular mode and interest earned thereon ,also treated as part of the grants, the same could not be treated as income of the assessee. In the present case, the assessee has deposited surplus grants admittedly as per the directions of the State Government with GSFS and earned interest income amounting to Rs.2,54,85,315/-.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

These are cross-appeals by the Revenue and assessee against order passed by the ld. Commissioner of Income Tax (Appeals), Gandhinagar, Ahmedabad [hereinafter referred to as “Ld. CIT(A)”] dated 28.10.2013 pertaining to the Asst. Year 2010-11 under section 250(6) of the Income Tax Act, 1961 (hereinafter referred to as the “Act’ for short).

2. Brief facts relating to the case are that the assessee is domestic company engaged in building infrastructure projects including roads. Its main objects, for which it has been incorporated, is to carry out construction and development of roads and do all work being handled by the Roads and Building department of the Government of Gujarat, under the BOT, BOOT or BOLT schemes or any other manner, and also to undertake projects outside Gujarat, develop and provide consultancy and construction services in connection with the infrastructure building activities. The main objects of the company for which it was established as noted in the Memorandum and Association of the company is reproduced hereunder:

3. The assessee was financed for the work to be carried out by it, from various sources, which included grants received from the State Government for the said purpose. In the assessment framed for the impugned year, the Assessing Officer (AO);

• treated the unspent grants received by the assessee from the State Government relating to the impugned year as being in the nature of income of the assessee and made addition of the same to the income of the assessee.
• Besides, he also noted that the assessee was receiving project development fees for various projects awarded by it to concessionaires. He noted, while framing the assessment, that the assessee had not accounted for the entire project development fees earned/accrued during the impugned year, but had spread it over the period of the projects ,being three years. Noticing that this was a change in accounting method for the said fees as adopted by the assessee in earlier years, when the entire amount was returned to tax in the year of accrual, and not agreeing with this change in method of accounting, he treated the entire project development fees received/ earned by the assessee during the impugned year as income of the assessee.
• Further, he noted that the assessee had deposited the surplus amount of grants received by it from Government with Gujarat State Financial Services (GSFS) and had earned interest on it which also was not returned to tax but treated as current liability, as part of the grants received from the Government. The AO held the same to be taxable as income from other sources, and accordingly taxed the entire interest received by the assessee from the GSFS as income of the assessee.
• The AO further noted that the assessee had incurred expenses for projects undertaken against which no income had been offered. Further, taking note of the fact that, even grants received from the government were not routed through the profit & loss account, he held that when the income is not routed through P&L account, therefore there was no question of allowing claim of expenses to the assessee. Accordingly, he disallowed all expenses relating to the projects for which no income was offered.

Accordingly, he made addition to the tune of Rs.86,64,75,122/- to the returned income of the assessee of Rs.3,00,86,385/- as under:

4. The assessee went in appeal against the order passed by the AO to the ld.CIT(A) who deleted all the additions made by the AO except that relating to the interest on deposits with GSFS and a part of expenses of project for which no income was offered. Accordingly, the appeal filed by the assessee was partly allowed by the ld.CIT(A). Aggrieved by the same, both the Revenue and the assessee have come up in appeal before us.

5. We shall first deal with the appeal of the Revenue in ITA No.136/Ahd/2014.

6. Ground nos.1 & 2, it was common ground, related to the issue of project developments fees earned by the assessee which it had apportioned over the period of the project, but the AO had treated it as taxable in entirety in the year of receipt i.e. impugned year, and the ld.CIT(A), however, had upheld the claim of the assessee. The said grounds read as under:

“1. The learned CIT(Appeals) has erred in law and on facts in deleting the addition made by the AO on account of project management fees of Rs.41,12,03,380/- received by the assessee.

2. The Id. CIT(A) has erred in not considering the argument of the AO in as much as the entire TDS has been claimed while the corresponding income has not been offered by ignoring the mandatory provisions of Section 199 read with Rule 37BA(3).

7. The facts relating to the issue are that the assessee-company had received project development fees of Rs.51.97 crores from three agreements, but had offered only Rs. 10.85 Crs. to be specific, Rs.10,85,58,620/-, to tax in the impugned year. The details of the same are as under:

8. The assessee had apportioned the project development fees of Rs.51.97 crores over the entire period of the projects, as mentioned in the concessionaire’s agreement i.e. 30 months, and had accordingly offered only Rs.10.85 crores to tax during the impugned year. The balance was been offered to tax in the subsequent years.

