2004 (12) TMI 17 - HC - Income Tax

No material has been placed on record to show that there was any stipulation that the interest earned on such grant/aid if kept in fixed deposit in commercial banks would not accrue to the appellant but to the State Government. In fact the orders issued by the State Government were for treating the amount of interest. By treating it as a further grant, in fact is an application of money after it has been earned by the appellant and, therefore, the Tribunal was-justified in holding that the interest, in fact, was taxable at the hands of the appellant. The theory of real income is not applicable to the facts of the present case inasmuch as the interest has accrued to the appellant which it had retained for years together and only later on it has decided to convert a part of the amount of accumulated interest and not the whole of it towards its share capital appeal dismissed

Issues Involved
1. Whether the Tribunal was legally correct in holding that the appellant company is not the 'Government' and its income, therefore, was not outside the provisions of the Income-tax Act.
2. Whether the Tribunal was legally correct in affirming the taxability of receipts amounting to Rs. 47,23,315 and Rs. 71,96,225 as income of the appellant.
3. Whether there was any material for the Tribunal to conclude that interest received on funds deployed with banks remained with the appellant Nigam and was not diverted to the State Government at the source.
4. Whether the findings about the taxability of receipts amounting to Rs. 47,23,315 are vitiated in law due to lack of consideration of relevant materials.
5. Whether the Tribunal was legally correct in not accepting the alternative plea of the appellant that it carried a corresponding liability towards the State Government, which should be allowed as a deduction.
6. Whether the Tribunal was legally correct in holding that the amount in question did not partake of the character of grants-in-aid given by the State Government and was taxable in the hands of the appellant.

Issue-wise Detailed Analysis

1. Government Status and Income Tax Provisions
The appellant did not advance any argument on whether the Tribunal was legally correct in holding that the appellant-Nigam is not the Government and its income was not outside the provisions of the Income-tax Act. Therefore, this issue was not considered further in the judgment.

2. Taxability of Receipts as Income
The Nigam argued that the interest accrued/received on fixed deposits from the State Government's grants did not reach the Nigam but was diverted to the State Government by overriding title. The Tribunal, however, held that the interest income belonged to the Nigam and was taxable. The court upheld this view, noting that the Nigam had been enjoying the interest income for over 15 years without transferring it to the State Government. The Government orders directing the deposit of grants in the treasury were advisory and not binding.

3. Interest Received and Diversion to State Government
The Tribunal concluded that the interest received on funds deployed with banks remained with the Nigam and was not diverted to the State Government at the source. The court supported this conclusion, stating that the Government orders were merely advisory and did not constitute a legal obligation that would divert the income before it reached the Nigam.

4. Consideration of Relevant Materials
The court found that the Nigam had not complied with the Government orders to deposit the grants in the treasury and had instead kept the funds in commercial banks. The orders were considered advisory and did not affect the taxability of the interest income. The court also noted that there was no evidence that the State Government was aware of the interest income or had laid any claim to it.

5. Alternative Plea of Corresponding Liability
The Tribunal recorded that the appellant did not press its alternative plea regarding the corresponding liability towards the State Government. The court did not permit the appellant to raise this plea as it was not addressed before the Tribunal. The court relied on the principle that facts recorded by the Tribunal are final unless rectified in appropriate proceedings.

6. Character of Grants-in-Aid
The court held that the interest income did not partake of the character of grants-in-aid. The interest was not sanctioned as a grant-in-aid by the State Government and was not included in the grant given to the Nigam. The Government orders were advisory and did not create a legal obligation to treat the interest as part of the grant. The court concluded that the interest income was taxable in the hands of the Nigam.

Conclusion
The appeals were dismissed, and the court upheld the Tribunal's decision that the interest income accrued to the Nigam and was taxable. The court found no merit in the appellant's arguments and held that the Government orders were advisory and did not constitute a legal diversion of income by overriding title. The parties were ordered to bear their own costs.

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