Patna High Court
Commissioner Of Income-Tax vs Late Banwari Lal Agarwala (Through ... on 3 March, 1987
JUDGMENT Ashwini Kumar Sinha, J.
1. These six references are under Section 256( 1) of the Income-tax Act, 1961. The assessment years in question are 1966-67, 1967-68, 1968-69, 1969-70 and 1970-71.
2. The Income-tax Appellate Tribunal, Patna Bench "B", Patna, has stated a consolidated case and has referred the following common question of law for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that only 1/3rd of the commission income was assessable in the hands of the assessee ?"
3. The assessee, Shri Banwarilal Agrawala, died on November 16, 1969. In some years, the returns had already been filed by the deceased while he was alive but the assessments were completed through the legal representative, Shri P.K. Agrawala. In other years, the returns were filed by the legal representative, Shri P. K, Agrawala. However, same set of facts concerns all the assessment years in question.
4. For the assessment year 1970-71, however, there are two assessments, one in the status of individual before the death of Shri Banwarilal Agrawala and the other in the status of Hindu undivided family after the death of Shri Banwarilal Agrawala.
5. The assessee derived commission from East Bhagatdih Colliery Co. (P.) Ltd. from leasing out coal-bearing lands and coal mines along with the machinery, furniture, assets etc. The commission was received by virtue of an agreement dated July 12, 1965. In the above agreement between the assessee and M/s. East Bhagatdih Colliery Co. (P.) Ltd., the stipulation was that the company had to pay Rs. 1.50 per tonne as commission on coal despatch. It was also clearly stipulated in the agreement that 0.50 paise per tonne was to go to the assessee and Re. 1 per tonne was to be paid to Shri Hardeo Das Memorial Trust, The above trust was a private trust created by a document dated January 9, 1964, by the assessee and the other members of his family. Thus, according to the assessee, 1/3rd of the income received was to go to the assessee and the balance of 2/3rds was to go to the trust.
6. The Income-tax Officer found that the coal mines and the coal-bearing lands and the other assets belonged to the assessee and no part of these assets had been transferred to the trust. In this view of the matter, the Income-tax Officer held that the whole of the commission income should be taken as income of the assessee and no part of it could be taken as the income of the trust. For the assessment year 1966-67, out of Rs. 30,000 commission income, Rs. 10,000 was shown as the income of the assessee whereas Rs. 20,000 was claimed to be the income of the trust. The Income-tax Officer, however, assessed the whole of Rs. 30,000 in the hands of the assessee. For later assessment years, the Income-tax Officer made an additional remark that the arrangement was not genuine as there was no agreement on the basis of which 2/3rds was to be paid to the trust.
7. The assessee thereafter went in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner reversed the findings of the Income-tax Officer and allowed the claim of the assessee. The Appellate Assistant Commissioner considered the terms of the agreement and also went into the history of the trust and held that there was a trust dated January 9, 1964, as a result of which the trust came into existence and in order to give adequate income to the trust, the members of the family decided that 2/3rds of the income from the colliery in question should be treated as income of the trust and the Appellate Assistant Commissioner further found that for this purpose the agreement dated July 12, 1965, entered into with East Bhagatdih Colliery Co. (P.) Ltd. stipulated the payment of 2/3rds of the commission to the trust.
8. The Appellate Assistant Commissioner held that as a result of the agreement (dated July 12, 1965), an overriding title for 2/3rds was created in favour of the trust and there was diversion of income at source and there was no payment of the amount by the assessee to the trust. In this view, of the matter, the Appellate Assistant Commissioner held that though the property in question as such had not passed to the trust, there was a genuine agreement for only 1/3rd of the commission income to arise in the hands of the assessee, whereas the balance of 2/3rds was to arise in the hands of the trust. The Appellate Assistant Commissioner deleted 2/3rds of the commission income from the hands the assessee.
