2023 (3) TMI 155 - HC - Income Tax

Accrual of income - interest income earned on the fixed deposit - effect of overriding title - Assessee is a government undertaking working under the instruction of the Government who on the directions of the Government keeps a portion of unutilized funds in short term bank deposits and interest earned from these deposits is transferred to the respective fund accounts of the Government - whether said interest income being covered under the Income from Other Sources as defined in the Income Tax Act, 1961? - Tribunal justification in holding that an executive guideline (guideline issued by the Ministry of Tourism in the case) can override the statutory provisions of the Income Tax Act, 1961 - HELD THAT - As a matter of fact, an office memorandum issued by the Joint Secretary, Ministry of Tourism, Govt. of India had directed to the Assessee that funds released as installments of Central Financial Assistance (CFA) from the Ministry of Tourism were to be deposited in saving accounts or fixed deposits in banks and as a result a substantial amount accrues as interest on deposits made out of CFA. It was also directed to ensure utilization of earned interest on deposits for the execution and completion of concerned projects without deviation to any other head of expenditure. In case there is no scope to utilize the amount of interest for execution of the concerned project, such amount may be returned to the Ministry of Tourism. Thus, the income never reached the Assessee and was diverted at source by an overriding title. The law is well settled by a long catena of cases to the effect that in event of there being a diversion of income by overriding title, question of income being assessed in the hands of Assessee does not and cannot arise. Reference in this regard may be made to the case of Shri Sitaldas Tirathdas, Bombay 1960 (11) TMI 17 - SUPREME COURT . Thus it is clear that the Assessee never becomes the owner of money and as such the addition made by the AO was not sustainable in both the assessment years. CIT (A) as well as the ITAT who has sustained the order of CIT (A) did not commit any error in holding that the petitioner never became the owner of the money which came from interest and deleted the addition. We are of the considered view that no error ahs been committed by both the forums. - Decided against revenue.

Summary

Issues Involved:
1. Whether the interest income earned on the fixed deposit is considered income of the Assessee under the Income Tax Act, 1961.
2. Whether an executive guideline can override statutory provisions of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Interest Income as Income of the Assessee:
The primary issue was whether the interest income earned on fixed deposits by the Assessee, a Jharkhand State Government undertaking, should be considered as its income under the Income Tax Act, 1961. The Assessee argued that the funds, including the interest earned, were always the property of the Government, and the Assessee merely managed these funds under government directives. The funds were used for approved projects and any unutilized funds, including interest, were returned to the government.

The court noted that the Assessee, under government directions, deposited unutilized funds in short-term bank deposits, and the interest earned was transferred back to the respective government fund accounts. The court referenced the case of Commissioner of Income Tax, Bombay City II, Bombay vs. Shri Sitaldas Tirathdas, which established that income diverted by an overriding title before it reaches the Assessee is not considered the Assessee's income. The court concluded that the interest income never reached the Assessee as its income but was diverted at source by an overriding title, making the addition of this income by the Assessing Officer unsustainable.

2. Executive Guideline vs. Statutory Provisions:
The second issue was whether an executive guideline could override the statutory provisions of the Income Tax Act, 1961. The Revenue argued that the ITAT erred in holding that the interest income was not the Assessee's income despite it being covered under 'Income from Other Sources' as defined in the Income Tax Act, and that an executive guideline from the Ministry of Tourism could not override the statutory provisions of the Act.

The court observed that the funds and the interest earned thereon were managed according to government instructions, and the Assessee never became the owner of the money. It was highlighted that the interest income was utilized for the execution and completion of government-approved projects, as per the guidelines. The court reaffirmed that the interest income was diverted by an overriding title before it could be considered the Assessee's income, thus supporting the ITAT's decision.

Conclusion:
The court upheld the decisions of the CIT (Appeals) and ITAT, which had disallowed the addition of interest income to the Assessee's total income for the assessment years 2012-13 and 2014-15. The court found no error in the decisions of the lower forums, concluding that the interest income never became the Assessee's income due to the overriding title of the government. Consequently, both questions of law were decided against the Revenue, and the appeals were dismissed, sustaining the orders passed by the ITAT in ITA No. 136/Ran/2018 and ITA No. 226/Ran/2016.