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Petitioner: COMMISSIONER OF INCOME-TAX, BOMBAY CITY. I VS Respondent: C. N. PATUCK
Court Name: Bombay High Court Judge(s): V. S. Desai, S. P. Kotwal Title: COMMISSIONER OF INCOME-TAX, BOMBAY CITY. I vs C. N. PATUCK Case No.: Income-tax Reference No. 104 of 1962 Date of Judgment:1968-01-22 Reported As: 1972 PTD 371 Result: N/A
JUDGMENT
JUDGMENT KOTVAL, C. J.-The question referred for our decision ill this reference is: "Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 3,000 paid to the un--married daughter from his total income of the previous years relating to the assessm ent years 1957-58 and 1960-61 ?" The circumstances under which this question comes to be referred are as follows : C. N. Patuck was assessed as an individual in the relevant assessment years. He was a partner of a firm known as Messrs Patuck & Sons. From this firm he derived an income from two sources. He had a one-third share in the profits of the partnership and was receiving Rs: 400 per month as his salary. The assessee was a married man but some time in 1951 his marriage with his wife came to be dissolved and a divorce was granted to him with other consequential reliefs. The suit was Suit No. 16 of 1951, before the Parsi Chief Matrimonial Court at Bombay and it was decreed on 2nd April 1951, by consent of both the parties. As a result of this compromise the assessee made certain provisions for the two unmarried daughters by that marriage and that arrangement has given rise to the present reference, Since the real question arising in this reference is as to the construction of the terms of the decree passed in that case and the subsequent agreement entered into as envisaged in that decree, we set forth verbatim the operative part of that decree. Clause 4 was as follows: "4. The plaintiff agrees to pay to his daughter, Jeroo, a monthly sum of Rs. 250 and to his daughter, Sooni, a monthly sung. Of Rs. 250. Such sums shall be paid to each of them till her marriage. The payments shall be made on or before the 10 day of each month. In the event of the marriage of each of the said daughters, Jero and Sooni, the plaintiff shall pay to each of them a sum of Rs. 10,000 ors the marriage of each of them. In order to secure regular payment of the above sums anth
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agree--ment will be entered into between the plaintiff, the said two daughters and the partners of Messrs Patuck Sons & Co. Agreeing to pay to each of them the monthly sum of Rs. 250, respectively, out. Of the remuneration and profits payable to the plaintiff from the partnership firm. In the event of the retirement of the plaintiff` from the said partnership or in case of hideath the payment of the said sums mentioned in this clause shall constitute a first charge on the share of the plaintiff in the said partnership and if and when required the plaintiff will execute a document for that purpose." The decree contemplated that. An agreement would be entered into and such an agreement was entered into on the 4th April 1951. It was a tripartite agreement between the firm of Messrs Patuck & Sons, the assessee himself and his two daughters and the relevant portion of that agreement was as follows: "By a Deed of Partnership dated 23rd October 1944, and entered into between Mr. Cowasji Nusserwanji Patuck and ourselves a monthly sum of Rs. 400 as and by way of re--muneration and one-third share in the profits of the partnership business is payable to Mr. Cowasji Nusserwanji Patuck as a partner. We have been informed and taken notice of the following provision made for you by our partner Mr. Cowasji Nusserwanji Patuck as a part of the consent terms in Parsi Chief Matrimonial Suit No. 16 of 1951 between him and his wife Shera Cowasji Patuck: `The plaintiff (i.e., Cowasji Nusserwanji Patuck) agrees to pay his daughter Jeroo a monthly sum of Rs. 250 and to his daughter Sooni a monthly sum of Rs. 250. Such sums shall be paid to each of them till her marriage. The payments shall be made on or before the 10th day of each month. In the event of the marriage of each of the said daughters Jeroeand Sooni, the plaintiff (i.e., Cowasji Nusservvanji Patuck) shall pay to each of them a sum of Rs. 10,000 on the marriage of each of them. In order to secure regular payment of the above sums an agreement will be entered into between the plaintif i.e, Cowasji Nusserwanji Patuck), the said two daughters and the partners of Messrs Patuck Sons & Co. Agreeing to pay each of them the monthly sum of Rs. 250 respectively out of the remuneration and profits payable to the plaintiff i.e., (Cowasji Nusserwanji Patuck) from the said partnership firm. In the event of the partnership firm being dissolved or in the event of the retirement of the plaintiff (i.e., Cowasji Nusserwanji Patuck) from the said partnership or in case of his death the payment of the sums mentioned in this clause shall constitute a first charge on the share of the plaintiff (i.e., Cowasji Nusserwanji Patuck) in the said partnership and if and when required the plaintiff (i.e., Cowasji Nusserwanji Patuck) will execute a document for that purpose." In consideration of the above premises and in further consideration of the sum of Rs. 5 paid to us by Mr. Cowasji Nusserwanji Patuck and Rs. 5 paid to us by you two we agree to pay to each of you out of the remuneration and one-third share in the profit of the aforesaid partnership, such payment to be made by cheque on or before the 10th of each month:" During the accounting year the assessee's share of profits is the firm and his salary according to the statement of the case were first credited to his account and then the assessee made the payment to his daughters direct, though the receipts obtained from his daughters mentioned that the payments were made by the firm. The statement of the case also clarifies that "the firm assured itself that the payments were duly made to the two daughters regularly. The bona fides of this arrangements and the factum of payments are not in dispute." One of the daughters, it is stated, has got married and, therefore, the question which arises in the reference is limited only to the amount paid to the remaining unmarried daughter. The assessee claimed that the amount paid to his daughter under the term; of the: decree and the agreement did not constitute his income at all and was not liable to tax. He claimed that the amount was at source diverted and ceased to be his income, because of the overriding title created in his daughter. The Income-tax Officer held that, though the payment was legally enforceable against the assessee, the payment of the above sum amounted to nothing more than the discharge of a personal obligation and that there was no provision in the Income-tax Act to
