1982 (1) TMI 70 - AT - Income Tax

Interest Income on Short-Term Deposits Deemed Non-Taxable Due to Government's Overriding Title, Tribunal Rules.

Gujarat Narmada Valley Fertilizers Co. Ltd. Versus Income Tax Officer.

The Tribunal concluded that the interest income earned by the assessee-company on short-term deposits, as directed by the Government of Gujarat, was ... Income, Diversion By Overriding Title Issues involved: Determination of tax liability on interest income earned on short-term deposits by an assessee-company following directions from the Government of Gujarat.Summary:1. The assessee-company received a contribution of Rs. 6 crores from the Government of Gujarat towards its share capital, with a subsequent resolution directing the payment of interest earned on short-term deposits to the State Government. The Income Tax Officer (ITO) included the interest income in the assessee's taxable income, considering it as an application of income rather than an overriding title in favor of the Government.2. The Commissioner (Appeals) rejected the assessee's argument that the Government had an overriding title on the interest income, emphasizing that the money belonged to the assessee-company and the deposits were made in its name. The Commissioner relied on a decision of the Karnataka High Court and directed verification of the correct interest amount for taxation.3. The Tribunal considered the Government's directions and resolutions, concluding that an overriding title existed in favor of the Government regarding the interest earned on the deposits. The Tribunal highlighted that the money was contributed for share capital and any interest earned was subject to the Government's directive, making it non-taxable for the assessee.4. Citing a Supreme Court decision, the Tribunal emphasized that income diversion occurs when income is diverted at the source, not after reaching the assessee. The Tribunal found that the Government's directions from the inception of the contribution restricted the use of the money, including the interest earned, leading to an overriding title in favor of the Government.5. The Tribunal dismissed the revenue's argument that the second resolution did not refer to the assessee-company, noting the subsequent letter directing the payment of interest. It upheld that the interest income was not taxable for the assessee due to the Government's overriding title.6. Consequently, the Tribunal allowed the appeal in favor of the assessee, determining that the interest income earned on short-term deposits, following the Government's directions, was not taxable for the assessee-company.