Assignment of fixed deposits shifts interest income away from the transferor company and to the shareholders or beneficiaries.
Fixed deposit receipts were treated as effectively assigned to shareholders where transfer documents, delivery of the receipts and intimation to the bank showed a clear intention to transfer the deposits, so the interest accrued on them was not assessable in the hands of the company in liquidation. Even if the transfer were not complete, the company had divested the beneficial interest and held the deposits only as trustee or conduit for the shareholders, so the interest belonged to the beneficiaries and was taxable, if at all, in their hands. The article thus states that effective assignment or beneficial earmarking of fixed deposits shifts the tax incidence away from the transferor company.
Issues: (i) Whether the fixed deposit receipts had been transferred to the shareholders so that the interest thereon was not assessable in the hands of the company in liquidation. (ii) Whether, even if there was no transfer of the fixed deposits, the company in liquidation held them only as trustee for the shareholders and the interest income was taxable only in the hands of the beneficiaries.
Issue (i): Whether the fixed deposit receipts had been transferred to the shareholders so that the interest thereon was not assessable in the hands of the company in liquidation.
Analysis: The transfer documents, the interim distribution resolution, the delivery of the deposit receipts, and the intimation given to the bank showed an intention to assign the fixed deposits to the shareholders. The Court treated the deposits as assignable actionable claims and applied the principle that assignment becomes effective upon execution of the transfer instrument and clear manifestation of intention, without requiring any special form. The bank correspondence and certificates supported the conclusion that the shareholders were entitled to receive the interest.
Conclusion: The fixed deposit receipts had been transferred to the shareholders, and the interest thereon was not taxable as the income of the company in liquidation.
Issue (ii): Whether, even if there was no transfer of the fixed deposits, the company in liquidation held them only as trustee for the shareholders and the interest income was taxable only in the hands of the beneficiaries.
Analysis: On the facts found, the company had already divested itself of the beneficial interest in the deposits in favour of the shareholders. In any event, once the deposits and the right to receive interest stood earmarked for the shareholders, the company's role was only that of a trustee or conduit. The income from the deposits therefore belonged to the beneficiaries and not to the company as trustee.
Conclusion: The company in liquidation, at the highest, held the deposits as trustee for the shareholders, and the interest income was assessable only in the hands of the beneficiaries.
Final Conclusion: The reference was answered in favour of the assessee on both questions, with the interest on the fixed deposits held not taxable in the hands of the company in liquidation.
Ratio Decidendi: Where fixed deposit receipts are effectively assigned to shareholders by clear transfer documents, delivery of receipts, and intimation to the bank, the interest accruing on those deposits is not assessable in the hands of the transferor company but in the hands of the transferees or beneficiaries.
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