9. The Department thereafter went in further appeal before the Tribunal. The Tribunal upheld the order of the Appellate Assistant Commissioner and held that only 1/3rd of the commission income was assessable in the hands of the assessee which was actually received by him. The Tribunal further found that it was nobody's case that the income, in fact, had come to the assessee before being passed on to the trust and in view of the relevant clauses in the agreement (dated July 12, 1955), the trust was not to receive income from the assessee but from the company which was managing the colliery. The Tribunal, interpreting the relevant clauses in the agreement, also found that an overriding title for the 2/3rds of the commission income was created in favour of the trust.
10. Thus the Tribunal upheld the order of the Appellate Assistant Commissioner.
11. The Tribunal having held as above, the references are at the instance of the Revenue under Section 256{1) of the Income-tax Act (hereinafter referred to as "the Act ").
12. The learned senior standing counsel for the Department has contended that commercial assets from which the income arose were, admittedly, not transferred to the trust and hence the entire commission income was chargeable to income tax as the income of the transferor (the assessee). The learned senior standing counsel for the Department also submitted that it was only the income (not the assets) which was transferred to the trust, Learned counsel for the Department, on the admitted position as above, submitted that the provisions of Section 60 of the Act were applicable to the instant case and hence the entire commission amount was taxable in the hands of the transferor (the assessee).
13. Learned counsel for the Department further submitted that the instant case was a case of only the application of the income after it had accrued. Learned counsel submitted that there being no transfer of assets to the trust, the legal obligation, if any, was by the assessee's own volition and there was no enforceable obligation before earning the commission.
14. On the other hand, learned counsel for the assessee though he conceded that there was no transfer of the assets from which the income arose, yet, in the facts of the present case, there was diversion of income at source and an overriding title was created in favour of the trust.
15. Learned counsel for the assessee submitted that if the 2/3rds of the commission income never reached the assessee's hands before being passed on to the trust, then it had the effect of an overriding title for that part of the commission income created in favour of the trust. Learned counsel for the assessee submitted that it was a case in which there was diversion of income at source and hence it could not be held that the whole of the commission amount arose in the hands of the assessee.
16. Before I deal with the respective submissions advanced by the respective learned counsel for the parties, it is pertinent to quote Section 60 of the Act.
"Section 60. All income arising to any person by virtue of a transfer whether revocable or not and whether effected before or after the commencement of this Act shall, where there is no transfer of assets from which the income arises, be chargeable to income-tax as the income of the transferor and shall be included in his total income ".
17. It would also be pertinent to quote the relevant clauses of the deed of agreement dated July 12, 1965, between the assessee and Bhagat Dih Colliery Company Private Limited (marked as annexure "E" to the statement of case).
" ......(3) That the ownership of and the right, title and interest of the amalgamated unit will continue to rest as at present, namely, in the first party in respect of the coal-bearing lands described in the first and second schedules hereunder.......(16) the second party during the period of the agreement shall pay as profit as follows. To the first party (Shri Banwarilal Agarwala) at the rate of 50 paise per tonne of coal on all coal raised from schedule ' A' and schedule ' B' coal lands mentioned below (b) Hardeodas Memorial Trust, 14, Bentinck Street, Calcutta at the rate of Re. 1 (Rupee one) only per tonne of coal on all coal raised from schedule ' A ' and schedule ' B ' coal lands mentioned below...... ".
18. The respective learned counsel for the parties have placed before us the order of the Appellate Assistant Commissioner and also that of the Tribunal. It is unfortunate that neither the Appellate Assistant Commissioner nor the Tribunal looked into the provisions of Section 60 of the Act.
19. A bare reading of Section 60 of the Act makes it clear that in cases where by virtue of a transfer income arises to any person and there is no transfer of assets from which the income arises, the income may, on general principles, be regarded as the income of the transferor and be assessed in his hands, though it is applied in a particular manner under the legal obligation.
20. Cases arise where the income is applied in a particular manner under a statutory or contractual obligation or under the provisions of a company's memorandum or articles of association. It is well-settled that if a person has transferred or assigned the source of his income so that it is no longer his, he may not be taxed upon the income arising after the assignment or transfer of the source, apart from special statutory provisions like sections 61 to 64 of the Act which artificially deem it to be the transferor's income. But, it is well-settled that if he does not transfer the source of income and merely applies the income so that it passes through him and goes on to an ultimate purpose, even though he may have entered into a legal obligation to apply it in that way, still it remains his income. Section 60, in terms as it stands, clearly provides that in all such cases, the income should be assessed as the income of the transferor.