9. The ld.DR contended before us that the AO had rightly taxed the entire amount of project development fees in the impugned year since, the project development fees at the rate 2% of the total project costs were agreed to be paid within 15 days from the appointed date of the agreement entered into with concessionaires and thus were received during the impugned year itself as per the agreement; that accordingly income had accrued and was received immediately on signing of the agreement, and therefore, as per the mercantile method, it was all taxable in the impugned year itself, and there was no occasion to tax the same over the period of projects, as done by the assessee. He drew our attention to the finding of the AO to the effect that the assessee had changed its accounting policy in the impugned year itself, while in the earlier years it was taxing the project development fees in the year of receipt only. He also pointed out that entire TDS had been deducted and claimed by the assessee in the impugned year. Therefore, he pointed out that the ld.CIT(A) had erred in holding that the assessee had rightly apportioned the project development fees over the period of projects.

10. The ld.counsel for the assessee, on the other hand, relied on order of the ld.CIT(A), pointing out that the ld.CIT(A) had rightly appreciated the contentions of the assessee that the project development fees were received for services to be rendered by the assessee over the period of projects by way of cutting off trees, shifting of electric lines, underground pipelines, telephone lines, electric cables and towers etc. so as to ensure smooth construction of roads by the concessionaire, and since all the activities could not be achieved in the same year, therefore, the assessee had rightly apportioned the same over the period of projects. He drew our attention to the finding of the ld.CIT(A) in this regard at para 5.1 of his order as under:

“5.1 The appellant company has received Project development fee of Rs.51.97 crores from 3 agreements as under:

The appellant company has offered Rs.10,85,58,620/- (out of 51.97 crores) during the year under consideration for taxation. It has amortized the total amount of Rs.51.97 crores over the entire period as mentioned in the concessionaire agreement i.e. 30 months. The appellant company has offered for taxation the balance amount of the proceeds received in subsequent years viz. AYs 2011-12 and 2012-13. In this respect, accounting policy following by the appellant is as per Sch.l4-Significant Accounting Policies. The appellant has submitted that it has consistently followed the accounting policy. Further the appellant has to incur expenses in the nature of cutting of trees , shifting of electric lines , underground pipelines, telephone line, electric cables and towers etc over this period to ensure smooth construction of roads by the concessionaire. This cannot be achieved by the appellant in the same year. The appellant shall be incurring these expenses slowly and gradually as the work progresses and in a phased manner. “Therefore the proceeds received cannot be characterized as income in the same year itself. The appellant has correctly amortized it over the period of the concessionaire. Considering the above facts I am inclined to agree with the appellant’s submissions. Accordingly the addition made by the AO is directed to be deleted i.e. income is to be amortized over the period of 30 months.

11. He further contended that since the remaining amount had been offered to tax in the subsequent years, there was no reason now to tax the same in the impugned year, and for the same he relied on the decision of Hon’ble Apex Court in the case of Excel Industries, 358 ITR 295 9SC).

12. We have heard the rival contentions and have also gone through the orders of the authorities below. The issue to be adjudicated is, whether the assessee had rightly apportioned the project development fees received by it over the period of projects, or it was to be taxed in the year of receipt only, as done by the AO. The contention of the assessee that this project development projects was to be utilized by the assessee in lieu of services to be rendered by the assessee to the concessionaire for smooth conduct of their work by way of cutting trees, shifting of electric lines/poles etc. has not been controverted by the Revenue. Further, the assessee has placed before us copies of the concessionaire agreement entered into between the assessee and one M/s.Khurana Infrastructure & Toll Road Pvt. Ltd., drawing our attention therefrom to the fact that the by virtue of the agreement certain services were the responsibility of the assessee including shifting of services and utilities; clearance for cutting trees and transportation. Therefore, the fact that the assessee was required to render services for smooth conduct of the contract work is not denied. In the light of the same, we are in agreement with the ld.CIT(A) that since the contract work could not be completed within the year, the services to be rendered by the assessee would automatically spill over to the succeeding years of contract period. Therefore, the project development fee received by the assessee for the same, we hold, has been rightly apportioned over the period of the respective projects.

13. Even otherwise, we are in agreement with the ld.counsel for the assessee that since the project development fees apportioned to the subsequent year has also been returned to tax by the assessee in the said years, the department in any case has not been deprived of any tax. The decision of the Hon’ble apex court in the case of Excel Industries (supra), referred to by the Ld.Counsel for the assessee before us, squarely applies in such circumstances requiring no addition to be made where the question merely relates to year in which income is to be subjected to tax and the Revenue has not been deprived due taxes on the said income .

