Diversion of income at source under liquidation rules kept realisations from advances outside taxable income.

A co-operative bank under liquidation was held to have its realisations from advances, including interest and dividend receipts, diverted at source because statutory liability under the Deposit Insurance and Credit Guarantee Corporation of India Act had to be discharged first. The amounts did not come to the free disposal of the bank and therefore were not assessable as its taxable income. The impugned additions were accordingly unsustainable.

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Issues: Whether, in the case of a co-operative bank under liquidation, the realisation of advances and the income arising therefrom stood diverted at source under the Deposit Insurance and Credit Guarantee Corporation of India Act, 1961 so as to be excluded from taxable income.

Analysis: The assessee-bank was under liquidation and, till the statutory liability towards deposit insurance stood discharged, the amounts realised from advances were required to be applied towards that obligation. On that footing, the income from such realisations, including interest and dividend receipts, did not remain at the free disposal of the assessee. The statutory obligation operated as a diversion before income could be treated as income of the assessee, and the amounts were therefore not available as taxable income in its hands.

Conclusion: The issue was decided in favour of the assessee; the impugned additions were not sustainable as the receipts were held to be diverted at source and not taxable as income of the assessee.

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