High Court Of Allahabad
U.P. Bhumi Sudhar Nigam vs. CIT
Section 4
Asst. Year 1994-95, 1995-96
R.K. Agrawal & Prakash Krishna, JJ.
IT Appeal Nos. 3 & 4 of 1999
3rd December, 2004
Counsel Appeared
S.K. Garg & Shakeel Ahmad, for the Appellant : A.N. Mahajan, for the Respondent
JUDGMENT
R.K. Agrawal, J. :
Both the appeals filed under s. 260A of the IT Act, 1961 (hereinafter referred to as the ‘Act’) by U.P. Bhumi Sudhar Nigam, Lucknow (hereinafter referred to as the ‘Nigam’) raise common substantial question of law.
2. Income-tax Appeal No. 3 of 1999 relates to the asst. yr. 1995-96 whereas IT Appeal No. 4 of 1999 relates to the asst. yr. 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 IT 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 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 source, in favour of the State Government ? (iv) Whether the findings about the taxability of receipts amounting to Rs. 47,23,315 are not vitiated in law as having been arrived at without giving due consideration of the relevant materials/information, particularly to the effect that— (a) the amount in question stood credited in a separate account classified as ‘interest payable to Government’; (b) the State Government never gave up its claim for the said sum; (c) the Nigam at its part had already taken effective steps for making over the said sum as stood comprised in the overall credit balance under the head ‘Interest payable to State Government’ with such governance; and (d) other relevant/attendant facts and circumstances of the case.
(v) Whether the Tribunal was legally correct in not accepting the alternative plea of the appellant, that it carried corresponding liability towards the State Government, which in any case was liable to be allowed, as a sequel to the sustenance of addition of Rs. 47,23,315 ?
(vi) Whether the Tribunal was legally correct in holding that the amount in question did not partake the character of grants-in-aid given by the State Government, and the same was straightaway taxable in the hands of the appellant ?”
In the asst. yr. 1995-96, the amount is Rs. 47,23,315 whereas in the asst. yr. 1994-95, the amount is Rs. 71,96,225. Briefly stated the facts giving rise to the present appeals are as follows: According to the appellant, the Nigam is a company wholly owned by the Government of Uttar Pradesh. There were its various functionaries as shareholders which had come into existence for carrying out the following: “1. To undertake, assist, aid, finance, execute and promote measures for land development, conservation and improvement of soil and water resources such as : (a) Reclamation of land including reclamation of saline and alkaline soils and revine and gullied areas. (b) Farm drainage, both surface and sub-surface. (c) Prevention of mitigation of soil erosion. (d) Protection of land against damage by floods or drought. (e) Water management including conservation irrigation, use of sprinkers gated pipes and water harvesting. To carry on the business of farmers, graziers, planters, contractors for the construction of works and any other operations or business which may seem calculated directly or indirectly to develop the land for agricultural purposes or purposes akin to agriculture. 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 grant-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 asst. yrs. 1994-95 and 1995-96, the Nigam had received a sum of Rs. 71,96,225 and Rs. 47,23,315, respectively, towards the interest accrued/received on fixed deposits made by it. Before the AO it was contended on behalf of the Nigam that interest on FDRs, which had not been shown in the income of the Nigam but in the footnote of the balance sheet that it is income of the State Government, is not the income earned by the Nigam but it belonged to the State Government and, therefore, on the principle of diversion of income by overriding title the Nigam claimed that it was not its income. The Dy. CIT, Special Range, III, Lucknow, while framing the assessment order in each of the two years did not accept the plea of the Nigam and held it to be its income and accordingly imposed tax thereon. Feeling aggrieved, the Nigam preferred separate appeals before the CIT(A), Lucknow, who has held that the interest accrued to the Nigam on funds kept in banks and interest payable is revenue receipt. He upheld the action of the AO in treating the interest payable as taxable receipt. Feeling aggrieved the Nigam preferred separate appeals before the Tribunal, Allahabad. The Tribunal by its common order has dismissed the appeals.