14. In view of the above, we see no reason to interfere in the order of the ld.CIT(A) deleting the addition made of Rs. 41,12,03,380/- on account of taxing the entire project development fees received by the assessee during the impugned year itself.

15. We may add here that since the Revenue has pleaded that the assessee has claimed benefit of TDS on the entire amount of project development fees received during the year, though the same has not been returned to tax in entirety during the year, we direct the AO to grant benefit of TDS in accordance with law.

Ground no.1 and 2 raised by the Revenue are accordingly dismissed.

16. Ground no.3 & 4 raised by the Revenue relate to the issue of expenses incurred by the assessee for which no income was found to be offered, and which accordingly was disallowed by the AO, amounting to Rs.2,10,53,596/-. However, the said addition made by the AO was deleted by the ld.CIT(A). The said grounds read as under:

3. The learned CIT(Appeals) has erred in law and on facts in deleting the addition of Rs.2,10,53,5967- out of Rs.3,46,71,427/- towards expenses claimed for which no income is offered.

4. The CIT(A) has erred in law and facts in deleting the disallowance of expenses of ROB projects (ROB Chhayapuri, Umreth ROB and Savli ROB) even though the corresponding income has not been offered.

5. On the facts and circumstances of the case the Ld.CIT(A) ought to have upheld the order of the Assessing Officer.

17. The details of the projects for which expenses were so claimed

18. The ld.DR contended that the assessee had given no cogent reply for claiming only expenses relating to the said projects and offering no income for the same .He contended that even grants received by the assessee from the Government was not routed through the profit & loss account but was reflected as current liability in its balance sheet . He therefore contended that this claim of expenses of the assessee without corresponding disclosure of income against the same was not in accordance with law, and addition was rightly disallowed by the AO. In this regard he heavily relied on the order of the AO.

19. The ld.counsel for the assessee, on the other hand, contended that it had been explained to the AO that the assessee was not receiving grants from the Government for all projects, and in some cases in the absence of any grants received from the government, the expenses were to be borne by the assessee itself, and that is why the claim of expenses in the case of the impugned projects. He further drew our attention to the explanation given to the ld.CIT(A) which was appreciated by the ld.CIT(A) also that in respect of railway over-bridge, i.e. ROB, the same was a small assignment to the assessee and has been undertaken to benefit the public at large and no grant was given by the Government for the same. The assessee, he stated, had to undertake the project for the welfare and benefit of the public at large. The ld.counsel for the assessee contended that it is not necessary that, against every incurrence of expenses there has to be commensurate income accruing to the assessee. He contended that the only condition to be fulfilled was that the expenses ought to have been incurred wholly and exclusively for the purpose of business, for qualifying as eligible business expenses as per section 37(1) of the Act. And that as long as the said conditions were met, the claim could not be denied for the reason that no income had accrued to the assessee against the expenses incurred. He heavily supported the order of the ld.CIT(A).

20. Further, with respect to the Rajkot-Jamanagar project, he drew our attention to the finding of the ld.CIT(A) to the effect that the assessee company had offered income with respect to this, which fact was brought to the notice of the AO also during assessment proceedings. Our attention was drawn to the finding of the ld.CIT(A) at page no.16 of the order deleting the addition of Rs.1.1 crores holding as under:

“In respect of the Rajkot Jamnagar project the appellant company has offered income as well as claimed expenses. This has also been reproduced by the AO in the body of the assessment order (refer page 2 of he order). Therefore, the action of the assessing officer in respect of Rajkot- Jamnagar Project is uncalled for and should be deleted. He is directed to delete the addition of Rajkot-Jamnagar project.