21. The learned counsel for the Department, in support of his submissions as mentioned in paragraph 9 above, has relied upon a Supreme Court case in the case of Provat Kumar Mitter v. CIT [1961] 41 ITR 624.
22. This was a case under the old Act of 1922. In this case, the assessee was a registered holder of 500 ordinary shares in a limited company. By a deed of settlement, the assessee assigned to his wife the right, title and interest in all dividends and sums of money which might be declared or might become due and payable in respect of those shares for the term of her natural life and covenanted to deliver and endorse over to her any dividend warrant or other document of title to such dividends or sums of money and to instruct the company to pay such dividends and sums of money to her.
23. The assessee contended that since the settlement was for the lifetime of his wife, the third proviso to Section 16(1)(c) of the 1922 Act applied and the dividend could not be deemed to be his income and Section 16(3) was also not applicable, as there was no transfer of the shares. The High Court decided the case against the assessee on the ground that the assignment was merely the application of the assessee's income and not assignment of any sum out of the revenue before it had become the income of the assessee.
24. The matter then went to the Supreme Court.
25. Before I state as to what the Supreme Court held, it is pertinent to quote the material portion of the instrument of that case [1961] 41 ITR 624 (at pages 625 and 626):
"This Deed Witnesseth that for effecting the said desire and in consideration of the natural love and affection of the Settlor for the Beneficiary, the Settlor as the beneficial owner assigns unto the Benficiary the right, title and interest to every dividend and sum of money which may be declared or become due and payable on account of or in respect of the said shares (not being the price or value thereof) and further hereby covenants with the Beneficiary to hand over and/or endorse over to the Beneficiary any dividend warrant or any other document of title to such dividend or sum of money as aforesaid and to instruct the said company to pay any such dividend or such sum of money to the Beneficiary to hold the same unto the Beneficiary absolutely during the term of her natural life.
And it is hereby agreed and declared that the Beneficiary shall remain entitled to and shall receive and stand possessed absolutely of every dividend and sum of money which she may receive on account of the said shares during the term of her natural life and that the Settlor shall have no right, title or interest therein or derive any benefit therefrom during the said period."
26. It would be noticed that under the terms quoted above, the shares themselves remained the property of the assessee and it was only the income arising therefrom which was sought to be settled or assigned to his wife.
27. The Supreme Court held that the deed of assignment was, in its true nature, only a contract by the assessee to transfer, or make over, to his wife in future all dividends that may be declared in respect of the shares It further held that as a company can pay dividend only to the registered holder of the shares, neither Section 16(1)fc) nor its third proviso was applicable to the case. It held that the income continued to accrue to the assessee and was assessable in the hands of the assessee as his income, even though it was ultimately payable to his wife under the terms of the deed. It further held that it was a case of application of income after it had accrued and not a case of diversion of any sum of money before it had become the income of the assessee.
28. In my opinion, the facts of this case are absolutely at par with the facts of the instant case and thus the ratio in the case of Provat Kumar Mitter v. CIT [1961] 41 ITR 624 (SC) fully supports the submissions advanced by the learned senior standing counsel for the Department.
29. The learned senior standing counsel for the Department then relied upon another Supreme Court case in the case of K.A. Ramachar v. CIT [1961] 42 ITR 25.
30. This case too was a case under the old Act of 1922. In this case, the assessee who was a partner in a firm executed three irrevocable deeds of settlement in favour of his wife, a married daughter and a minor daughter, assigning to each of them one-fourth of his share of the profits in the firm (but not losses) payable to him during a period of 8 years from the date of the settlement to be enjoyed by them absolutely and exclusively.
31. They were also entitled directly to receive and collect from the firm their share under the settlements. In the account books of the firm, the profits due to the assessee were credited to the assessee's account and one-fourth thereof was transferred to the accounts of each of the three beneficiaries.
