Income: Interest: Accrual: A. Y. 1992-93: Assessee-company promoted by State Government: Amount received from Government towards share capital: Interest earned on short term deposits: Agreement that interest would belong to Government: Interest not assessable in hands of assessee:

The assessee was promoted by the Government of Gujarat and the Gujarat Electricity Board to augment power generating capacity in the State of Gujarat. The Gujarat Government sanctioned a sum of Rs. 5 crore towards equity share capital. It was agreed that, pending the allotment of shares whatever income was earned by way of interest by the assessee would belong to the Government of Gujarat. In the accounting year relevant to the A. Y. 1992-93, the assessee earned interest of Rs. 53.92 lakh from such short-term deposits. The assessee claimed that the interest amount belonged to the State Government and accordingly was not assessable in its hands. The Assessing Officer did not accept the contention and assessed the interest in the hands of the assessee. The Tribunal confirmed the addition.

On appeal by the assessee, the Gujarat High Court reversed the decision of the Tribunal and held as under:

“i) Merely because the initial agreement between the parties did not make any provision with respect to the treatment of such interest, that would not be sufficient to change the nature and basic character of such income. In the absence of specific stipulation to the contrary, such interest must be treated to be held by the assessee in trust for the Government.

ii) Further, on 17th September, 1992, the Government of Gujarat and the assessee after due deliberation, agreed that the best solution would be to transfer such income to the Government. The amounts were not assessable in the hands of the assessee.”