2019 (2) TMI 2068 - AT - Income Tax

Accrual of income - interest earned on fixed deposit - Real income theory - The said income was not the business receipt of the assessee company but was income from Other sources - AO rejected the contention of the assessee to hold that the interest accrued to the appellant was its income - HELD THAT - CIT(A) deleted the addition stating that Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the other of the heads is a question of fact to be found on the relevant circumstances, having regard to business principles. Another distinction that shall be borne in mind is that between the real and the statutory profits, i.e., between the commercial profits and statutory profits. The latter are statutorily fixed for a specified purpose. Facts of the case clearly show that the appellant never became the 'owner' of the money. It had to return the excess funds to the government. The addition made by the Ld. Assessing Officer cannot be sustained in appeal. Ground of appeal is allowed in favour of assessee.

Summary

Issues Involved:
1. Whether the interest earned on fixed deposits by the assessee is to be treated as business receipt or income from other sources.

Issue-Wise Detailed Analysis:

1. Interest Earned on Fixed Deposits:
The primary issue in this case is whether the interest earned on fixed deposits by the assessee, a State Government Corporation, should be classified as business receipt or income from other sources. The assessee argued that the funds, including the interest earned, belong to the government and are used strictly according to government guidelines. The funds are kept in short-term bank deposits, and the interest earned is either utilized for government projects or returned to the government.

The Assessing Officer (AO) disagreed, citing several judgments, including those from the Hon’ble Uttarakhand High Court, the Supreme Court, and the ITAT Mumbai, to support the position that the interest income should be treated as the assessee’s income.

CIT(A)’s Observations:
The Commissioner of Income Tax (Appeals) [CIT(A)] analyzed the facts and distinguished them from the cases cited by the AO. The CIT(A) noted that in the cited cases, the funds belonged to the assessee, whereas, in this case, the funds were always the property of the government. The CIT(A) emphasized that the interest earned was directed by the Ministry of Tourism to be used only for project execution or to be returned to the government if not utilized.

The CIT(A) also referred to the audit observations from the Comptroller and Auditor General (C&AG) of India, which advised treating the interest income as government income. The CIT(A) concluded that the interest income never reached the assessee and was diverted at the source by an overriding title. This concept was supported by the Supreme Court’s ruling in CIT v. Sitaldas Tirathdas, which distinguished between income that is diverted before reaching the assessee and income that is applied to discharge an obligation after reaching the assessee.

Supporting Case Laws:
The CIT(A) further supported the decision by citing the case of Poona Electric Supply Co. Ltd v. CIT, where the Supreme Court held that real profits, not statutory profits, are subject to income tax. The CIT(A) concluded that the appellant never became the owner of the funds, and the excess funds had to be returned to the government, thus reinforcing that the interest income could not be treated as the appellant’s income.

Tribunal’s Decision:
The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)’s decision, finding no infirmity in the order. The ITAT agreed that the interest income was not the assessee’s income but was to be treated as government income, as per the guidelines and the legal precedents discussed. Consequently, the grounds of appeal raised by the revenue were dismissed.

Conclusion:
The appeal filed by the revenue was dismissed, and the interest earned on fixed deposits by the assessee was not treated as the assessee’s income but as government income to be utilized or returned according to government directives. The judgment emphasized the importance of the nature of funds and the obligations attached to them in determining the classification of income.