Option 4 is the correct one which states that `Indian federalism is not based on the principle of Separation of Powers`. In Indian federalism, while there is a clear demarcation of powers, the central government retains the authority to override state government decisions under certain situations. This can be contrasted with the principle of Separation of Powers, which generally implies an equal division of powers among various branches of government without any supremacy.

Option 1 is incorrect as courts indeed interpret the Constitution and powers of different levels of the Government in Indian federal system. Option 2 is also incorrect as the sources of revenue for the Union and State Governments are clearly specified in our Constitution. Similarly, option 3 is incorrect as the powers of the Union and the States are defined and specified in the Constitution.