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allow expenses of a personal nature. He referred to the decision of this Court in Sitaldas Tirtahda's case ((1958) 33 I T R 390). He held that Situldas's case had not decided the point whether expenses to meet "per--sonal obligations of a personal nature can be allowed as a deduc--tion . . . . . " The order of the Income-tax Officer dells with the sum of Rs. 6,000, namely, the amount of the payment to both the daughters, but since the order of the Income-tax Officer, as we have said, one daughter got married and, therefore, the question regarding her does not survive. In appeal, the Appellate Assistant Commissioner reversed the decision of the income-tax Officer and allowed the claim of the assessee for the two years relying upon the same decision and a decision of this Court in Seth Motilal Manekchand's case ((1957) 31 I T R 735). He held: "The point for consideration is whether the Income-tax Officer was justified in not allowing the sum of Rs. 3,000 paid to one of the daughters of the appellant. Here there is a legally enforceable right against the appellant on whom there is an obligation to pay the sum of Rs. 3,000 as maintenance, which could be enforced in a Court of law. The appellant was therefore entitled to deduct such sums. This is the view held by their Lordships of the Bombay High Court in the case of Sitaldas Tirathdas and in the case of Seth Motilal Manekchand. That being the position of the law, the Income-tax officer was not justified in not allowing the maintenance allowance of Rs. 3,000 paid to one of the appellant`s daughters. He is directed to allow it." The Department went up in appeal to the Income-tax Appellate Tribunal at Bombay and before the Tribunal it was pointed out that the decision of this Court upon which the Appellate Assistant Commissioner had relied, namely, Sitaldas Tirathdas v. Commissioner of Income-tax had by then been reversed by the decision of the Supreme Court in Commissioner of Income-tax v. Sitaidas Tirathdas ((1961) 41 I T R 367 (SC)). Nonetheless the Tribunal confirmed the decision of the Appellate Assistant Commissioner and dismissed the departments appeal. The view which the Tribunal took was that the provisions of the decree and the agreement created an overriding charge on the salary and the share of profits of the assesses, which charge could be legally enforced, and, as a consequence of that charge, the receipts from the partnership payable to the assesses had to the extent of the charge ceased to be his income. There was thus a diversion of his income at source and it could not be said that it was income taxable in his hands. They relied upon the decision of the Privy Council in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax ((1933) 1 I T R 135 (P C)) and upon the decision of the Supreme Court in Sitaldas's case. On behalf of the Commissioner Mr. Joshi has disputed all these findings of the Tribunal. He has urged that, in the first place, the Tribunal has erred in the construction of the two documents before it and that having regard to the provisions of those two documents its conclusion that they gave rise to a charge upon the assessee's share of profits in the partnership was wrong, and that, in the circumstances of this case, a charge could never 'trice the manner in which the parties dealt with the profits shows that the profits were first paid to the assessee and then the assessee himself distributed the profits to his two daughters. The whole arrangement was merely made in order to insure to the two daughters their maintenance. It was paid out of the remuneration and the profits and, therefore, it could not be said that the profits were diverted at source and ceased to be the income of the assessee. He has also urged that this being a partnership the assessee who was a partner therein could not, in law, divert any part of the profit by creating a superior title in any one. Upon the authority of a decision of the Supreme Court he urged that the profits could only be payable to a partner and to no one else. Therefore, even legally, the arrangement was not valid. Lastly, be has urged that, in any case, the income from the partnership accrued to the assessee before the charge possibly could attach itself to that and, therefore, the charge would not affect that Income. Before the charge could operate, the amount of -the profits had already -become the income of the assesses. The
