PRINCIPLES OF TAXATION

SUBMITTED TO: SUBMITTED BY:

PROF. GIRJESH SHUKLA SURUCHI SINGH
PROFESSOR OF LAW 1020202149
HPNLU, SHIMLA BALLB

7TH SEMESTER
 DECLARATION

I Suruchi Singh, a 4th year student of Himachal Pradesh National Law University, Shimla
hereby declare that the assignment titled case comment on the case Principal Commissioner
of Income Tax V. Jharkhand Tourism development corporation Ltd. Was done by me under
the guidance of Dr. Girjesh Shukla (professor of law) HPNLU, Shimla.

I also affirm that the content of this project has nor been submitted or published in any form
to any institution for any degree or purpose.

Suruchi Singh
1020202149
Ballb
HPNLU, Shimla
 LIST OF CASES

• Dalmia Cement Ltd. vs. Commissioner of Income-tax

• Commissioner of Income-tax vs. Jhanzie Tea Association
• Commissioner of Income-tax vs. Tea Producing Co. of India Ltd
• Commissioner of Income-tax vs. Sitaldas Tirathdas
• P.C. Mullick vs. Commissioner of Income-tax
• Raja Bejoy Singh Dudhuria vs. Commissioner of Income-tax
 PRINCIPAL COMMISSIONER OF INCOME TAX V. JHARKHAND
TOURISM CORPORATION LTD. 2023

FACTS OF THE CASE

The Income-tax Act of 1961, Section 41 - Income - Diversion at source through the
application or overriding title of income (interest on money not used) Assessment years
2012–13 and 2014–15 - Assessee was a State Government undertaking incorporated with the
purpose of promoting tourism in the State on behalf of the Central and State Government -
Central/State Government disbursed funds to assessee for payment in accordance with their
guidelines for approved projects - According to Governmental directions, assessee kept a
portion of unutilized funds in short-term bank deposits, which resulted in earning interest
income – It was noted that assessee was liable to refund unutilized funds as and when
requisitioned – Such funds always remained property of Government – Interest earned from
these deposits was transferred to respective fund accounts of Government – Assessee never
became owner of money which came from interest.

The Assessee is a Jharkhand State Government project that was established with the goal of
advancing tourism in the region by building, running, and maintaining tourism-related
infrastructure on behalf of federal, state, and local governments. The assessee received funds
from the Central and State governments to be paid for approved projects in line with
government rules. The assessee is responsible for returning any unused funds back to the
government upon request. As a result, the money was always the government's property, even
though the assessee had permission to spend it and was required to follow the instructions on
how to handle the excess.

1
Section 4, Income Tax Act, available at: https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx
 ISSUES

i. Whether on the facts and in the circumstances of the case and in law, the learned
Income Tax Appellate Tribunal is justified in holding that the interest income
earned on the fixed deposit is not an income of the Assessee, despite the said
interest income being covered under the 'Income from Other Sources' as defined
in the Income-tax Act, 1961?

ii. Whether on the facts and in the circumstances of the case and in law, the learned
Income Tax Appellate Tribunal is justified in holding that an executive guideline
(guideline issued by the Ministry of Tourism in the case) can override the statutory
provisions of the Income-tax Act, 1961?
 ARGUMENTS ADVANCED BY THE APPELLLANT

i. Even if the interest income on the fixed deposit is covered by "Income from other
sources" as defined by the Income Tax Act, the learned ITAT was not justified in
determining that it is not the amount of the assessee. The knowledgeable ITAT
ought to have understood that a Ministry of Tourism executive guideline cannot
supersede an Act statutory provision.

ii. The fact that the Assessee has a fixed deposit account in its own name and that
the Bank withheld TDS on interest income produced in the account—which the
Assessee has also demonstrated and claimed—should have really been noted by
the knowledgeable ITAT and CIT (Appeals).

iii. he argues that the orders issued by the CIT (Appeals) for the two assessment
years and the corresponding impugned orders issued by the knowledgeable ITAT
are erroneous and unsustainable legally. Consequently, he requests that the
impugned orders for the corresponding assessment years be quashed and set
aside.
 ARGUMENTS ADVANCED BY THE RESPONDENTS

i. The Assessee is an agency of the government that carries out its directives.
According to the memorandum dated 16-12-2006, even the term deposit
investment was made on behalf of the government. In actuality, the assessee never
acquired ownership of the funds, so there was no question of any income by the
assessee on the interest earned by it. As a result, the tax question was not raised.

ii. He goes on to say that since two forums had contemporaneous conclusions for not
just the present and past years, but also for prior years, both appeals should be
rejected.
 DECISION

Examining these cases' facts and the aforementioned rulings from the Hon'ble Apex Court, it
is evident that the Assessee never actually gains financial ownership, and as a result, the
increase made by the AO was unsustainable in both assessment years. The learned CIT
(Appeals) and ITAT, who upheld the CIT (Appeals) order, did not mistake in concluding that
the petitioner never acquired ownership of the interest-generating funds and that the addition
was deleted. It is our belief that neither of the forums has made any mistakes.

The decision is held in the favour of the Assessee. The income never reached the Assessee and
was diverted at source by an overriding title.

ANALYSIS

A lengthy string of cases has well-established the law, holding that the question of income
assessment in the hands of the assessee does not and cannot arise in the event of an income
diversion by overriding title.