We have heard Sri S.K. Garg, learned counsel for the appellant, and Sri A.N. Mahajan, learned standing counsel for the Revenue. At the outset it may be mentioned that the learned counsel for the appellant did not advance any argument on the question whether the Tribunal was legally correct in holding that the appellant-Nigam is not Government and its income, therefore, was not outside the provisions of the income-tax. Learned counsel for the appellant submitted that the amount of interest accrued/received by the Nigam on fixed deposits which it had taken in respect of the amount of grant received from the State Government did not reach the Nigam as by overriding title it was diverted to the State Government and it was really the income of the State Government, thus, it was not liable to tax at the hands of the Nigam. He further submitted that the State Government had issued order dt. 7th March, 1979, in which it had directed that all the State Government undertakings/corporations/ boards should keep the amount of grant in the personal ledger account (PLA) in the treasury and those amounts which had already been invested in the fixed deposits in the commercial bank be withdrawn and kept in the treasury. Another Government order was issued on 3rd April, 1980 in which the State Government had stated that if in any special circumstances the amount of grant had not been kept in the PLA 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. Similar view was reiterated by the State Government in its order dt. 4th Dec., 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 bank as its income and that is why it was not showing in the P&L a/c and a note was made in the balance sheet/P&L a/c 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 concept of real income should be employed. He further submitted that the board of directors of the Nigam had passed a resolution on 23rd March, 1998, in which out of the amount of interest accrued/received on fixed deposits in respect of the grant made by the State Government, it was resolved that Rs. 350 lakhs be converted in the share capital. He further submitted that in respect of the asst. yr. 1981-82 the Tribunal itself had held that the interest accrued on the fixed deposits was diverted by overriding title to the Government of Uttar Pradesh. Learned counsel for the appellant raised an alternate plea that in case the amount in question is treated to be the income of the Nigam there was a corresponding liability towards the State Government upon the Nigam to makeover the amount of such interest and, therefore, amount in question ought to have been deducted while computing income of the Nigam which is following the mercantile system of accounting.
8. In support of his various pleas, the learned counsel for the appellant has relied upon the following decisions : CIT vs. Sitaldas Tirathdas (1961) 41 ITR 367 (SC); Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC); Motilal Chhadami Lal Jain vs. CIT (1991) 94 CTR (SC) 195 : (1991) 190 ITR 1 (SC); Addl. CIT vs. United Motor Transport Service Association (1991) 190 ITR 13 (All); CIT vs. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690 (Kar); CIT vs. Shiv Prakash Janak Raj & Co. (P) Ltd. (1996) 136 CTR (SC) 421 : (1996) 222 ITR 583 (SC); Godhra Electricity Co. Ltd. vs. CIT (1997) 139 CTR (SC) 564 : (1997) 225 ITR 746 (SC); National Handloom Development Corpn. Ltd. vs. Dy. CIT (2004) 188 CTR (All) 195 : (2004) 266 ITR 647 (All); Jit & Pal X-Ray (P) Ltd. vs. CIT (2004) 186 CTR (All) 541 : (2004) 267 ITR 370 (All); Siddheshwar Sahakari Sakhar Karkhana Ltd. vs. CIT (2004) 191 CTR (SC) 66 : (2004) 270 ITR 1 (SC).
9. Learned standing counsel on the other hand submitted that Nigam had invested the amount of grant-in-aid in the commercial bank in its own name and further the interest which had accrued on the said fixed deposits did belong to the Nigam. The Government orders issued in this behalf did not change the position, it was an opinion expressed by the State Government regarding ownership of the income and its treatment. The Nigam had not acted strictly in conformity with the said Government orders and had been keeping the amount received from the State Government 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 apex Court in the case of State Bank of Travancore vs. CIT (1986) 50 CTR (SC) 290 : (1986) 158 ITR 102 (SC).
10. We have given careful consideration and are of the view that so far as the alternate plea is concerned in para No. 3.23 of the order under appeal, the Tribunal has specifically mentioned that the 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 the learned counsel for the appellant to raise this plea before us. The 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 Tribunal in the appropriate proceedings. We are supported in the view which we have taken by the decision of the apex Court in the case of State of Maharashtra vs. Ramdas Shrinivas Nayak AIR 1982 SC 1249.
