Diversion of income by overriding title failed where liquor trade receipts accrued first and were later remitted to the Government.

A statutory corporation engaged in liquor trading remained taxable on income accrued in its own hands because the amounts described as privilege fee, special privilege fee and special privilege fee for sports were realised from sales and remitted only afterwards to the Government. The absence of a clear statutory mechanism diverting income before accrual meant the claim of diversion by overriding title failed, and Article 289 did not exempt the receipts. The issue of disallowance of provision for leave encashment and pension contribution was not examined on merits and was sent back for fresh consideration after hearing the assessee.

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Issues: (i) whether the amounts described as privilege fee, special privilege fee and special privilege fee for sports paid to the State Government were deductible business expenditure or were only application of income, and whether such receipts were immune from tax under Article 289 of the Constitution of India; (ii) whether the disallowance of the provision for leave encashment and pension contribution should be sustained or examined afresh.

Issue (i): whether the amounts described as privilege fee, special privilege fee and special privilege fee for sports paid to the State Government were deductible business expenditure or were only application of income, and whether such receipts were immune from tax under Article 289 of the Constitution of India.

Analysis: The statutory scheme showed that the assessee corporation was a distinct corporate entity carrying on trading activity in liquor in its own name. The amended excise provisions and the Government orders did not establish that the corporation's income itself was the income of the State. The amounts were realised from sales, accrued to the assessee, and were thereafter remitted to the Government. The absence of a specific statutory mechanism for quantifying the alleged privilege fee and the manner in which the amounts were worked out as a balancing figure showed that the remittance was made after accrual of income. On these facts, the claim of diversion of income by overriding title failed, and Article 289 did not exempt the income from taxation at the hands of the assessee.

Conclusion: The privilege fee and allied payments were not deductible as diversion at source or as immune State income, and were treated as application of income in the hands of the assessee, against the assessee.

Issue (ii): whether the disallowance of the provision for leave encashment and pension contribution should be sustained or examined afresh.

Analysis: The issue had not been examined on merits by the first appellate authority, and the Assessing Officer had disallowed the amount without proper consideration of the assessee's explanation. The matter required fresh examination after affording an opportunity of hearing.

Conclusion: The issue was remanded to the Assessing Officer for fresh consideration, in favour of the assessee to that limited extent.

Final Conclusion: The substantive challenge to the taxability of the privilege fee payments failed, while the issue relating to leave encashment and pension contribution was restored for fresh adjudication; the common order therefore granted only limited relief.

Ratio Decidendi: A statutory corporation's income remains taxable in its own hands unless the statute clearly divests that income before accrual; a later remittance of surplus to the Government is application of income and not diversion by overriding title.

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