Overriding title over interest income led the Tribunal to treat Government-linked deposit interest as not taxable in the assessee's hands.

Interest earned on short-term bank deposits of Government-contributed share capital was treated as diverted at source by overriding title in favour of the Government and therefore not taxable in the assessee's hands. The contribution was made for allotment of shares, and the surrounding resolutions and later Government letter required that any interest on temporarily parked funds be paid to the Government. The Tribunal applied the principle that income is excluded from the assessee's hands only where the obligation exists at the source; a post-receipt obligation would merely amount to application of income. Balance-sheet treatment and the Revenue's cited precedent did not change the real character of the receipt.

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Issues: Whether the interest earned by the assessee on short-term bank deposits of the Government-contributed share capital was taxable in its hands, or stood diverted to the Government by an overriding title.

Analysis: The contribution of Rs. 6 crores was made for allotment of shares, and the surrounding resolutions and the Government's later letter required that if the amount remained parked in short-term deposits, the interest thereon was to be paid to the Government. On these facts, the receipt was treated as subject to a restriction at source, so that the interest did not truly accrue as income of the assessee. The principle applied was that income is diverted before it reaches the assessee only where the overriding obligation exists at source, whereas a post-receipt obligation is merely application of income. The Tribunal also held that the balance-sheet entry and the Karnataka High Court decision relied on by the Revenue did not alter the real nature of the receipt.

Conclusion: The interest was held to be diverted by an overriding title in favour of the Government and was not taxable as the assessee's income.

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