11. After hearing the learned counsel for the parties we find that the Nigam had been depositing the amount of grant received by it from the Government of Uttar Pradesh in the commercial banks notwithstanding the Government orders dt. 7th March, 1979 and 3rd April, 1980. It has been enjoying income from interest for the last more than 15 years and it has not bothered to pay amount of interest to the State Government except making a provision in its books of account towards liability for payment of interest to the State Government. The State Government has also not bothered to treat the interest accrued/received by the Nigam on the amount of grants invested in fixed deposit with commercial bank as its income. Once the corpus of capital is floated and is handed over to the Nigam on day-to-day basis then the State Government has no control over the corpus of the Nigam. The Government order dt. 3rd April, 1980, contains general direction for being carried out by the corporation of the Government. It does not specifically regulate the working of the Nigam. Similar is the position with regard to the Government order dt. 4th Dec., 1993. The amount of interest does not appear the characteristic of grant-in-aid as this amount has not been sanctioned by the State Government as grant-in-aid nor there is any decision or order of the Government to consider the amount in question as grant-in-aid given to the Nigam. It may be mentioned here that in a case of diversion of income by overriding title the person in whose favour the income is to be diverted should be aware about the exact amount of such income which it has earned. In the present case there is no material brought on record to prove that the State Government was at any point of time aware about the interest income received/accrued by the Nigam for which it can lay any claim. These Government orders appear to have been issued just to take out the interest income earned by the Nigam from the taxation under the IT Act.
12. In the case of Sitaldas Tirathdas (supra), the apex Court has set out the classic statement of the true principle of diversion of income as follows: “…Obligations, no doubt, there are 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 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 (selfimposed 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 executed 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….”
13. In the case of Motilal Chhadami Lal Jain (supra) 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 above passage, it is clear that the expressions ‘reaches the assessee’ and ‘has been received’ have been used not in the sense of the income being received in cash by one person or another. What the passage emphasizes is the nature of the obligation by reason of which the income becomes payable to a person other than the one entitled to it. Where the obligation flows out of an antecedent and independent title in the former (such as, for example, the rights of dependants to maintenance or of coparceners on partition, or rights under a statutory provision or an obligation imposed by a third party and the like), it effectively slices away a part of the corpus of the right of the latter to receive the entire income and so it would be a case of diversion. On the other hand, where the obligation is self- imposed or gratuitous (as here), it is only a case of an application of income.” In the case of CIT vs. Sunil J. Kinariwala (2003) 179 CTR (SC) 15 : (2003) 259 ITR 10 (SC), the apex Court, after referring to the decisions of the Privy Council in the case of Raja Bejoy Singh Dudhuria vs. CIT (1933) 1 ITR 135 (PC) and P.C. Mullick vs. CIT (1938) 6 ITR 206 (PC); of the apex Court in the case of Sitaldas Tirathdas (supra), K.A. Ramachar vs. CIT (1961) 42 ITR 25 (SC); Motilal Chhadami Lal Jain (supra); CIT vs. Bagyalakshmi & Co. (1965) 55 ITR 660 (SC) and Murlidhar Himatsingka vs. CIT (1966) 62 ITR 323 (SC), has held that if a third person becomes entitled to receive an amount under an obligation of an assessee even before he could claim to receive it as his income, there would be a diversion of income by overriding title but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title. In the case of State Bank of Travancore (supra) the apex Court has laid down the following propositions : “(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation no income had resulted because the 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 fundamentalism. With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency than to be carried away by common cliches. The concept of real income certainly is a well-accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principle of law of income-tax as developed.”
16. In the case of Shiv Prakash Janak Raj & Co. (P) Ltd. (supra) the apex Court has approved the view taken by the Court in the case of State Bank of Travancore (supra) that if there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee and the concept of real income certainly is a well-accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principle of law of income-tax as developed. In the case of Pandavapura Sahakara Sakkare Kharkane Ltd. (supra), the Karnataka High Court has held that there was stipulation that one-third of the price charged for selling of molasses as fixed by the Government of India under the Molasses Control Order should be transferred to the fund called ‘Molasses Storage Fund’ which could be utilised only according to the instructions issued by the Government from time to time. The amount, thus, transferred has to be kept separately from other business funds in a separate bank account and it was not possible to withdraw the same without the prior approval of the Excise Department. The right of the fund got diverted from the hands of the assessee by virtue of the Molasses Control Order and, therefore, it could not be included in the income of the assessee as the amount in question got diverted at the source itself by virtue of the statutory application. In the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. (supra) the apex Court has held that the assessee merely acted as an agent in collecting the amounts towards the Chief Minister Relief Fund, Late Y.B. Chavan Memorial Fund and Hutment Fund and remitting the same to the Government or to the trustees in truth and in substance, the money collected by the assessee was not reaching the assessee as part of its income but the collection was made for and on behalf of the person to whom it is payable. It had no manner of right or title over the same money, therefore, these receipts should not treated as income of the assessee.