32. The assessee claimed that for the assessment year in question, those amounts could not be included in his total income for purposes of assessment to income-tax.
33. The assessee contended before the Income-tax Officer that the amount payable to his wife and two daughters never became his income, being diverted by an overriding title, and hence that amount could not be included in his total income for purposes of assessment, as it was excluded by reason of the third proviso to Section 16(1)(c) of the Indian Income-tax Act, 1922.
34. The assessee's contentions were not accepted by the Income-tax Officer and his appeals to the Appellate Assistant Commissioner and the Tribunal also failed.
35. The matter then went before the High Court and the question referred for the High Court's opinion was as follows (at page 26):
"Whether the inclusion in the assessee's total income of the profits settled by him on his wife and two daughters is justified in law ?"
36. The High Court answered the question in the affirmative. However, on a certificate granted by the High Court, the matter went before the Supreme Court at the instance of the assessee.
37. Before I state as to what the Supreme Court held, it is necessary to quote a few relevant clauses of the deed in that case.
"Whereas the settlor has settled upon his minor daughter, Srimathi Meera Bai, one-fourth of his share of profits payable to him from the firm for a period of 8 years :
And whereas out of natural love and affection, the settlor is desirous of conferring upon the beneficiary a similar portion of his share of profits from the firm ".
38. the deed goes on to say :
"Now this indenture witnesseth as follows :
1. The settlor hereby assigns unto the beneficiary all the rights of the settlor in respect of one-fourth of his share of profits in the firm (but not the losses) payable to him during a period of eight years commencing from the date hereof to be taken and enjoyed by the beneficiary in absolute and exclusive right.
2. The settlor shall not have any manner of right or interest in the said one-fourth share hereby settled and the right to receive from the firm one-fourth of the settlor's share during the said period of eight years shall exclusively vest in the beneficiary.
3. The beneficiary shall be entitled directly to receive and collect from the firm the share of profits hereby transferred for the said period of eight years......
8. This settlement shall be irrevocable. "
39. The Supreme Court, on examination of the deeds of settlement, held (i) on the facts, that the tenor of the deeds of settlement showed that the profits were first to accrue to the assessee and were then applied for payment to the beneficiaries ; (ii) that under the law of partnership, it was the partner and the partner alone who was entitled to the profits. A stranger, even if he were an assignee, did not have and could not have any direct claim to the profits. By the deeds in question, the assessee merely allowed a payment to his wife and daughters to constitute a valid discharge in favour of the firm ; but what was paid was, in law, a portion of his income, (iii) That the dispositions were, in law and in fact, portions of the assessee's income after it had accrued to him and tax was payable by him at the point of accrual. The amounts had, therefore, to be included in the assessee's total income.
40. In that case the Supreme Court followed the principles decided in the case of Promt Kumar Mitter v. CIT [1961] 41 ITR 624.
41. In my opinion, the facts of this case also are at par with the facts of the instant case and the ratio decided in this case as well fully supports the submission advanced by learned counsel for the Department.
42. On the other hand, learned counsel for the assessee, in support of his submissions as mentioned in paragraph 10 above, relied upon a Supreme Court case in the case of Murlidhar Himatsingka v. CIT [1966] 62 ITR 323. On the facts of that case, the Supreme Court held that there was an overriding obligation and the income of M in firm A did not remain his income in spite of the sub-partnership.
43. In this case M, who was a partner in a registered firm (firm A), entered into a sub-partnership (firm B) with his two sons and a grandson. One of the clauses of the deed of sub-partnership (firm B) provided that the profits and losses of M in the registered firm (firm A) shall belong to the sub-partnership (firm B) and shall be borne and divided in accordance with the shares specified therein, but that the capital with the assets and liabilities would belong to M exclusively. The sub-partnership was also registered.
