Diversion at source under the deposit insurance liquidation scheme kept bank receipts outside taxable income.

Amounts realised by a co-operative bank under liquidation from advances and assets were applied first toward the statutory deposit insurance liability under section 21(2) of the Deposit Insurance and Credit Guarantee Corporation of India Act, 1961. Because the liquidation scheme left no discretion to the bank to use those receipts for its own benefit until that liability was discharged, the amounts were treated as diverted at source and never formed part of the assessee's taxable income. The receipts were therefore not taxable in the hands of the assessee, and the Revenue's appeals were dismissed.

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Issues: Whether the income realised by a co-operative bank under liquidation was diverted at source under section 21(2) of the Deposit Insurance and Credit Guarantee Corporation of India Act, 1961 so as to be non-taxable in the hands of the assessee.

Analysis: The liquidation scheme under section 21(2) of the Deposit Insurance and Credit Guarantee Corporation of India Act, 1961 required the amounts realised from advances and assets to be applied towards the deposit insurance liability. On the facts, the bank under liquidation had no discretion to appropriate the realised funds for its own use until the statutory liability to the deposit insurer was fully discharged. The amounts were therefore not available to the assessee as its income, and the principle of diversion at source applied to the receipts in question.

Conclusion: The receipts were held to be diverted at source and not taxable as income of the assessee; the Revenue's appeals were dismissed.

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