Expert Advisory Committee
ICAI-Expert Advisory Committee
Options:

1.30 Query:    

Treatment of interest accruing on short term deposits made with banks out of

Grants-in-aid received from Government of India.

 

1.An enterprise; under Ministry of Defence, Government of India, is registered as a society under Societies Registration Act, 1860, on 16.6.1984. The Defence Minister and the Finance Minister are President and Vice President, respectively, of the General Body and the Scientific Adviser to Raksha Manthri is the Chairman of the Governing Body. The society has been entrusted with Research & Development (R & D) of Light Combat Aircraft (LCA) and the Cabinet Committee for Political Affairs (CCPA) has approved the cost and liad down certain time frame to complete the task. It is a non-profit organisation.

 

2.  The society annually prepares Receipts and Payments Account, Income & Expenditure Account and Balance Sheet. As no trading is involved, there is no profit and loss account. Accounting is, by and large, on cash basis, except for interest on deposits with banks, Provident Fund accumulation etc. No depreciation is provided. Excess of expenditure over income (income which is of minor nature such as recoveries of house rent, transport charges etc.) is capitalised and transferred to Balance Sheet. In fact, there is no balance which is charged off in the Income and Expenditure Account and Receipts and Payments Account, unlike in the conventional profit and loss account. These annual accounts are audited by statutory auditors (chartered accountants)     nominated by the Comptroller & Auditor General of India (C & AG). C & AG also audits the expenditure accounts of the society though he is not required to certify the balance sheet/annual accounts. The annual report together with annual accounts shall be placed on the table of Lok/Rajya Sabha in the Parliament.

 

3. The society receives grants-in-aid from Govt. of India for financing the requirements of the Light Combat Aircraft project. Grants-in-aid is shown on the ‘Liability’ side of the Balance Sheet. The society has been exempted from paying Income-tax under Rule 6 of the Income-tax Rules, for the purpose of clause (ii) of sub-section (1) of Section 35 of Income-tax Act, 1961.

 

4. At times, there are temporary surpluses of funds received from Govt. owing to variation in expenditure vis-à-vis original plans. Such funds are sometimes placed in short term deposits with banks to generate additional resources which will supplement the grants-in-aid for funding the Light Combat Aircraft project.

 

5. According to the querist, interest generated out of funds given by the Government of India by way of Grants-in-aid to finance the Light Combat Aircraft project should also closely follow the treatment given to Grants-in-aid. The view of the querist is that such interest generated should be treated as a capital receipt and disclosed along with grants-in-aid under ‘Liability’ side of the Balance sheet, as a separate item designated “Interest earned on Grants-in-aid received from Government”.

 

6.  The querist has given another view that the interest so generated should be shown as a deduction in expenditure including on capital assets and developmental activities and should not be reflected at all in the Balance Sheet. In support of this, it is argued that interest earned has to pass through Income and Expenditure Account and once this happens, it goes to reduce the expenditure. Under this approach, the interest generated out of funds given by the Government of India is accounted as a revenue receipt, this will go to offset expenditure on various assets/developmental costs since expenditure will be understated to the extent such interest offsets the actual expenditure.

 

7.  The view of the querist is that interest earned on surplus Grants-in-aid invested in a fixed deposit should be treated as a capital receipt and shown along with Grants-in-aid. This can, if necessary, be stated explicitly in the accounting policies shown in the Notes to Balance Sheet. Otherwise, when actual expenditure is compared with the sanctioned cost, there will be mismatch since the net expenditure is understated to the extent of interest income treated as revenue income and deducted from expenditure. The querist also feels that it is appropriate to compare the gross expenditure with sanctioned cost instead of the net expenditure, i.e., after offsetting the interest income.

 

8. The querist also feels that its view is fully supported by the opinion given by the Expert Advisory Committee, The Institute of Chartered Accountants of India, New Delhi, vide Query No. 1.17 of Volume III of the Compendium of Opinions, which reads as under:

 

“Query 2 (iii):   Whether the interest accrued on such fixed deposits should be shown under the head ‘Current Assets’ as ‘Interest accrued on investments’ or ‘interest accrued on fixed deposit account’.

 

Opinion: The interest accrued on the Fixed Deposit Account may be included in the amount of the fixed deposit with an appropriate disclosure because the interest earned on the deposit is to be used either for granting loans to the specified Research Institutions or deposited in the fixed deposit account thereby increasing the Research and Development Fund.”

 

9. The querist has sought the opinion of the Expert Advisory Committee regarding treatment of interest accruing on short term deposits made with banks, out of grant-in-aid received from the Government of India.

 

                                                                          Opinion                                  February 7, 1996

 

1.  The Committee is of the view that the querist has not specified the terms of the agreement with the government regarding treatment of the interest received from government grants which are deposited as short term deposits with banks. If the agreement provides that interest accruing from short term deposits with banks from Government grants will only be used for the same purpose for which the grant is used, i.e., for financing the Light Combat Aircraft project, it should be added to that grant and accounted in the balance sheet, by routing it through the Income and Expenditure Account. If the agreement provides that the income received from short term loans deposited with banks could be used as a general income and not for the specific purpose of the grant then it should be shown as a revenue receipt. If the agreement is silent, then it is advisable that such income should be added to the ear-marked fund, by routing it through the Income and Expenditure Account.

 

2. Based on the above, the Committee is of the opinion that the treatment of interest accruing on short term deposits with banks out of grant-in-aid received from Government of India, would depend upon the terms of agreement as stated in para 1 above.

_____________________________