Commissioner of Income Tax vs Punjab Energy Development Agency

Adarsh Kumar Goel, J.—Delay in refiling is condoned. Heard on merits.

Revenue has preferred this appeal u/s 260A of the Income Tax Act, 1961 (for short, "the Act"), proposing to raise three questions of law, but learned Counsel for the revenue presses only question No. 3, which is as under:

Whether on the facts and circumstances of the case and in law, the Hon''ble ITAT was correct in sending back the issue of taxability of interest income back to the file of the Assessing Officer without appreciating the fact that the assessee has failed to prove that the interest was earned from a property held under a trust or a legal obligation?

It is fairly stated that other questions relate to findings of fact and are, thus, not substantial questions of law.

The assessee is a public sector undertaking and received grants from Central and State Governments for its various projects. On the grants of Governments received, it earned interest income. It claimed deduction on the said income u/s 11(1)(a) of the Act, which was not allowed by the Assessing Officer. However, the CIT(A) upheld the claim of the assessee. The Tribunal remanded the matter to examine whether there was co-relation between schemes and the amounts spent.

Learned Counsel for the revenue submits that the interest income was not derived from the property held under the Trust for charitable religious purposes.

Though learned Counsel refers to judgments in Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, ; Commissioner of Income Tax, Karnataka Vs. Sterling Foods, Mangalore, ; Hindustan Lever Ltd. Vs. Commissioner of Income Tax, ; Commissioner of Income Tax Vs. Cement Distributors Ltd., ; Commissioner of Income Tax Vs. Pandian Chemicals Ltd., ; Nanji Topanbhai and Co. Vs. Assistant Commissioner of Income Tax and Others, and Commissioner of Income Tax Vs. K.K. Doshi and Co., her main reliance is on judgment of the Madras High Court in Pandian Chemicals Ltd. (supra), which dealt with the expression income "derived" from the interest for claiming benefit u/s 80HH of the Act, which is permissible in respect of income derived from new undertaking. It was held that the interest income was not income derived from new undertaking.

We are unable to hold that interest income "derived from" amount of grants is not income "derived from" property held in Trust for charitable purposes within the scope of the said expression in Section 11(1)(a). None of the judgments relied upon is in the contact of Section 11. Qualification for attracting Section 11(1)(a) is that income should be derived from property held in Trust for charitable purpose. The CIT(A) as well as the Tribunal held that interest income from grants was fully covered u/s 11(1)(a). In Assistant Commissioner of Income Tax Vs. Thanthi Trust, it was held that income from incidental business was also covered u/s 11(1)(a).

Even if test of income directly arising from property of Trust is applied, interest directly accrues on funds of the Trust. In Commissioner of Income Tax, Bombay City III Vs. Pruthivi Trust, it was observed:

In order to ascertain the scope and ambit of the expression "income derived from property held under trust" reference can be held to the decision of this Court in J.K. Trust v. CIT (1955) 23 ITR 143. In this case, the High Court has held that in order to claim exemption it is not sufficient that the property is indirectly responsible for the income. The income must directly and substantially arise from the property held under trust. For arriving at this conclusion this Court referred to the decision of their Lordships of the Privy Council in CIT v. Kamakhya Narayan Singh (1948) 16 ITR 325 where the definition of the expression has been given of the word "derived". At page 151 (of 23 ITR) this Court pointed out:

Reference might also be usefully made to the definition of the expression ''derived'' given by the Privy Council in Commissioner of Income Tax v. Kamakhya Narayan Singh (1948) 16 ITR 325. It is true that their Lordships were there considering the question of agricultural income, but the interpretation placed upon the expression ''derived'' by their Lordships is not without assistance for interpreting the same expression in Section 4(3)(i). The expression used in this section is ''any income derived from property held under trust'', and to put upon it the interpretation put by the Privy Council, the property must be the effective source from which the income arises. It is not sufficient that the property should be indirectly responsible for the income. The income must directly and substantially arise from the property held under trust....

Even on above test, interest income will fall u/s 11(1) (a).

The judgments relied upon relate to cases where benefit is permissible on account of special nature of the income and income derived from source other than the specified source does not quality for exemption. In case of income of charitable institutions, the said consideration is not relevant. The scheme of Section 11 is not to include income derived from the property of the Trust in total income. This being the position, interest income from property of the Trust clearly falls u/s 11 of the Act.

Same will be position with regard to income from sale of solar cooker and other equipments developed by the Energy Development Agency.

We, thus, do not find that any substantial question of law arises for consideration.

The appeal is dismissed.