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TMI Blog2004 (12) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... n 260A of the Income-tax Act, 1961 (hereinafter referred to as "the Act") by U.P. Bhumi Sudhar Nigam, Lucknow (hereinafter referred to as "the Nigam") raise common substantial questions of law. Income-tax Appeal No. 3 of 1999 relates to the assessment year 1995-96 whereas Income-tax Appeal No. 4 of 1999 relates to the assessment year 1994-95. In both the appeals the following substantial questions of law with the difference in the figure of receipts have been raised: (i) 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? (ii) Whether on the due consideration of the true nature of receipts amounting to Rs. 47,23,315 and the attendant facts and circumstances of the case, the Tribunal was legally correct in affirming taxability thereof, as income, in the case of the assessee? (iii) Whether there was any material for the Tribunal to come to the conclusion that interest received in relation to the funds which got deployed with scheduled/nationalised banks remained lying with the appellant Nigam, and there was no diversion of the same, at the very so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or indirectly to develop the land for agricultural purposes or purposes akin to agriculture. 3. The company is thus formed as a company for promoting rural development through land reclamation activities in the State of Uttar Pradesh being useful object of general public utility and intends to apply its profits, if any or other income in promoting its objects and to prohibit distribution of any dividends to its members;" as its main objects as contained in the memorandum of association of the Nigam. The Government of U.P. had been giving grants-in-aid to the Nigam for implementation of various specific projects. According to the appellant the grants were with the stipulations that the sum so provided by the State Government should be placed in personal ledger account with the treasury and in case the funds are placed with commercial banks in any form, then the interest earned on such funds shall belong to the Government itself. The State Government has been issuing instruction/notification from time-to-time in order to regulate the said stipulations. During the assessment years 1994-95 and 1995-96 the Nigam had received a sum of Rs. 71,96,225 and Rs. 47,23,315, respectively tow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommercial banks be withdrawn and kept in the treasury. Another Government order was issued on April 3, 1980, in which the State Government had stated that if in any special circumstances the amount of grant had not been kept in the personal ledger account in the treasury and had been invested in the fixed deposit account, the amount of interest earned thereon should not be treated as income of the Nigam/undertaking but should be added in the grant. In other words the interest would not be the income of the Nigam/undertaking but shall form part of the grant given by the State Government. A similar view was reiterated by the State Government in its order dated December 4, 1993. According to the appellant in view of the aforementioned Government orders the Nigam has not been treating the amount of interest accrued/received on fixed deposits/receipts from the commercial banks as its income and that is why it was not showing in the profit and loss account and a note was made in the balance-sheet/profit and loss account that the said amount belonged to the State Government. He next submitted that the amount of interest did not belong or accrue to the appellant and in the present case the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernment in the commercial banks and not in the treasury which itself shows that the said orders had no binding force and further it is not diversion of income by overriding title but a case of application of money after it has been earned. He has relied upon a decision of the apex court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC). We have given a careful consideration and are of the view that so far as the alternate plea is concerned in paragraph No. 3.23 of the order under appeal, the Tribunal has specifically mentioned that learned counsel for the assessee had not addressed them on this ground and nothing has been said by them on the claim of deduction. As the appellant had not pressed its alternative plea before the Tribunal for which specific finding has been recorded by the Tribunal, we are not permitting learned counsel for the appellant to raise this plea before us. Learned counsel, however, submitted that in the grounds of appeal such a plea was specifically raised and in fact he had argued the same before the Tribunal. Be that as it may, we are taking the facts recorded by the Tribunal on this aspect as final unless it is rectified by the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation (self-imposed and gratuitous) after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable." In the case of Moti Lal Chhadami Lal Jain [1991] 190 ITR 1 the apex court has held that the existence of a mere obligation is not sufficient to constitute diversion of income. It has held as follows: "In the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not been resulted or accrued to the assessee. After debiting the debtors account and not reversing that entry-but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits. We were invited to abandon legal fundame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. It had no manner of right or title over the same money, therefore these receipts should not be treated as income of the assessee. In the case of Jit and Pal X-Ray Pvt. Ltd. v. CIT [2004] 267 ITR 370 this court has held that the fundamental principle is that an application of income is an allocation of one's own income after it accrues or has arisen, although such application may be under a contract or obligation, whereas diversion of income is that which diverts away or deflects before it accrues or reaches the assessee and it is received by him only for the benefit of the person who is entitled to the income under an overriding charge or title. There is a distinction between the obligation to spend money in a particular manner attached to an income, and a similar obligation attaching to the source of the income. If the obligation is on the source of the income it is a case of diversion of income by overriding title, but if the obligation is to spend the money in a particular manner it is only an application of the income. In the case of Godhra Electricity Co. Ltd. [1997] 225 ITR 746 the apex court has held that income-tax is a levy on income. No doubt, the Income-tax Act t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and not of diversion of income by overriding title. (ii) If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about the hypothetical income which does not materialise. (iii) The existence or absence of entries in his books of account cannot be decisive or conclusive in the matter. (iv) The concept of real income must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principle of the law of income-tax as developed. It is not in dispute that the Nigam had invested the amount of grant received by it in fixed deposits with commercial banks on which interest had accrued. The appellant has not placed on record the specific orders by which the Government of Uttar Pradesh had given the grant and whether such orders contained any such stipulation that the amount of interest which may accrue if the grant is invested/kept in commercial banks, shall be the income of the Government of Uttar Pradesh and shall be added to the grant earned. In the absence of any such material having been placed on record it is not possible to hold that the interest did not belong to the Ni ..... X X X X Extracts X X X X X X X X Extracts X X X X
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