The appellant has stated that in respect of the Railway Over bridge projects they were solely assigned to it and therefore they have been undertaken for the benefit of the public at large. Those expenses were only for welfare and benefit of public at large. The appellant being a government of Gujarat undertaking has to incur such expenses. It is not disputed by the AO that the appellant company is not in the business of development of road and road related projects. At this juncture it would be relevant to rely upon the decision of the Apex court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co.( 89 Taxman 92) which is reproduced hereunder:

“The principles for determining whether the payment of the kind made by assessee could be regarded as a business expense are well-settled. What is to be seen is not whether it was compulsory for the assessee to make the payment or not but the correct test is that of commercial expediency. As long as the payment which is made is for the purposes of the business, and the payment made is not by way of penalty for infraction of any Jaw, the same would be allowable as a deduction. The contribution which was made by the assessee could under no circumstances be regarded as illegal payments or payments which were opposed to public policy. This was not a case where the assessee was paying any bribe to any person nor is this a case where money was being contributed to any private fund or for the benefit of any individual which could be regarded as a form of illegal gratification. By a voluntary scheme, with which the District Collector was associated, the District Welfare Fund had been established for the benefit of the general public. The payment to such a fund which was openly made by all the millers and which fund was being used for public benefit could not be regarded as being opposed to public policy. Requiring payment to be. made for a just cause which would f.’-.;:. -.. entitle a businessman to obtain a licence or permit cannot he regarded as being against ‘S’-vthe public policy. Any contribution made by an assessee to a public welfare fund which is directly, connected or related with the carrying on of the assessee’s business or which results in the benefit to the assessee’s business has to be regarded as an allowable deduction under section 37(1). Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister’s Drought Relief Fund or a District Welfare Fund established by the District Collector or any other Fund for the benefit of the public and with a view to secure benefit to the assessee’s business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) when such payment had been made for the purpose of assessee’s business. Therefore, the payment made by the assessee in the instant case was allowable as deduction”

Respectfully following the ratio laid down by the Hon’ble Apex court in the above case, the above addition in respect of railway over bridge is directed to be deleted.

31. We have heard both the parties and have carefully gone through the authorities below. The issue before us relates to the allowance of claim of expenses with respect to certain projects against which no income was allegedly booked by the assessee. The amount concerned being Rs. 2,10,53,596/- And the project wise details are reproduced above.

22. Firstly, we are in agreement with the ld.counsel of the assessee that for the allowance of claim of expenditure, the only requirement to be fulfilled as per the law is that it should have been incurred wholly and exclusively for the purpose of business of the assessee, i.e it should satisfy the test of commercial expediency. Section 37(1) of the Act clearly stipulates the same as the only condition to be fulfilled for claiming expenses while computing the income from business. There is no dispute vis-à-vis the same nor did the ld.DR state anything to contradict this position of the law, when pointed out by the ld.counsel for the assessee before us.

23. In the facts and circumstances of the case, it is not the case of the Revenue that these expenses have not been incurred wholly and exclusively for the purpose of business of the assessee. In fact admittedly these expenses relate to road and bridge construction which is the main object for which the assessee company has been incorporated and even as per the AO/CIT(A) these expenses relate to projects undertaken by the assessee. In the light of this fact alone, there is no case for disallowing the impugned expenses when admittedly they have been incurred wholly and exclusively for the purpose of carrying out the business of the assessee. The case of the Revenue being that no income has been booked against the same, then the logical course of action was to determine whether the assessee failed to book income against the same or has not treated a particular receipt as income .The entire effort of the Revenue ought to have been to bring the concerned income to tax. In the absence of the same, the Revenue could not have been gone on to disallow the expenses incurred by the assessee, which otherwise admittedly were incurred wholly and exclusively for the purpose of business. For this reason alone, we agree with the ld.counsel for the assessee that the disallowance made by the AO was rightly deleted by the ld.CIT(A).

24. Even otherwise on facts, we find that the ld.CIT(A) has noted, that with respect to the Rajkot-Jamnagar project, the assessee had booked income also. This fact has not been controverted by the Revenue before us. Therefore, the very basis with the AO for disallowing the expenses incurred in relation to Rajkot-Jamnagar project does not survive, and the ld.CIT(A), therefore, we hold, has rightly deleted the disallowance of expenses relating to this project.

25. Vis-à-vis the railway over-bridge(ROB) projects, the ld.CIT(A), we hold, rightly appreciated the contentions of the assessee that this work was carried out by the assessee for the benefit of the public at large without any assistance from the Government by way of grants. The Revenue has not controverted this contention of the assessee that it carried out these projects without any assistance by way of grants from the Government or without any remuneration for the same. And as has been held by us above, the absence of any income against any expenditure incurred, would not invalidate the claim of expenditure, which otherwise has been undisputedly incurred wholly and exclusively for the purpose of business of the assessee.

26. In view of the same, we see no reason to interfere in the order of the ld.CIT(A) deleting the disallowance of expenses incurred on projects amounting to Rs.2,10,53,596/-.

