GUJARAT NARMADA VALLEY FERTILISER CO LTD Vs. INCOME TAX OFFICER
INCOME TAX APPELLATE TRIBUNAL
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K.R. Dixit, Judicial Member -
(1.) 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 twofold :
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.  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.
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.
(3.) 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.;
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