Vildirect: IncomeTax-caselaws-1982-VIL-29-ITAT-AHM

1982-VIL-29-ITAT-AHM

Equivalent Citation: [1982] 2 ITD 51

Income Tax Appellate Tribunal AHMEDABAD

IT Appeal' No. 258 (Ahd.) of 1981

Date: 02.01.1982

GUJARAT NARMADA VALLEY FERTILIZERS CO. LTD.

INCOME TAX OFFICER.

BENCH

Member(s) : K. T. THAKORE., K. R. DIXIT.

JUDGMENT

Per Shri K.R. Dixit, Judicial Member --- The assessee-company has been promoted by the Gujarat State Fertilizers Co. Ltd. (hereinafter referred to as "GSFC") with the help of the Government of Gujarat who had agreed to contribute 26 per cent of the equity share capital of the assessee-company. In accordance with this promise of help, the Government of Gujarat by resolution dated 25-6-1976 was pleased to sanction an amount of Rs. 6 crores towards the payment of its contribution in respect of share capital of the assessee-company. Pursuant to this, the assessee-company received the said amount of Rs. 6 crores on 22-7-1976. However, the State Government later on noted that it was the GSFC who as co-promoter with the Government was actually implementing the project of setting up of a fertilizer plant of the assessee-company. Therefore, by resolution dated 1-11-1976, it resolved on two points as follows:

1. The Government's contribution received by the assessee-company shall now be made available to Gujarat State Fertilizers Co. Ltd., co-promoter with the Government of Gujarat, to meet the expenditure on execution of new fertilizer project.

2. In the event of Gujarat State Fertilizers Co. Ltd. being not required to utilise immediately the contribution received from Government, and if any portion of these funds remains invested in short-term deposits with banks, the net interest received by the Gujarat State Fertilizers Co. Ltd. will be paid to State Government.

By this date the assessee-company had already received the said sum of Rs. 6 crores and out of this sum it paid Rs. 2 crores to the GSFC and placed the balance amount of Rs. 4 crores in short-term bank deposits. The aforesaid resolution of 1-11-1976 did not, in clear terms, direct the assessee-company to pay the interest on these deposits to the State Government. The GSFC by their letter dated 29-12-1976 to the Government of Gujarat referred to the direction about the payment of interest on the short-term deposits to the Gujarat Government and stated that the interest was earned not by it but by the assessee-company and hence, the State Government should issue directions to the assessee-company to pay the interest to the State Government. The Government of Gujarat by their letter to the assessee-company dated 13-1-1977 directed the assessee-company to pay the interest amount earned on the short-term deposits to the Government of Gujarat. Accordingly, the assessee-company paid the said interest received, amounting to Rs. 5,00,662, to the State Government. Before the ITO, the assessee claimed that the interest received on these deposits was not taxable as there was an overriding title in favour of the Government of Gujarat in accordance with the resolution referred to above. The ITO rejected this claim and included it in the income of the assessee-company on the ground that the interest income actually accrued to the assessee and the subsequent payment to the Government was only an application of income.

2. Before the Commissioner (Appeals) the assessee's argument was two-fold:

1. The second resolution dated 1-11-1976 imposed an obligation of payment of interest on short-term deposit as a condition for the Government to subscribe to the share capital of the assessee-company. This argument has been negatived by the Commissioner (Appeals) on the ground that after the payment of Rs. 6 crores to the assessee-company the Government had no right over the money which belonged to the assessee-company.

2. That the Government had an overriding title in respect of the income of the deposit. This argument was also negatived by the Commissioner (Appeals) on the ground that since the money belonged to the assessee-company and the deposits were made in the bank in the name of the assessee-company, it could not be said that the income did not accrue to the assessee-company but to the Government of Gujarat.

The Commissioner (Appeals) has also relied on the decision of the Karnataka High Court in the case of Addl. CIT v. Bangalore Soft Drinks (P.) Ltd. [1980] 126 ITR 38 and concluded that following the reasoning in that case, the sum of Rs. 6 crores had to be treated as part of the capital of the assessee-company and interest earned thereon was income in the hands of the assessee. He has, however, noted the assessee's contention that the interest income was not Rs. 5,00,662. He, therefore, directed the ITO to verify the correct amount and disallow only the exact amount of interest.

3. Before us the learned counsel on behalf of the assessee has urged that the State Government had an overriding claim in respect of the amount of interest earned on the short-term deposits, by virtue of the directions given to the assessee-company in the form of resolutions and letters. In the alternative, he has contended that the interest amount should be allowed as deduction as the same is expenditure incurred for the purpose of earning that interest income. He has argued that the terms of the first resolution by which the Government agreed to subscribe to the share capital of the assessee-company were later on modified by a subsequent resolution and there was no demur by the assessee-company regarding the modifications. He has also argued that before the allotment the Government could have withdrawn the amount paid to the assessee-company and, therefore, it was free to impose the condition with regard to the payment of interest which then became binding on the assessee-company. On behalf of the revenue, the learned departmental representative has urged that the money in question having been paid to the assessee-company belonged to it, and that the short-term deposits were in the name of the assessee-company and that, therefore, the income of interest on those deposits belonged to the assessee-company, making it liable to tax thereon. What the assessee-company did with it subsequently was not a concern of the revenue. He has drawn our attention to the balance sheet of the assessee company for the year 1976 wherein an amount of Rs. 6 crores is shown under the title "Capital" and emphasised that the narration is that the said amount is to be adjusted towards the share capital. He has further drawn our attention to the language of the Government's resolution dated 1-11-1976 wherein no obligation has been cast on the assessee-company to pay interest earned on bank deposits to the Government.