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principle that income which could be charge to tax in the case of an individual must be his income flows from the provisions of section 3 of the Income-tax Act itself. By that section the charge of income-tax falls on the "total income of the previous year of every individual. . ." "Total income" is defined in section 2(15) and means "total amount of income, profits and gains referred to in subsection (1) of section 4 computed in the manner laid down in this Act". Obviously that implies that it must be an individual's own total income before it could be taxed in his hands. If then zither by act of parties or by operation of law it is taken away from an individual at source and never becomes his income, it cannot be taxed as his income, This principle is variously referred to in the authorities, to which we shall presently refer, as the principle of real income or the diversion of income at source by virtue of an overriding title in some one else as opposed to the assessee. The leading case is the Privy Council case in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax. In that case the Raja, who had succeeded to the ancestral estate of the family on the death of his father, was sued by his step-mother for maintenance and in the suit a consent decree was passed directing him to make a monthly payment of a fixed sum to his step-mother and declar--ing that the maintenance was to be a charge on the ancestral estate in his hands. The Raja claimed that in computing his Income the amounts paid by him to his step-mother under the decree should be excluded. The Privy Council negatived the contention that the liability of the Raja under the decree fell under any of the exemptions or allowances under sections 7 to 12 of the Indian Income-tax Act, but nevertheless they allowed the deduc--tion on the ground that the sums paid by the Raja to his step--mother were not his income at all. They held that the decree of the Court by charging his entire estate with a specific payment to his step-mother had to that extent diverted his income from him and had directed it to his step-mother. To that extent, therefore, what he received for her was not his income. It was not a case of the application by the appellant of part of his income in a particular way, but it was rather the allocation of a sum out of his revenue before it became income in his hands. The High Court of Calcutta had held that the Raja's liability towards his step-mother was of the same kind as his liability to provide for his wives and daughter and the position was the same as if the Raja "had received his various properties, securities and businesses under a bequest from his father upon the terms that these assets were charged with an annuity for the maintenance of the widow". The Privy Council met this reasoning by saying (see page 138): "---------.. Their Lordships do not agree with the learned Chief Justice in his rejection of the view that the sums paid by the appellant to his step-mother were not 'income' of the appellant at all. This in their Lordships' opinion is the true view of the matter. When the Act by section 3 subjects to charge "all income` of an individual, it is what reaches the individual as income which it is intended to charge. In the present case the decree of the Court by charging the appellant's whole resources with a specific payment to his step-mother has to that extent diverted his income from him and has directed it to his step-mother ; to that extent what he receives for her is not his income. It is not a case of the application by the appellant of part of his income in a particular way, it is rather the allocation of a sum out of his revenue before it becomes income in his hands." The Privy Council in this respect emphasized the difference between the provisions of the English Income-tax Code and the Indian Income-tax Act. The important difference which they pointed out was that, after a certain date, in the English system of income-tax legislation, the principle of deduction of tax at source was introduced and, therefore, deductions which were formerly authorized were prohibited, but under the Indian Income tax Act there was no similar provision for deduction of tax at source and the consequent reimbursement of the tax-payer in the case of such a charge as that to which the revenues of case assessee in that case were subject and then their Lordships observed ;
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"While their Lordships are disinclined to entertain any argument from the one system to the other, they would infer, If any inference were permissible, that the omission from the Indian act of any such provision points rather to an intention to tax, in Lord Davey's phrase, only `the real income' of the tax-payer, than to an intention to impose, without tight of reimbursement, a tax on. What is a charge upon his income." This leading case is referred to In almost every authority in India to which our attention has been invited. Before we go to these authorities, one thing may be noted regarding this decision of the Privy Council. It was a case where there was an express charge created by the consent decree itself: As we shall presently show fn several decisions of the High Courts in India, this authority was applied in cases where there was no express charge declared, one such case being the decision of this Court in Sitaldas Tirathdas v. Commissioner of Income-tax. That was also a case where the assessee, Sitaldas, had paid in the relevant assessment years 1953-54 and 1954-55 two amounts of Rs. 1,350 and Rs. 18,000 as maintenance to his wife and children under a decree of a Court, beat the decree had not made the payment of the maintenance a charge on any property. It was expressly contended by counsel on behalf of the assessee that the assessee claimed a deduction of that amount from his total income because his real total income was whatever had been computed, which he did not dispute, less the amount of the Maintenance paid under the decree. The Division Bench accepted this contention relying upon an earlier decision of this Court in Seth Motilal Maneckchand v. Commissioner of Income-tax. They pointed out that in that case this Court had in terms laid down that it is not essential that there should be a charge but that It was quite sufficient it there was a legally enforceable claim and that if that test was to be applied to the facts of that case the decree in that case would undoubtedly constitute a legally enforceable claim. It was contended in that case that the test was whether the property was subject to a valid and legal charge which could be validly challenged In a Court of law and the Division Bench negatived that contention. Sitaldas's case went up to the Supreme Court upon a certificate under section 66-A(2) of the