If an assessee-company cannot allot shares immediately in favor of State Government against investment made by it in assessee-company, then Interest earned on deposits made out of such funds shall belong to the State Govt. and shall not be taxed in the hands of assessee:

The assessee company received certain funds from Govt. of Gujarat as contribution towards it equity share capital. Till the time the assessee company allotted shares to Govt. of Gujarat, the said funds were parked in short term deposits with a schedule bank on which it earned certain interest. The assessee company and Govt. of Gujarat had entered into an arrangement according to which the said interest should belong to and be received on behalf of Govt. of Gujarat. It was held by the Hon’ble High Court that during the pendency of allotment of shares, the funds received towards equity share capital were held by the assessee company in trust for and on behalf of Govt. of Gujarat and hence, any interest accrued by investment of such funds must belong to the Govt. of Gujarat and till it remained in the hands of the assessee company, it must be treated to have been held in trust.

[GUJARAT POWER CORPORATION LTD. - TAX APPEAL No.99 of 2000 - GHC]