Interest on securities transferred to a fund was not assessable to the original owner; tax credit claim also failed.

Interest earned on securities endorsed to the Accountant-General and forming part of the Excess Profits Fund was not assessable in the assessee's hands, because the assessee was neither legally nor beneficially entitled to the securities or the income during the relevant period. The later refund of the amount to the assessee did not change the character of the receipts. For tax credit under section 18(5) read with section 18(3), the assessee had to show that the Fund held the securities only as bare trustee and that the assessee had the relevant entitlement to the income; that basis was absent, so the credit claim also failed.

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Issues: (i) Whether the amount representing interest earned on securities transferred to the Accountant-General as part of the Excess Profits Fund was assessable in the hands of the assessee as interest on securities. (ii) Whether the assessee was entitled to credit for tax under section 18(5) read with section 18(3).

Issue (i): Whether the amount representing interest earned on securities transferred to the Accountant-General as part of the Excess Profits Fund was assessable in the hands of the assessee as interest on securities.

Analysis: The securities were endorsed in favour of the Accountant-General and formed part of the Fund. The interest was received by the Accountant-General on securities held and invested for the Fund. The fact that the amount was ultimately refunded to the assessee did not alter the character of the receipts or make the assessee the owner of the securities during the relevant period. The assessee was neither legally nor beneficially entitled to the interest.

Conclusion: The amount was not assessable in the hands of the assessee as interest on securities and the answer was against the assessee.

Issue (ii): Whether the assessee was entitled to credit for tax under section 18(5) read with section 18(3).

Analysis: The claim for credit depended on the assessee establishing that the securities were held by the Fund merely as bare trustees for the assessee and that the assessee had the relevant entitlement to the income. As the Fund owned and held the securities and the assessee had no legal or beneficial interest in them, the statutory basis for credit was absent.

Conclusion: The assessee was not entitled to credit under section 18(5) read with section 18(3), and the answer was against the assessee.

Final Conclusion: The reference was answered entirely against the assessee, and the connected motion failed.

Ratio Decidendi: Where securities are transferred to a fund and held in the fund's name, the interest earned on those securities is assessable in the hands of the owner of the securities and not in the hands of a person who is only ultimately refunded the proceeds.

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