Ground no.3 & 4 raised by the Revenue are therefore dismissed.

27 The Revenue has raised the following additional ground before us vide letter dated 6.7.2018 :

“1. The ld.CIT(A) has erred in law and on facts in deleting the addition made by the AO on account of unutilized grant of Rs.39,51,15,000/-“

28. The ld.AR had no objection to the admission of the same. However, at the same time, he pointed out that the issue had been rightly decided in favour of the assessee by the ld.CIT(A) being covered by the decision of the ITAT in the case of the assessee itself in the preceding year i.e. Asst.Year 2008-09. Copy of the order of the ITAT was placed before us at PB Page No.105 to 110.

29. The ld.DR, however, relied on the order of the AO.

30. Brief facts relating to the issue are that the assessee received grants from the government for carrying out its infrastructure projects including roads. During the assessment proceedings, the AO noted from the balance sheet of the assessee in the impugned year that out of the grants received during the impugned year, an amount to the extent of Rs.39,51,15,000/- had remained unutilized. The assessee had shown this as current liability in its balance sheet while the AO held that this was to be treated as income of the assessee. The reasoning of the AO being that, sanction letter giving grants to the assessee did not specify the kind of activities to be carried out by the assessee for utilization of the grants it received and the AO inferred from the same that the grants were in the nature of receipts in the hands of the assessee, and applying the proposition laid down by the Hon’ble Apex Court in the case of Sahny Steel & Press Works Ltd. Vs. CIT, 228 ITR 253 held that unspent grant to the tune of Rs.39,51,15,000/- was to be treated as income of the assessee.

31. We have noted that the identical issue had come up before the ITAT in the case of the assessee itself in Asst. Year 2008-09 wherein , following the order passed by the ITAT in the case of Gujarat Safai Kamdar Vikas Nigam Vs. ACIT, ITA No.3232/Ahd/2008 dated 17.4.2009 and Gujarat State Disaster Management Vs. ACIT in ITA No.949/Ahd/2009 dated 5.6.2009, the ITAT held that the said unspent grant could not be treated as income of the assessee. The ITAT noted that in the said decision also the unspent grant, treated as income of the assessee by the AO, was rejected by the ITAT noting that the assessee was a mere nodal agency to implement certain schemes of the Government of Gujarat and the unspent grant remained property of the Government and had to be returned to the Government as and when demanded; that therefore, there was no question of treating the grant as income of the assessee.

32. In view of the same, since the issue stands decided in favour of the assessee in earlier years by the ITAT, we see no reason to interfere in order of the ld.CIT(A), deleting the addition made on account of unspent grant to the tune of Rs.39,51,15,000/-.

33. The additional ground raised by the Revenue is therefore dismissed.

34. In effect appeal of the Revenue is dismissed.

35. We now take up the assessee’s appeal in ITA No.191/Ahd/2014.

36. Ground no.1 raised by the assessee is as under:

“i. The Ld. CIT(A) has erred in law and on facts in confirming addition of Rs.25485315 being interest on deposit from GSFS.

It is respectfully submitted that the funds are being parked in GSFS under the directives of Govt. of Gujarat. It is further submitted that the Id. CITA) failed to appreciate the fact that in the year under appeal Appellant received advice from C&AG not to book the int. as income and treat it as liability or use it as part of grant as per the object incidental to attainment of main object of Memorandum of Association.

It is further submitted that Id. CIT(A) ought to have referred to the decision of Hon. ITAT Ahmedabad Bench in the case of Gujarat State Disaster Management Authority v/s. ACIT Gandhinagar Circle, Gandhinagar (ITA No. 949/Ahd/2009, order dated 05/06/2006). The Hon. Tribunal clearly held that int. can not be assessed as the assessee’s income.

It is further submitted that Id. CIT(A) ought to have referred to the following decisions cited before him and argued.

CIT Vs. Karnataka Urban – Infrastructure Development & Finance Corporation 284 ITR 58 (Karn)

CIT vs. Delhi State Industrial Development 162 Taxman 275 (Del).”

