Statutory diversion at source excluded a compulsory storage-fund amount from income, and the section 40A(5) deletion was upheld.

A statutory amount compulsorily earmarked from the sale price for a storage fund under the Ethyl Alcohol (Price Control) Amendment Order, 1971 was held not to form part of taxable income, because the assessee had no unfettered dominion over the sum and the amount was diverted at source for a specific statutory purpose. The deletion of the disallowance under section 40A(5) of the Income-tax Act, 1961 was also upheld, as the issue was governed by prior binding decisions of the same court. The reference was therefore disposed of in favour of the assessee on both questions.

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Issues: (i) Whether the amount of Rs. 43,633 transferred to the storage fund for molasses and alcohol account under the Ethyl Alcohol (Price Control) Amendment Order, 1971, formed part of the assessee's income for the relevant assessment year. (ii) Whether the disallowance of Rs. 16,041 under section 40A(5) of the Income-tax Act, 1961, was rightly deleted.

Issue (i): Whether the amount of Rs. 43,633 transferred to the storage fund for molasses and alcohol account under the Ethyl Alcohol (Price Control) Amendment Order, 1971, formed part of the assessee's income for the relevant assessment year.

Analysis: The price of rectified spirit was statutorily fixed and a specified portion was compulsorily set apart for a storage fund. The amount was not freely available to the assessee, was subject to statutory control, and could be utilised only for construction or erection of storage facilities in the manner directed by the authorities. The decisive consideration was not the ownership of the fund but the existence of a statutory diversion at source and the assessee's loss of domain over the amount.

Conclusion: The amount of Rs. 43,633 did not form part of the assessee's income and the issue is answered in favour of the assessee.

Issue (ii): Whether the disallowance of Rs. 16,041 under section 40A(5) of the Income-tax Act, 1961, was rightly deleted.

Analysis: The issue was covered by earlier binding decisions of the same court relied upon by both sides, and the accepted position was that the deletion could not be disturbed.

Conclusion: The deletion of the disallowance of Rs. 16,041 was upheld and the issue is answered in favour of the assessee.

Final Conclusion: The reference was disposed of with both questions answered in favour of the assessee, and the principal income-tax addition relating to the storage fund was excluded from taxable income on the basis of statutory diversion at source.

Ratio Decidendi: Where a statute compulsorily earmarks a fixed part of the sale price for a specific fund and the assessee has no unfettered dominion over that amount, the sum is diverted at source and does not constitute real income for income-tax purposes.

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