Interest earned on deposits made out of grant received from Govt. for specified purposes with certain restrictions as to usage of such funds and with a condition that such interest would form part of grant can’t be taxed in the hands of the assessee:

Assessee, a Special Purpose vehicle (SPV), is engaged in the development of SEZ, Diamond Trading Institution and other such    infrastructure to promote the diamond industry to a worldwide level. During the year under consideration, assessee received certain interest on FDR from a bank which was taxed by AO in the hands of the assessee. On appeal, the Hon’ble ITAT observed that the assessee has been promoted under Industrial Infrastructure Upgradation Scheme (IIUS) of Central Government for carrying out infrastructural development in the industrial cluster. Accordingly, the Central Govt. released certain grant and such funds could have been used only for the prescribed projects. Such projects couldn’t take off as the notification for declaring SEZ was not received from Central Govt. and there were no. of hitches in allotment of land and other Govt. approvals. Hence, the said funds were kept under Escrow accounts / FDRs with bank. The assessee neither had any entitlement over such funds nor had the authority to spend the same without the approval of the Govt. Further, it was also prescribed that interest earned on such grants already released by the Govt. shall also form part of the central grant limit. Hon’ble ITAT was of the view that the assessee was merely a custodian and Govt. had prohibited grant as well as interest from any use except for the prescribed purposes. In case such project is not materialised, the same has to be repaid to the respective agencies with interest. The assessee was holding interest income as trustee of the Govt. Hence, it was held that such interest income cannot be taxed in the hands of the assessee.