Thus, the income never reached the Assessee and was diverted at source by an overriding
title.

• This Court provided a very clear explanation of the idea of income diversion
by an overriding title in CIT v. Sitaldas Tirathdas2 in the following way:

"In our opinion, the true test is whether the amount sought to be deducted, in truth, never
reached the assessee as his income. 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 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 after such income reaches the
assessee, the same consequence, the 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

2
CIT v. Sitaldas Tirathdas [(1961) 41 ITR 367: AIR 1961 SC 728]
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."3

Interest earned on said unutilized funds kept in FDs could not be treated as income in the
assessee's hands when the government disbursed funds to the assessee—State Government
undertaking for making payment in accordance with Government's guidelines for approved
projects and as per Government direction assessee kept unutilized funds in FDRs. This is
because assessee was liable to refund unutilized funds as and when requisitioned and funds
always remained property of the Government.

➢ Reference can also be made to the case of Dalmia Cement Ltd. v. CIT4

➢ In Travancore Sugar & Chemicals case5 this Court reiterated the same test and
observed: (SCC p. 284, para 22)

"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."6

https://www.taxmann.com/research/search?searchData=principal%20commissioner%20of%20income%20tax
%20vs%20Jharkhand%20tourism%20development%20corporation%20ltd

4
Dalmia Cement Ltd. v. CIT [1999] 104 Taxman 97/4 SCC 124
5
CIT v. Travancore Sugar and Chemicals Ltd., (1973) 3 SCC 274: 1973 SCC (Tax) 186: (1973) 88 ITR 1
6

https://www.taxmann.com/research/search?searchData=principal%20commissioner%20of%20income%20tax
%20vs%20Jharkhand%20tourism%20development%20corporation%20ltd
DIVERSION OF INCOME

When income is lawfully transferred by a taxpayer to a third party prior to it reaching the taxpayer, it
is referred to as income diversion. The income that is legally transferred is not counted against the
taxpayer's income for taxation reasons. Put otherwise, the revenue is redirected to a different
individual prior to it being subject to taxation at the taxpayer's end.

The following requirements must be satisfied in order for an income diversion to be recognised under
the Income Tax Act:

a) Existence of a legal obligation: The taxpayer must be required by law to apply the income before it
accrues or becomes due to them in a certain way. This legal duty may result from a statute, an
agreement, a contract, or from any other type of legal framework.

b) Diversion before to accrual or arising of income: Before the money accrues or arises for the
taxpayer, it must be lawfully diverted to a third party. Upon accrual or emergence, income is subject
to taxation in the taxpayer's possession, unless it meets the requirements for income diversion.

c) Diversion without the taxpayer's control: The revenue has to be sent to a different entity without the
taxpayer's influence. Once money is diverted, the taxpayer cannot have any authority or control over
it.

d) Genuine and bona fide transaction: The income diversion must be sincere and bona fide; it cannot
be a fake or colorable transaction meant to avoid paying taxes.

The diverted money will be taxable in the hands of the third party to whom it is diverted and will not
be considered the taxpayer's income for tax purposes if all these requirements are satisfied.

EXAMPLE OF DIVERSION OF INCOME

M/s ABC is a partnership firm in which A and his two sons B & C are partners. The partnership deed
provides that after the death of Mr. A, B & C shall continue the business of the firm subject to a
condition that 20% of profit of the firm shall be given to Mrs. D (Wife of Mr. A/ Mother of B & C).
After the death of Mr. A, whether this 20% amount of profit be included in the Total Income of Firm
M/s ABC or is a case of diversion of income of M/s ABC and not taxable in its hands?
This is a case if Diversion of Income and the said 20% amount shall not be included in the Total
Income of M/s ABC, i.e., it is deductible from its Total Income. This is because the clause mentioned
in partnership deed has given an overriding title of 20% profit to Mrs. D and such income is a
precondition for the firm to continue its business. In other words, this 20% profit reaches Mrs. D
before it becomes income of the firm and hence it is a case of diversion of Income.

OVERRIDING TITLE7

Overriding title refers to a sort of tax avoidance scheme, where an individual or a company
transfers their income or the assets to another party via legal document known as overriding
title.

Overriding title can be considered as one of the ways of DIVERSION OF INCOME. The use
of overriding title to divert income id considered as one of the aggressive tax planning and
scheme to avoid or reduce the amount of taxes.

FUNCTIONING OF OVERRIDING TITLE8

1. An individual or a company creates an overriding title by means of a legal document that

transfers the rights to receive any income, assets or profits from another party.

2. Overriding title is generally a legal document structured like lease or license, that allows
the diversion of the income or the asset.

3. Then the income or asset is paid to the individual or company to whom it is being diverted.
It can be any party such a s family member, or an unrelated party.

4. By doing this, tax liabilities can be reduced as the income or assets are no longer directly
attributed to the original party.

7
https://www.legalserviceindia.com/article/l85-Application-of-Income.html

8
https://legalvidhiya.com/diversion-of-income-by-overriding-
titles/#:~:text=Diversion%20of%20income%20by%20overriding%20titles%20refers%20to%20a%20tax,on%20th
e%20income%20or%20assets
 BIBLIOGRAPHY

https://www.scconline.com/

https://legalvidhiya.com/

https://incometaxindia.gov.in/

https://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf

https://taxguru.in