Interest on Govt. Grants Taxable as Income From Other Sources: Patna HC

Bihar Police Building Construction Corporation Pvt. Ltd. Vs PCIT (Patna High Court)

The Patna High Court dismissed a writ petition filed by Bihar Police Building Construction Corporation Pvt. Ltd., upholding an assessment order under Section 143(3) of the Income Tax Act. The corporation had challenged the inclusion of interest income earned from fixed deposits of unutilized government grants in its total taxable income. The grants were intended for the construction of buildings for the Police Department. The corporation argued that a government circular stipulated reducing future grants by the amount of interest earned on unutilized funds, thus the interest should not be considered taxable income under Section 56 of the Income Tax Act.

The High Court, while acknowledging the delayed challenge to the assessment order, chose to adjudicate the matter due to its pendency since 2022, rather than directing the corporation to pursue an appellate remedy. The court examined the corporation’s reliance on precedents like Commissioner of Income Tax, Bihar – II, Patna v. Bokaro Steel Ltd, Bokaro and NTPC Sail Power Company Private Limited v. Commissioner of Income Tax. These cases dealt with interest earned on borrowed funds used for business expansion or construction, where such interest was considered a capital receipt and not taxable income due to its inextricable link to the project.

The Patna High Court distinguished the present case from the cited precedents. It emphasized that the corporation was not constructing buildings for business purposes or expansion but rather as a state entity using government grants. The court clarified that the interest earned on these grants was not linked to setting up a business or reducing construction costs, unlike the interest on borrowed funds in the cited cases. Therefore, the court concluded that the interest income earned from the government grants constituted “income from other sources” under Section 56 of the Income Tax Act.

The court also addressed the corporation’s argument regarding the government circular. It held that the circular, governing the financial relationship between the government and the corporation, could not override the tax laws. The court stated that while the corporation could request the government to adjust future grants to account for taxes paid on the interest income, the circular itself did not exempt the interest income from taxation under the Income Tax Act. The court clarified that the principles established in Tuticorin Alkali Chemicals and Fertilizers Ltd., which dealt with pre-business interest income, were applicable to the present case, not the principles in Bokaro Steel Ltd., which concerned interest on borrowed funds for business projects. The court found no grounds to entertain the writ petition and accordingly dismissed it.

Read SC Judgment: SC: Govt. Grant Interest Taxable (SLP Dismissed)