In the case of Jit & Pal X-Ray (P) Ltd. (supra) 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. (supra) the apex Court has held that income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. 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. In the case of National Handloom Development Corpn. Ltd. (supra) this Court has held that a basic concept in IT law is that the assessee must have received or have acquired a right to receive the income before it can be taxed. There must be a debt owed to him by somebody, if the amount is to be taxed on mercantile (accrual) basis. Unless a debt has been created in favour of the assessee by somebody it cannot be said that the income has accrued to him or he has a right to receive the income. When one refers to the right of an assessee to receive an amount so as to make it taxable, it necessarily means a right enforceable under law. If the claim is not legally enforceable the assessee cannot be said to be vested with a right to claim the amount. In the case of Kedarnath Jute Mfg. Co. Ltd. (supra) the apex Court has held that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. The decision of this Court in the case of United Motor Transport Service Association (supra) relied upon by the learned counsel for the appellant is not applicable in the present case inasmuch as it related to case of depreciation under s. 10(2)(vi) of the IT Act, 1922. This Court has held that the depreciation is admissible only where the assessee is the owner of the asset in question.
24. From the aforesaid cases the following principles emerge : (i) If a third person becomes entitled to receive an amount under an obligation of an assessee even before he could claim to receive it as his income, there would be a diversion of income by overriding title but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee 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 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 bank 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 Nigam. By the Government order, dt. 7th March, 1979 the State Government undertakings/corporations/boards were directed to deposit the amount of grant in the PLA in the treasury and in future also they were required to deposit the amount in the treasury and all amounts which have been deposited in the commercial bank should be withdrawn and deposited in the PLA of the treasury. In the order dt. 3rd April, 1980, the State Government had expressed its opinion that if in any special circumstances the amount of grant is not deposited in the PLA in the treasury and the same is invested in the fixed deposit account, then the amount of interest should be added to the Government grant/loan and should not be shown in the P&L a/c of the undertaking/corporation. In the order dt. 4th Dec., 1993, the State Government has reiterated its earlier direction/opinion and directed that instruction regarding deposit of the amount in the PLA of the treasury should be strictly followed. From a perusal of the aforementioned Government orders we are of the considered opinion that it is only a direction issued by the Government of Uttar Pradesh to the Nigams and undertakings and the contention that the amount of interest did not accrue to the Nigam and it belonged to the State Government is not correct. The State Government has only expressed its opinion regarding the treatment of the amount of interest and, therefore, these Government orders cannot come to the rescue of the appellant. Moreover, we find that the Nigam has not at all complied with the direction contained in the aforementioned Government orders regarding deposit of amount received from the State Government in the PLA account in the treasury. These orders are, therefore, in the nature of advisory orders only.
Applying the principle laid down in the aforesaid cases to the facts of the present case, we find that no material has been placed on record to show that there was any stipulation that the interest earned on such grant/aid if kept in fixed deposit in commercial bank would not accrue to the appellant but to the State Government. In fact the orders issued by the State Government were for treating the amount of interest. By treating it as a further grant, in fact is an application of money after it has been earned by the appellant and, therefore, the Tribunal was justified in holding that the interest, in fact, was taxable at the hands of the appellant. We are also of the considered opinion that the theory of real income is not applicable to the facts of the present case inasmuch as the interest has accrued to the appellant which it had retained for years together and only later on it has decided to convert a part of the amount of accumulated interest and not whole of it towards its share capital.
27. In view of foregoing discussions we do not find any merit in these appeals which are hereby dismissed. However, the parties shall bear their own costs.
[Citation : 280 ITR 197]
