'Income from unused welfare funds taxable'

MUMBAI: In a judgement that will have a bearing on the taxabilty of funds released by the Maharashtra state government for the welfare projects of its employees, such as housing schemes for its officers, the Income-tax Appellate Tribunal, Mumbai has held that the income generated by parking these funds with banks and FIs are liable to be taxed.
The ITAT bench consisting of A L Gehlot and G C Gupta, in an order last week, also held that such income will be classified as business income and not “income from other sources�.
Funds provided by the state government to welfare bodies for undertaking various projects, are deposited with banks or financial institutions. The unutilised portion of the funds generate interest income. It is this interest income, ITAT has held, which is liable to be taxed.
Rajesh Chaturvedi, senior partner of accounting firm Chaturvedi & Shah told ET: ``With this order of Mumbai ITAT, all the state welfare corporations will be taxed accordingly. Second, by classifying interest income generated through parking these funds as “business income� and not “income from other sources� is a relief to these corporations.�
T P Ostwal, senior tax consultant said “the ITAT order will be applicable to similar welfare projects in Maharashtra�.
The assessee, the Maharashtra State Police Housing and Welfare Corporation, approached the ITAT, after the department held that such income was taxable.
The corporation’s argument was that it is a public limited company authorised under its memorandum and articles of association to undertake construction of buildings for the housing of employees of the government of Maharashtra in the police and jail dept. The entire share capital of the assessee is owned by the state government. Hence, it argued, the activity of the assessee company is a state activity and not a trading activity. Thus it should not be taxed.
However, the department’s point of view was that the assessee is a company registered under the Company’s Act. The assessee thus cannot be construed to be part of the state. Also providing housing to the officers and employees of the police department is not a state activity. Hence these should be no exemption from taxation.
The ITAT accepted the point of view of the department.