Signature bonus received for developing and transferring power projects constitutes taxable revenue receipt.

The assessee, promoted by the Gujarat Electricity Board and the Government of Gujarat, was established to develop and implement power projects and facilitate private-sector participation in the power sector.

For Assessment Year 1995–96, it filed a return declaring a loss. The Assessing Officer included interest income of ₹27.86 lakh in the assessee’s income and made other adjustments.

The assessee contended that the interest belonged to the Government of Gujarat and had merely been diverted pursuant to Government directions.

The CIT(A) and the Tribunal rejected this contention, relying on the Tribunal’s decision in the assessee’s own case for an earlier year.

During appellate proceedings, the assessee also claimed that ₹898.42 lakh received as “signature bonus” for transferring two power projects to GMDC and GIPCL was a capital receipt.

The CIT(A) and the Tribunal held that the receipt arose from the assessee’s ordinary business of developing and transferring power projects and was therefore taxable revenue income.

Whether interest of ₹27.86 lakh earned on funds provided by the Government of Gujarat was taxable as the income of the assessee or belonged to the Government of Gujarat.

Whether ₹898.42 lakh received as signature bonus for transferring power projects was a capital receipt or taxable revenue income of the assessee.

The Court applied the doctrine of diversion of income by overriding title, holding that income legally belonging to another person pursuant to a binding obligation is not taxable in the hands of the recipient; it relied on the Court’s earlier decision concerning the assessee, including Gujarat Power Corporation Ltd. v. Income-tax Officer, 354 ITR 201.

In distinguishing capital receipts from revenue receipts, the Court applied the principle that compensation for the sterilisation or extinction of an income-producing asset or profit-making structure may be capital in nature, as recognised in Kettlewell Bullen & Co. Ltd. v. CIT, CIT v. Barium Chemicals Ltd., Prabhu Dayal v. CIT and Bombay Burmah Trading Co. v. CIT, while noting the assessee’s reliance on B.C. Srinivasa Shetty concerning transfer of an asset with no ascertainable cost of acquisition.

The Court also considered Section 250(5) of the Income-tax Act, 1961 regarding admission of additional grounds, although the claim was examined on merits by the appellate authorities.

On the interest issue, the Court followed its earlier ruling in the assessee’s own case, under which the relevant Government funds and the interest generated thereon were treated as belonging to the Government of Gujarat rather than the assessee.

The Revenue could not controvert the applicability of that ruling; accordingly, the interest could not be taxed in the assessee’s hands.

On the signature bonus, the Court accepted the concurrent factual findings that the assessee’s business involved identifying, developing and implementing power projects and transferring them to investors or public-sector entities.

The assessee had undertaken land surveys, soil testing, obtaining approvals and other preparatory work, and had incurred expenditure in developing the projects.

The signature bonus was therefore consideration connected with the assessee’s ordinary commercial activity and not compensation for the destruction or sterilisation of a capital asset or profit-making apparatus.

The fact that 20% of the bonus was shared with the Gujarat Electricity Board in recognition of expenditure incurred by it further supported the business character of the receipt.

The principle in B.C. Srinivasa Shetty was held inapplicable because the project development involved substantial expenditure and was not a transfer of an asset acquired without cost.

The second question was answered in favour of the Revenue and against the assessee, holding that the ₹898.42 lakh signature bonus was taxable revenue income arising from the assessee’s ordinary business activities.

The appeal was accordingly partly allowed.