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TMI Blog2012 (11) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... power generating capacity in the State of Gujarat by attracting private sector partners or its own. The Government of Gujarat had sanctioned amounts of Rs.1 crore and 4 crores towards equity share capital of the assessee company. Such amounts were transferred to the assessee company for allotment of shares. Such amounts were shown in the balance sheet of the assessee company as amounts received from promoters to be adjusted towards share capital in due course. However, the assessee company could not commence the work for which it was incorporated. In the meantime, the amount received as contribution towards share capital was deposited in schedule banks in short term deposits. From such short term deposits, the assessee company earned the interest of Rs.53.92 crores during the year 1991-92. 5. The assessee company contended that since such amount of interest was received from the contributions by the Government towards share capital which remained in the corporation in trust, the income did not belong to the assessee. 6. The Assessing Officer, however, objected to such treatment of the interest by the assessee company and called upon the assessee to justify the same. Before the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad in the assessment year 1991-92, earned similar interest of Rs.1,90,299/- on the deposits made with the bank from the share capital money received by the company. On such income, the company had paid tax. In the current year also, the company had initially paid advance tax on such interest income, but latter on changed its stand. 9. The assessment order dated 18.11.1993 was carried in appeal by the assessee. The Commissioner (Appeals) allowed the appeal of the assessee by his order dated 28.2.1994, relying on the decision of the Tribunal in the case of Gujarat Narmada Valley Fertiliser Co. Ltd. v. ITO [1982] 2 ITD 51 (Ahd.). The Commissioner placed heavy reliance on the letter of the Government dated 17.9.1990 which, in his opinion, clarified the situation for all practical purposes in favour of the assessee since the letter recorded that both the sides agreed that the interest income was received by the appellant on behalf of the Government and should, therefore, belong to the State of Gujarat. 10. The revenue carried the matter further in appeal before the Tribunal. The Tribunal by the impugned judgement dated 16.12.1999, allowed the revenue's appeal. Before the Tribunal, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... li Chemicals & Fertilizers Ltd. (supra). 13. Before us, learned counsel Shri J.P. Shah for the appellant vehemently contended that the Tribunal committed an error in allowing the revenue's appeal. He submitted that the amount received from the State of Gujarat towards share capital, was invested in short term fixed deposits since the purpose for which such amount was received could not be fulfilled. Nevertheless, the amount could be stated to have been held by the assessee in trust. Any income generated from such amount must belong to the State of Gujarat. He relied on the communication dated 17.9.1992 received from the State of Gujarat by the assessee company. Counsel placed heavy reliance on the decision of the Tribunal's case in case of Gujarat Narmada Valley Fertiliser Co. Ltd. (supra). He also relied on the decision of the Bombay High Court in case of CIT v. Tanubai D. Desai [1972] 84 ITR 713 wherein in a case where the solicitor was holding clients' moneys and had earned interest in the process, the Division Bench of Bombay High Court held that the assessee - solicitor was holding such moneys in quasi-trust on behalf of his clients and he held such moneys in a fiduciary capa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company, there was no clear specification with respect to interest that may be earned in case such share money could not be utilized immediately for the purpose for which it was given. It is equally true that for whatever internal reasons, the assessee company could not allot the shares to the State Government for such total sum of Rs.5 crores paid by the Government to the corporation. Such amount, therefore, remained in the hands of the assessee. Instead of allowing to remain idle, the assessee parked the same in short term deposits with schedule banks and thereby, earned interest income of Rs.53.92 crores in the previous year relevant to the assessment year 1992-93. 18. Vide letter dated 17.9.1992, Deputy Secretary of Government of Gujarat conveyed to the assessee company that the shares were to be issued in the name of the Government of Gujarat for which a total sum of Rs.5 crores was transferred by the Government to the assessee, however, such shares have so far not been issued. The issue was discussed with respect to the position arising on account of non-appropriation of the funds contributed by the Government of Gujarat towards equity share capital. It was noted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be sufficient to change the nature and basic character of such income. In absence of specific stipulation to the contrary, such interest must be treated to be held by the assessee in trust for the Government. Further, on 17.9.1992, the Government of Gujarat and the assessee both after due deliberations, agreed that the best solution would be to transfer such interest income to the Government. The suggestion that the corporation should bear the interest liability and pay interest to the Government on such unutilized funds, was not found workable. Had such an opinion adopted, decision in case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) would have applied. Instead, the Government only insisted that the interest which the corporation earned on such sums of money, should be transferred to the Government. Thus, even if initially the agreement between the parties was silent on the treatment of the interest, subsequently by virtue of the further understanding and arrangement between the parties, sufficient clarity was given to the issue. 22. We do not find that the arrangement arrived at between the assessee and the Government was prohibited by any of the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, 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. 26. Reliance placed by the Tribunal in case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra) was also misplaced. In the said decision, the assessee had earned interest out of investment made from the borrowed funds prior to the commencement of the business. It was in this background that the Apex Court held that such interest would be taxable and interest earned cannot be utilized to discharge liability for payment of interest. It was held that this was not a case of diversion of income by overriding title and that the deduction or set off against interest liability on the borrowed funds would not be permissible. The pre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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