Kumar has returned the Rs 5 crore lying unspent in the CM's relief account that was received from Gujarat after floods devastated large parts of the Kosi river belt in 2008, officials said on Saturday.
The move comes after local papers last week carried advertisements about the help given by the Gujarat government for Kosi flood victims.
Kumar had criticised the Gujarat government's claim that it had liberally donated aid to Bihar during the 2008 Kosi floods, calling it "uncivilised".
The Bihar Chief Minister had also taken strong exception to the use of a photograph with Modi in another advertisement published in local dailies and had even threatened to take legal action against those responsible.
"The Gujarat government's claim (on flood relief) is uncivilised and against Indian culture. Nobody claims of bestowing favours on those who face tragedy caused by natural calamities," Kumar, who heads the JD(U)-BJP government in Bihar, had said.
"We don't appreciate the fact that someone like honourable Chief Minister Narendra Modi coming and taking credit for that after two years (of giving money for Kosi victims). So we thought why not bring it back to square one and return the money," Dinesh Thakur, Disaster Management Minister, Bihar, said.
Asked if the decision would affect the relationship between JD(U) and the BJP), he said, "As of now I don't think there is any problem. That was a localised and on the spot problem that had cropped up. I think we are running the government so far so good. I don't think there is any problem as of now".
Thakur said the JD(U) did not want to spoil its secular image. "Inspite of being with the BJP right or wrong, BJP does not have a non-secular image in the country. We are not going to debate the merits of that....We have maintained our secular image and the government's secular image and we have a done a lot of things for the welfare of the minorities in the last five year. We don't want this to be upset by someone whose secular image is tainted. We don't want them to come this last minute and upset this image we have created in the last five years," Thakur said.
The JD(U) leader, who has an eye on Muslim votes, has fashioned himself as a secular leader and in the past had avoided sharing any platform with Modi in Bihar.
The decision to return the money comes at a time when the parties are preparing for the Assembly elections in the state due later this year. Kumar has kept Modi at an arm's length apparently to woo Muslim voters.
He had specifically asked the BJP not to use Modi, who had received flak for the 2002 Gujarat riots, in its campaign in the state during the 2009 Lok Sabha polls.
JD(U) national spokesman Shivanand Tiwari said what Kumar has done was in conformity with his announcement on June 12.
"Please ask the BJP and its leaders," Tiwari said when asked whether the decision would impact the alliance.
Meanwhile, senior BJP minister Giriraj Singh said the return of the funds was "against Constitutional prestige".
"It reflects an uncultured decision not permitted in politics," he said. Singh said when Modi had expressed sympathy and commitment for the people of Bihar and had accepted with full humility the support his state had received at the time of the Surat quake from Bihar, the controversy over the issue should have ended there.
"It won't be proper on my part to speak about the alliance the BJP has with JD(U)," he said in a reply to a question whether it would further strain relations between the two NDA partners.