The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that interest accrued on surplus funds received for implementation of the BharatNet Project cannot be treated as taxable income of the implementing agency when such interest is required to be added back to the project corpus under the governing Memorandum of Understanding (MoU).

The Bench of Shri Sanjay Garg (Judicial Member) and Narendra Prasad Sinha (Accountant Member) has observed that the interest earned on surplus project funds did not belong to the assessee in its own right. Instead, under the terms of the MoU with BBNL, such interest was mandatorily required to be added to the project corpus maintained for execution of the BharatNet Project.

The respondent/assessee was entrusted with the implementation of the BharatNet Project, a flagship telecommunications infrastructure initiative of the Government of India. The project was executed pursuant to a Memorandum of Understanding entered into between GFGNL and Bharat Broadband Network Limited (BBNL). Under the arrangement, project funds released by the Central Government were required to be maintained in a separate bank account dedicated exclusively to the project.

The Assessing Officer treated the interest earned on temporary surplus project funds placed in fixed deposits with public sector banks as taxable income under the head “Income from Other Sources.” For Assessment Year 2018-19 alone, an addition of ₹2.22 crore was made on this account. Similar additions were made in the other years under appeal.

On appeal, the Commissioner of Income Tax (Appeals) observed that the MoU expressly provided that any interest earned on the project funds would not belong to GFGNL but would automatically become part of the project corpus.

The appellate authority noted that the MoU required all project funds to be maintained in a separate account and further stipulated that surplus funds should be kept in fixed deposits with public sector banks, with the resulting interest being added back to the corpus of the project account. Consequently, GFGNL had no ownership rights over either the grant funds or the interest generated therefrom.

The CIT(A) also relied upon binding Gujarat High Court precedents, including decisions in Gujarat Municipal Finance Board v. DCIT and Gujarat Power Corporation Ltd. v. ITO, which held that interest earned on government grants is not taxable where the governing conditions require such interest to form part of the grant corpus itself. Based on these principles, the additions made by the Assessing Officer were deleted.

The Tribunal found no infirmity in the conclusions reached by the CIT(A). 

The Tribunal held that where the implementing agency merely acts as a custodian of grant funds and the interest generated thereon is earmarked exclusively for project purposes, such receipts cannot be regarded as taxable income in the hands of the agency.

The ITAT dismissed all three appeals filed by the Revenue for Assessment Years 2018-19, 2020-21 and 2021-22. The Tribunal thereby confirmed that the interest earned on surplus BharatNet project funds retained its character as part of the government grant corpus and was not liable to tax in the hands of assessee.

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