1991 (1) TMI 27 - HC - Income Tax

Transfer of Fixed Deposits to Shareholders: Interest Income Assessable to Beneficiaries, Not Trustee

Chandipore Fisheries Pvt. Limited Versus Commissioner Of Income-Tax

Chandipore Fisheries Pvt. Limited Versus Commissioner Of Income-Tax - [1992] 195 ITR 565, 66 TAXMANN 19 Issues Involved:1. Whether the fixed deposits were transferred to the shareholders.2. Whether the interest income from the fixed deposits should be assessed in the hands of the assessee as a trustee for the shareholders.Issue-Wise Detailed Analysis:1. Whether the fixed deposits were transferred to the shareholders:The Tribunal held that the fixed deposits were not transferred to the shareholders. The assessee, a company engaged in the fishery business, made a fixed deposit of Rs. 4,20,000 on October 18, 1977, with the United Bank of India. Subsequently, the term deposit was reinvested in 84 term deposits of Rs. 5,000 each. The Income-tax Officer assessed the interest income of Rs. 31,105 after deducting expenses, as the term deposits were not actually transferred to the shareholders. The Commissioner of Income-tax (Appeals) upheld this, stating that the assets were not transferred in specie and thus taxable in the hands of the assessee under section 60 of the Income-tax Act, 1961.The Tribunal agreed with the authorities below, noting that the bank was only requested to credit the monthly interest to certain savings bank accounts held by different shareholders. The letters and certificates did not show that these term deposits were transferred to the shareholders. The Tribunal concluded that the mere physical handing over of term deposit receipts to shareholders did not amount to a transfer.2. Whether the interest income from the fixed deposits should be assessed in the hands of the assessee as a trustee for the shareholders:The Tribunal did not find it necessary to address the alternative argument that the assessee was a trustee for the shareholders. However, the High Court considered this issue in detail. The High Court noted that the facts were not in dispute and reviewed the relevant documents, including the indenture made between the liquidator and a shareholder, which recorded the transfer of term deposit receipts. The court cited Section 130(1) of the Transfer of Property Act, which states that the transfer of an actionable claim is effected by the execution of an instrument in writing signed by the transferor. The court also referred to several precedents, including decisions from the Madras High Court and Assam High Court, which supported the view that an assignment becomes effective upon execution and does not require a particular form of writing or acceptance by the transferee.The High Court concluded that the fixed deposit receipts were indeed made over to the shareholders, supported by resolutions for distribution and intimation to the bank. The court held that the term deposit receipts were physically handed over to shareholders who were entitled to the interest. Therefore, the interest on the fixed deposits could not be considered the income of the company in liquidation. The company in liquidation was merely a trustee for the shareholders, and the interest income should be assessed as the income of the beneficiaries, not the trustee.Judgment:The High Court answered the first question in the negative and in favor of the assessee, indicating that the fixed deposits were transferred to the shareholders. The second question was answered in the affirmative and in favor of the assessee, stating that the interest income should be assessed in the hands of the beneficiaries (shareholders) and not the trustee (company in liquidation). There was no order as to costs.