4. The facts here show that the Gujarat Government paid an amount of Rs. 6 crores to the assessee-company as its contribution towards the share capital. But, later on, noticing that the entire amount may not be utilised immediately but may be placed as fixed short-term deposit, required that the interest amount should be paid to it. It is true, as pointed out by the departmental representative on behalf of the revenue, that this direction was not issued to the assessee-company but to the GSFC. However, this position was corrected by the Government by its letter dated 13-1-1977 to the assessee-company that the interest earned on the short-term deposits be paid to the Government. On behalf of the assessee, our attention has been drawn to the letter dated 22-9-1980 to the Commissioner (Appeals) wherein it has been stated that the sanction of the Central Government for the issue of share capital was given to the assessee-company by the Government's letter dated 21-1-1977 and that under the Capital Issues Control Act, 1947, no company can issue capital in excess of Rs. 50 lakhs without the consent of the Central Government. The letter of the Gujarat Government asking the assessee-company to pay the interest amount on the short-term deposit to the State Government is dated 13-1-1977. i.e., prior to the grant of permission for the issue of capital by the Central Government.

5. The legal position regarding the claim of overriding title has been stated by the Supreme Court in CIT v. Travancore Sugars and Chemicals Ltd. [1973] 88 ITR 1. In that case the promoters of the assessee-company had entered into an agreement with the Government of Travancore, whereby the assets of the Sugar Company, which was being wound up, and in which the Government held the largest number of shares, were agreed to be sold to the assessee-company to be floated for that purpose. One of the terms of the agreement of sale was that the Government shall be entitled to 10 per cent of the net profits of the company in every year. For the assessment year in question the Government became entitled to a sum of Rs. 42,488. The Supreme Court held as follows:

"Income can be said to be diverted only when it is diverted at source so that when it accrues it is really not the income of the assessee but is somebody else's income. It is thus clear that 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 after such income reaches the assessee it is merely a case of application of income to satisfy an obligation of payment and is therefore not deductible."

"The assessee had no choice at the time of inception, as a condition of its coming into existence, to agree to the several terms stipulated by the Government for transferring the profit-earning assets."

In this case, first of all, it is undisputed that the payment of Rs. 6 crores was made by the Government of Gujarat for contributing to the share capital of the company, in order that shares may be allotted to it for that amount. Therefore, there was never any understanding that the assessee company could make any other use of this money, inter alia, invest the money in short-term deposits and earn interest thereon. Therefore, from the beginning when the amount was contributed there was a restriction on the assessee-company with regard to the use of the money. The next stage is with regard to the right of the Government to collect the interest earned by the assessee-company if that money was put to any other use. It should be noted that Gujarat Government did not specifically permit the assessee-company to place and utilise the money on short-term deposits. All that it did by the combined effect of the resolution dated 1-11-1976 and the subsequent letter dated 13-1-1977 was to ask the assessee that if the money was placed on short-term deposits, the interest thereon was to be paid to the Government. This would follow as a natural corollary to the restriction on the use of the money, understood at the time of the payment as indicated above. The Government could have used the money or itself earned interest on it. Further, applying the aforesaid decision of the Supreme Court an overriding title in respect of interest earned existed in favour of the Government. The money was paid only for the allotment of shares and before shares could be allotted the Government directed the assessee-company to pay the interest thereon to it. Hence, as in the above case before the Supreme Court so in this case, from the inception (i.e., allotment) the Government's direction became applicable. Moreover, until the permission from the Government for the issue of share capital was received the Government was free to impose a condition regarding the payment of interest earned on the amount of its contribution to be utilised for allotment of shares. There is nothing on record to show that before the allotment of shares the Government could not have withdrawn the amount paid by it to the assessee-company. As stated above the Commissioner (Appeals) referred and relied upon the decision of the Karnataka High Court in the case of Bangalore Soft Drinks. The decision in that case, however, was in a different context. The question there was whether the sum received towards allotment of shares to a non-resident shareholder constituted a liability and, therefore, was a debt and should have been deducted while computing the capital for the purpose of relief under section 80J. Up to the end of the accounting period the permission of the Reserve Bank of India was not received and so the allotment of shares could not be made. The High Court held that the amounts having been paid for the purpose of allotment of shares, it cannot at all be considered that the amounts were paid by way of loan or that there was any amount of borrowing by the assessee. The amounts had been paid for a specific purpose and could be returned only if the shares were not allotted. This decision clearly shows that the Court was concerned with the question whether that amount received was a loan and it was in that context the High Court stated that the amounts could be returned only if the shares were not allotted. This decision, therefore, has no relevance to the question before us.

6. The argument of the learned representative on behalf of the revenue that the second resolution dated 1-11-1976 does not refer to the assessee-company is met by the letter dated 13-1-1977 to the assessee-company which has been considered above. Regarding the contention that the balance sheet showed the amount of share capital, it must be said that what we have to see is the real nature of the receipt, i.e., the purpose for which the amount of Rs. 6 crores was received. Therefore, for the reasons stated above we are of the view that an overriding title of the Government existed in respect of the amount of interest received on the short-term deposit of the assessee-company. Therefore, this amount cannot be considered to be the income of the assessee. Since we are deciding the first point in favour of the assessee, it is not necessary to consider the second argument put forward by the assessee's counsel.

7. In the result, the appeal is allowed.

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