44. For the assessment years in question, in that case, M's share in firm A was sought to be assessed in the individual assessment of M. M's contention that the income was diverted at source by an overriding interest was not accepted by the Income-tax Officer, the Appellate Assistant Commissioner or the Tribunal. The High Court held that it was not a case of diversion at the source by any overriding interest. The matter then went before the Supreme Court and the Supreme Court held--(i) that as M's share in the losses in the registered firm (firm A) was also to be shared, the right to receive profits and pay losses became an asset of the sub-partnership (firm B); (ii) that there was an overriding obligation in this case and the income of M in Firm A did not remain his income in spite of the sub-partnership ; (iii) that, therefore, M's share of income from firm A had to be included in the assessment of Firm B and not in M's personal assessment; and (iv) that there was nothing in Section 23(5)(a) of the Indian Income-tax Act, 1922, which prevented the income from firm A being treated as the income of firm B and Section 23(5)(a) being applied again.
45. A sub-partner has definite enforceable rights to claim a share in the profits accrued to or received by the partner in the original partnership. When a sub-partnership is entered into, the partner changes his character vis-a-vis the sub-partners and the income-tax authorities, although other partners in the original partnership are not affected by the changes that may have taken place.
46. In the case of a sub-partnership, the sub-partnership creates a superior title and diverts the income from the main firm before it becomes the income of partner. In other words, the partner in the main firm receives the income not only on his behalf but on behalf of the partners of the sub-partnership.
47. There is no warrant for the proposition that under Section 23(5)(a), only the partner of the registered firm can be assessed. The object of Section 23(5)(a) is not to assess the firm itself but to apportion the income among the various partners. After the income has been apportioned, the Income-tax Officer has to find whether it is the partner who is assessable or whether the income should be taken to be the real income of some other person. If it is the real income of another firm, it is that firm which is liable to be assessed under Section 23(5)(a).
48. Thus, from the facts of this case, it would appear that there was a sub-partnership which too was a registered one. A sub-partner has definite enforceable rights to claim share in the profits accrued to or received by the partner in the original partnership firm.
49. Thus, this case is clearly distinguishable on facts and does not support the submission advanced by learned counsel for the assessee on the facts of the instant case.
50. Learned counsel for the assessee then relied upon the case of CIT v Crawford Bayley & Co. [1977] 106 ITR 884 (Bom). In this case, the assessee firm was governed from April 1, 1957, by a partnership deed dated March 14, 1957. One of the partners, N, died on May 27, 1958. Thereafter a new partnership deed was executed on April 16, 1959, to take effect from April 1, 1959. A partner, L, died on July 16, 1959. A supplementary deed was executed on April 29, 1960. Under the provisions of the partnership deeds of 1957 and 1959, the widows of N and L were given some payments monthly.
51. The payments thus made were claimed as deductions by the assessee-firm in the assessments for the assessment years 1959-60 to 1963-64.
52. The Income-tax Officer rejected the claim holding that the widows were not parties to the agreement, that they had no rights against the firm, that the payments to them were purely voluntary, that it was open to the partners to modify or stop making payments without the consent of the widows and that, as the payments had to be made irrespective of profits or losses resulting to the firm, the payments had no bearing on the income of the firm and were not a charge on the firm.
53. The appeal to the Appellate Assistant Commissioner was dismissed. On further appeal, the Appellate Tribunal took the view that there was an obligation in the nature of a trust on the surviving partners to make the payments and accepted the claim of the assessee.
54. On a reference to the High Court, the High Court held that the true test for the application of the rule of diversion of income by an overriding charge is, whether the amount sought to be deducted, in truth, never reached the assessee as his income. 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 does not, in law, follow. It is the first kind of payment which can truly be exempted 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 applied.
55. The payment to the widows of a deceased partner under the partnership deeds in this case was not dependent upon the profits or losses of the assessee-firm. It was an absolute obligation and even though there might be no profits made by the assessee in a particular year, the obligation to pay to the widows under the partnership deeds was absolute. When the obligation to pay such amount to the widow of a deceased partner was absolute, there could be no question of application of income by the assessee firm after it accrued to it. As such payment has to be made even though no profits whatsoever might have been made, this provision was an obligation in the nature of a trust.
56. Even though the cestui que trust may not be a party to the contract, it can enforce its right under the contract by adopting appropriate legal proceedings. The payments had to be made by reason of an overriding title.