Income-tax Act and the Supreme Court reversed the decision of this Court. This decision of the Supreme Court is now the leading case on this subject so far as India is concerned. The Supreme Court referred to the decision of the Privy Council in Dudhuria's case and emphasised the distinction drawn by the Privy Council between a case of the application by the assessee of a part of his income in a particular way and a case where the assessee allocates a sum out of his revenue before it becomes income in his hands and quoted the same passage from Dudhuria's case to which we have referred above. Then the Supreme Court discussed a number of decision of different High Courts and a decision of the Supreme Court itself and proceeded to state the test in cases of this kind as follows at page 374: "These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not But we do not propose to examine the correctness of the decisions in the light of the facts in them. 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, in 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 another a portion of one's own income, which has been received and is since
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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." After laying down this test the Supreme Court applied the test to the facts in Sitaldas's case and held that the case was one of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of another's income. After so holding, however, the Supreme Court made an important observation at page 375 which serves to emphasise the ground upon which the Supreme Court laid down that test and the important remark was: "The matter in the present case would have been different if such an overriding charge had existed either upon the property or upon its income, which is not the case. In our opinion, the case falls outside the rule in Bejoy Singh Dudhuria's case and rather fails within the rule stated by the judicial Committee in P. C. Mullick's case (1938) 6 I T R 206 (P C)--- By that observation, in our opinion, the Supreme Court laid down that where a charge is created or, upon the facts and circumstances, a charge can be found, it would not be a case of mere application of a portion of his income by the assessee to discharge an obligation but a case in which an overriding charge is created by the assessee and he becomes only a collector of another's income. In other words, whenever a charge is created or exists, an overriding title is created in the charge-holder and. To the extent of the charge, the income of the assessee ceases to be his income, because the charge-holder has the paramount right by virtue of his overriding title to recover that income before it reaches the hands of the assessee. Of course, the decision of this Court was reversed because the Supreme Court held that, in the circumstances of that case, there was no overrid--ing title created-not that without a charge such an overriding title could never arise. A consideration - of the several cases which the Supreme Court considered in Sitaldas's case and their observations with regard to those cases also shows that they drew the same distinction. The Supreme Court referred to three cases where clearly a charge was created. In regard to Diwan Kishen Kishore Commissioner of Income-tax ((1933) 1 I T R 143) they observed (page 371): "It was held that the income never became a part of the income of the family or of the eldest member but was a kind of a charge on the estate . . . . . In that case, the payment to the junior member was a kind of a charge which diverted a portion of the income from the assessee to the junior member in such a way that it could not be said that it became the income of the assessee." The second case was Commissioner of Income-tax v. D. R. Naik ((1939) 7 I T R 362). In that case by a decree of the Court the assessee was entitled to receive certain properties as a residuary legatee, subject, however, to certain payments of maintenance to widows. As regards this case the Supreme Court observed at page 372: "It appears from the facts of the case, however. That there was a charge for the maintenance upon the properties of the assessee. This case also brings out correctly the principles laid down by the Judicial Committee that if there be an overriding obligation which creates a charge and diverts the income to someone else, deduction can be made of the amounts so paid" The third case which the Supreme Court considered in the same category was the case of Prince Khanderao Gaekwar v. Commissioner of Income-tax ((1948) 16 I T R 294). In that case the two grandsons of the settlor were entitled to a certain income from a family trust. By the trust It was also provided that if their mother lived separately, then the trustees were to pay her Rs. 18,000 per year. The mother lived separately and two deeds came to be executed by the two grand-sons whereby they agreed to pay her Rs. 15,000 per year and created a charge on the property. The sons, having paid Its. 6,000 in excess of their obligations, sought to deduct the same from their assessable income which claim was allowed by this, court holding that, though the payment was a
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voluntary payment, it was subject to a valid and legal charge which could be enforced in a Court of law and the amount was thus deductible under section 9(1)(iv). As regards this case, the Supreme Court held (page 373): "There is no distinction between a charge created by a decree of Court and one created by agreement of parties, provided that by that charge the income from property can be said to be diverted so as to bring the matter within section 9(1)(iv) of the act." Thus in all the, cases where there was a charge created the contention was upheld that the amount paid in respect of that charge ceased to be the income of the assessee because of am overriding title created in the charge-holder. By contrast the Supreme Court referred to…
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