Court Rules State Undertaking's Fixed Deposit Interest Not Income Due to Overriding Title, Dismisses Revenue Appeals.

The court upheld the decisions of the CIT (Appeals) and ITAT, ruling that the interest income earned on fixed deposits by the Assessee, a Jharkhand State Government undertaking, did not constitute the Assessee's income under the Income Tax Act, 1961. The interest was deemed to be diverted by an overriding title before reaching the Assessee, as it was managed and returned to the government according to directives. The court dismissed the Revenue's appeals, affirming that executive guidelines could not override statutory provisions, and sustained the ITAT's orders in ITA No. 136/Ran/2018 and ITA No. 226/Ran/2016.

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Issues Involved:
1. Whether the interest income earned on the fixed deposit is considered income of the Assessee under the Income Tax Act, 1961.
2. Whether an executive guideline can override statutory provisions of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Interest Income as Income of the Assessee:
The primary issue was whether the interest income earned on fixed deposits by the Assessee, a Jharkhand State Government undertaking, should be considered as its income under the Income Tax Act, 1961. The Assessee argued that the funds, including the interest earned, were always the property of the Government, and the Assessee merely managed these funds under government directives. The funds were used for approved projects and any unutilized funds, including interest, were returned to the government.

The court noted that the Assessee, under government directions, deposited unutilized funds in short-term bank deposits, and the interest earned was transferred back to the respective government fund accounts. The court referenced the case of Commissioner of Income Tax, Bombay City II, Bombay vs. Shri Sitaldas Tirathdas, which established that income diverted by an overriding title before it reaches the Assessee is not considered the Assessee's income. The court concluded that the interest income never reached the Assessee as its income but was diverted at source by an overriding title, making the addition of this income by the Assessing Officer unsustainable.

2. Executive Guideline vs. Statutory Provisions:
The second issue was whether an executive guideline could override the statutory provisions of the Income Tax Act, 1961. The Revenue argued that the ITAT erred in holding that the interest income was not the Assessee's income despite it being covered under 'Income from Other Sources' as defined in the Income Tax Act, and that an executive guideline from the Ministry of Tourism could not override the statutory provisions of the Act.

The court observed that the funds and the interest earned thereon were managed according to government instructions, and the Assessee never became the owner of the money. It was highlighted that the interest income was utilized for the execution and completion of government-approved projects, as per the guidelines. The court reaffirmed that the interest income was diverted by an overriding title before it could be considered the Assessee's income, thus supporting the ITAT's decision.

Conclusion:
The court upheld the decisions of the CIT (Appeals) and ITAT, which had disallowed the addition of interest income to the Assessee's total income for the assessment years 2012-13 and 2014-15. The court found no error in the decisions of the lower forums, concluding that the interest income never became the Assessee's income due to the overriding title of the government. Consequently, both questions of law were decided against the Revenue, and the appeals were dismissed, sustaining the orders passed by the ITAT in ITA No. 136/Ran/2018 and ITA No. 226/Ran/2016.

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