57. Further, no question of allowing an expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922, or the corresponding provisions of the Income-tax Act, 1961, arises in the present case, because deduction is claimed not as an expenditure under the exception but it is. claimed by way of payment in respect of items which are obligations in the cestui que trust and such payments are required to be made before the income even accrued to the assessee. Since a deduction is permissible under Section 10(1) of the Act, the question whether it is permissible under Section 10(2)(xv) did not arise for consideration.
58. Therefore, the payments made to the widows of the deceased partner were to be excluded from the assessments in the respective years.
59. Thus, on the facts in this case, it would appear that it was the firm's obligation to pay the money to the widows of N and L and it also appears that the entire interest was transferred to the trust, whereas, in the instant case, there is no transfer of the entire interest. Thus, the facts are clearly distinguishable. Secondly, I have all my doubts to the ratio decided in this case by the Bombay High Court to the following effect (at page 889):
"In a cestui que trust even though a person may not be a party to a contract, he can enforce his right under contract by adopting appropriate legal proceedings."
60. I do not agree with this view of the matter.
61. Learned counsel for the assessee then relied upon the case of CIT v. Nandiniben Narottamdas [1983] 140 ITR 16 (Guj). This case relied upon the principles as laid down in the case of Murlidhar Himatsingka v. CIT [1966] 62 ITR 323 (SC). I have already held above that the facts of Murlidhar's case [1966] 62 ITR 323 (SC) were absolutely distinguishable from the facts of the instant case. Even in the case of Nandiniben [1983] 140 ITR 16 (Guj) just referred to above, the facts were absolutely distinguishable and almost at par with the facts of Murlidhar's case [1966] 62 ITR 323. Thus, I hold that the ratio decided in this case as well does not support the submission advanced by learned counsel for the assessee.
62. In fact, the answer to the question referred to this court depends upon a fair and comprehensive reading of the clauses of the agreement dated July 12, 1965 (annexure "E" to the statement of case). The relevant two clauses have been quoted in the earlier part of the judgment. I have also given a comprehensive reading of the stipulations therein. On a fair and comprehensive reading of the stipulations in the agreement, I hold that, in the facts of the instant case, there was no transfer of assets from which the income arose and it was only the application of income going to the ultimate purpose, i.e., to the trust, after it had accrued. I further hold that even though the assessee entered into an agreement (annexure "E" to the statement of case) with Bhagatdih Colliery Co. (P) Ltd., the legal obligation, if any, was by the assessee's own volition and the Hardeo Das Memorial Trust (which was to receive 2/3rds of the commission income) had no enforceable right against Bhagatdih Colliery Co. (P) Ltd. The trust being no party to the agreement could not enforce its right by adopting any legal proceeding. The payment to the trust was to be made by the firm and not out of profit of the partners. The agreement did not curtail the rights of the parties to the agreement but only an obligation was cast on the firm. I further hold that there being no transfer of assets from which the income arose, the entire commission income, on general principles, will be regarded as the income of the assessee (transferor) and the entire commission income will be assessed in the hands of the assessee (transferor), even though it was applied in a particular manner under the legal obligation. I further hold, on a fair and comprehensive reading of the stipulations of the agreement (annexure "E" to the statement of case) that, in the facts of the instant case, it was not a case of diversion of any sum of money before it had become the income of the assessee.
63. Admittedly (as fairly conceded by learned counsel for the assessee), the commercial assets from which the income arose were not transferred to the trust. In the facts of the instant case, as already discussed above, what was transferred was only the income to the trust and, in that view of the matter, I hold that the provisions of Section 60 of the Act were applicable to the instant case and hence the entire commission amount had, therefore, to be included in the assessee's total income.
64. For the aforesaid reasons I, therefore, hold that, in the facts and circumstances of the case, the Tribunal was not correct in law in holding that only the one-third of the commission income was assessable in the hands of the assessee.
65. The question, therefore, referred to this court is answered in the negative, i.e., against the assessee and in favour of Revenue.
66. Parties shall bear their own costs.
Uday Sinha, J.
67. I agree.