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2012 (11) TMI 181 - HC - Income TaxDiversion of income by overriding title - Whether interest income received by the assessee from investment of the share capital money received from the Government which was deposited in fixed deposit, can be treated to be the income of the assessee or that of the Government Held that - Government of Gujarat, as a promoter of the assessee company, had paid a sum of Rs.6 crores as contribution towards the share capital. Such sum was invested by the assessee in short term deposits earning interest thereon. Subsequently, pursuant to the directive issued by the Government, the assessee paid such interest earned by it to the Government. It was in this background that the Tribunal held that this was a case of diversion of income by overriding title. The Government was free to impose conditions regarding the payment of interest earned, until it gave permission for the issue of share capital, which was done later. The Tribunal held that the mere fact that the amount was shown in the balance sheet of the assessee was also not relevant. The interest earned could not, therefore, be considered to be the income of the assessee. Mere fact that in the earlier year, the assessee had treated such income differently, or that in the year under consideration, initially had paid advance tax on such basis, would not be conclusive of the nature of the income. Income was of the Government of Gujarat and not of assessee, therefore, it cannot be taxed in the hands of the assessee - In the result, the appeal is allowed. The judgement of the Tribunal dated 16.12.1999 is set aside to that extent - in favour of the assessee and against the revenue.
Issues Involved:
1. Whether the interest income of Rs.53.92 lakhs earned from short-term fixed deposits should be treated as the income of the assessee company and taxed accordingly. Detailed Analysis: Background and Facts: The assessee, Gujarat Power Corporation Ltd., promoted by the Government of Gujarat and the Gujarat Electricity Board, received funds from the Government for equity share capital. These funds were deposited in short-term fixed deposits, generating interest income of Rs.53.92 lakhs for the assessment year 1992-93. The assessee contended that this interest income belonged to the Government of Gujarat and should not be taxed as the company's income. Assessing Officer's Decision: The Assessing Officer rejected the assessee's claim, arguing that: - There was no initial condition that interest on share application money should be paid to the Government. - The letter from the Government of Gujarat was received after the financial year ended. - The Companies Act does not authorize shareholders to claim interest on share application money. - The company had paid advance tax on such income, indicating it was initially considered taxable. - The provisions of the Companies Act, particularly sections 41 and 208, do not support the assessee's claim. Commissioner (Appeals) Decision: The Commissioner (Appeals) sided with the assessee, relying heavily on a letter from the Government of Gujarat and a precedent set by the Tribunal in the case of Gujarat Narmada Valley Fertiliser Co. Ltd. The Commissioner concluded that the interest income was received on behalf of the Government and thus should not be taxed as the company's income. Tribunal's Decision: The Tribunal reversed the Commissioner (Appeals) decision, stating: - The interest income was earned from funds contributed towards share capital, which belonged to the company until shares were issued. - The Companies Act mandates the issuance of share certificates within a specified time, and any delay does not alter the nature of the funds. - The Tribunal relied on the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, which held that interest income earned from deposits should be taxed as income. High Court's Analysis: The High Court analyzed the facts and legal principles in detail: - The funds were transferred by the Government for share allotment, and pending such allotment, the interest earned should be considered held in trust for the Government. - The letter dated 17.9.1992 from the Government clarified that the interest income should belong to the Government. - The initial agreement's silence on interest treatment does not change the income's character, especially given the subsequent understanding between the parties. - The High Court found no provision in the Companies Act prohibiting the arrangement between the assessee and the Government. - Section 208 of the Companies Act, which pertains to payment of interest out of capital, was deemed irrelevant to this case. - The High Court distinguished the present case from the Tuticorin Alkali Chemicals case, emphasizing that the interest was not earned from borrowed funds but from share capital contributions held in trust. Conclusion: The High Court concluded that the interest income of Rs.53.92 lakhs should not be treated as the income of the assessee company. The income belonged to the Government of Gujarat and was held in trust by the assessee. Therefore, it should not be taxed in the hands of the assessee. Judgment: The appeal was allowed, and the Tribunal's judgment dated 16.12.1999 was set aside. The question was answered in the negative, in favor of the assessee and against the revenue.
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