37. As is evident from the above, the assessee is aggrieved by the order of the ld.CIT(A) in upholding the action of the AO in treating the interest earned by it on deposits made with Gujarat State Financial services ,amounting to Rs.2,54,85,315/-, as its income from other sources. This interest had been earned by the assessee on the surplus grants received by it from the State Government, which as per the directives of the State Government itself, it was required to park with GSFS. The contention of the ld.counsel for the assessee before us was that the interest which was earned on the surplus grants partook the character of grants itself; was asset of the State Government and not the assessee, and in any case was not free funds available with the assessee so as to acquire by any way the character of income in the hands of the assessee. In this regard, he placed reliance on the decision of Hon’ble Gujarat High Court in the case of Gujarat Municipal Finance Board Vs. DCIT, 221 ITR 317 and our attention as drawn to the relevant portion of the order as under:

Held, allowing the petition that the Board was not established to carry on trade or business and it was not established for one particular facet of development but looking to the Twelfth Schedule of the Constitution and Article 243W, the board acted for the State and on behalf of the State. The State Government had directed the Board to treat the interest as part of its grants-in-aid. Hence, even if there was a receipt, in view of the principles of diversion, this would not amount to income of the Board and therefore, the same was not taxable.”

38. Reliance was also placed on the decision of the Hon’ble Gujarat High Court in the case of SAR Infracon P. Ltd., 42 com 405 holding that interest earned on Central Government grants which were released, could not be taxed as income of the assessee, if conditions stipulate that interest so earned would form part of Central Government grant.

39. The ld.DR however relied on the order of the ld.CIT(A).

40. We have heard the rival contentions and gone through the orders of authorities below. We have noted that the Hon’ble jurisdictional High Court in decisions referred to by the ld.counsel for the assessee before us, in the case of SAR Infracon P.Ltd. (supra) and in the case of Gujarat Municipal Finance Board (supra) has categorically held that the grants given by the State Governments stipulating deposits of the surplus grants in a particular mode and interest earned thereon ,also treated as part of the grants, the same could not be treated as income of the assessee. In the present case, the assessee has deposited surplus grants admittedly as per the directions of the State Government with GSFS and earned interest income amounting to Rs.2,54,85,315/-.

41. We have gone through the Memorandum and Articles of Association of the assessee-company, which was filed before us at PB Page No.117 to 159 and we find that clause 13A categorically states that surplus received by the assessee from the State Government have to be deposited as per the direction of the State Government and the company cannot make any profits out of this. The relevant clause 13A of the Memorandum is reproduced as under:

42. It is evident from the above that the interest earned on surplus funds, was not freely available to the assessee so as to utilize it in the manner it desired and make profits out of it.

43. In view of the same, 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.

44. 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.

Ground no.1 of the assesses appeal is allowed.

45. Ground No.2 reads as under:

“ii) The Ld. CIT(A) has further erred in not allowing full deduction of Rs.34671427/- In respect of exps. incurred for the purpose of business. The Id. AO had taken the view that these are the exps. On projects for which no income is offered out of which the Id. CIT(A) allowed the deduction of exps. Of Rs.21053596/-. It is submitted that the Id. CIT(A) ought to have held that when the exps. are incurred for the purpose of business it is not necessary that the expenditure must have result into income. No where the Id. AO nor Id. CIT(A) has held that the expenditure are not incurred for the purpose of business. And hence, it is respectfully submitted that the expenditure incurred for the purpose of project should have been allowed as deduction, as the expenditure is incurred for the purpose of business.”

46. The issue relates to the expenses incurred on projects against which no income was earned by the assessee. The ld.CIT(A) had upheld the disallowance to the tune of Rs.1.36 crores which related to the expenses incurred by the assessee on Bhuj-Nakhatrana Project and reasoning with the ld.CIT(A) was that there was no reason as to why the assessee would incur expenses without any commensurate income against the same earned.

47. We have already dealt with this aspect in the Revenue’s appeal in ITA No.136/Ahd/2014 above at ground nos.3 & 4, wherein we have held that, as long as fact that the expenses were incurred wholly and exclusively for the purpose of business of the assessee is not disputed, the claim of the assessee cannot be denied for the reason that no income was earned against the same.

48. We have dealt with this aspect elaborately in ground no.3 & 4 of the Revenue’s appeal and therefore, following the reasoning laid down therein, we hold that the disallowance of expenditure incurred on Bhuj-Nakhatrana amounting to Rs.1.36 crores was not in accordance with law. We, therefore, direct deletion of the same.

49. Ground No.2 raised by the assessee is allowed.

50. In effect the appeal of the assessee is allowed

51. In the result, the appeal of the Revenue is dismissed, while that of the assessee is allowed.

Order pronounced in the Court on 10t^h July, 2023 at Ahmedabad.