Overriding title on molasses sale proceeds kept the statutory fund transfer outside taxable income.

A statutory order fixed the sale price of molasses and required one-third of the price to be credited to a separate storage fund, kept in a separate bank account and used only as directed by the Government. Because the assessee had no unfettered right to treat that amount as its own, the sum was diverted at source by overriding title and never formed part of taxable income. The Karnataka High Court held that the transfer to the molasses storage fund was not taxable in the assessee's hands, and the Revenue's challenge failed.

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Issues: Whether the amount transferred to the molasses storage fund from the sale proceeds of molasses was deductible on the ground that it stood diverted by overriding title and, therefore, did not form part of the assessee's income.

Analysis: The sale price of molasses was fixed under the Molasses Control Order and a statutory mandate required one-third of the price to be credited to a separate fund, to be maintained in a separate bank account and utilised only as directed by the Government. The assessee had no unfettered right to appropriate that amount as its own income. The amount was diverted at the source itself by reason of the statutory obligation, on the same principle applied earlier in relation to contributions to the education fund under section 57 of the Co-operative Societies Act, 1957.

Conclusion: The amount transferred to the molasses storage fund did not constitute taxable income of the assessee. The question was answered in the affirmative and against the Revenue.

Final Conclusion: The statutory diversion of the sale proceeds prevented the disputed amount from being treated as the assessee's income, and the Revenue's challenge failed.

Ratio Decidendi: Where a statutory order diverts a specified part of sale proceeds before they can become the assessee's own income, the amount is excluded from taxable income as diversion by overriding title at source.

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