Bombay High Court
Commissioner Of Income-Tax vs Tolaram Jalan And Others, Trustees And ... on 22 February, 1991
Equivalent citations: [1991]191ITR134(BOM)
JUDGMENT
T.D. Sugla J.
1. This reference is at the instance of the Department. The Tribunal has referred to this Court three questions of law under section 265(1) of the Income-tax Act, 1961. They read thus :
"1. Whether the income of the estate was diverted by an overriding title of the creditors of the deceased before its accrual as a reason of a charge created under the will, or as a reason of the charge under section 325 of the Indian Succession Act, or as a reason of the legal obligation in the nature of a trust created under the will ?
2. Whether the Appellate Tribunal ought not to have held that even if the income arising from the estate be received on behalf of the creditors, the trustees would be assessable on this income under section 41(1) of the Indian Income-tax Act, 1922/164(1) of Income-tax Act, 1961 ? and
3. Whether, in the facts and circumstances of the case, the miscellaneous application dated November 26, 1975, on behalf of the Department was maintainable ?"
2. The late Shri Ramkumar Jalan was a partner in a few firms. He executed a will on April 21, 1951, in terms of which he bequeathed all his properties that he might possess at the time of his death to Shri Tolaram Jalan and Champalal Jalan (both his sons) and one Lalita Prasad Goenka as executors and trustees. The will provided that the executors and the trustees shall pay all his debts and expenses due and payable at the time of his death and apply the remaining assets for charitable purpose such as the spread of education in the country, especially in Bengal, Bombay and Bihar. The will authorized and empowered the trustees to carry on the business presently carried on by him before his death or to wind up and realise the assets and reinvest in such shares, securities or in deposits in banks or with other parties as they might consider appropriate.
3. The late Ramkumar Jalan died on January 8, 1957. The will was probated. The executors and the trustees decided to carry on the partnership business as trustees and executors instead of realising the value of the deceased's share in the partnership firms. It is not on record as to what happened in the proceedings for the assessment years 1957-58 or 1958-59. In the proceedings for the assessment years 1961-61 to 1965-66 with which this reference is concerned, the assesses (executors and trustees) claimed before the Income-tax Officer that the income earned by them as partners was not taxable in their hands as a charge was created under the will and or under section 325 of the Indian Succession Act on such income. There was also a legal obligation in the nature of a trust created under the will so much so that the share income was not the estate's income. Thus, the claim was that the share income never reached the estate as income, it being diverted at source. The claim was rejected by the Income-tax Officer as well as the Appellate Assistant Commissioner. On further appeal, the Tribunal set aside the orders of the Appellate Assistant Commissioner and restored the appeals to the file of the Appellate Assistant Commissioner for disposal afresh. By his subsequent order dated July 31, 1972, the Appellate Assistant Commissioner again dismissed the assessee's appeals.
4. When the appeals came up before the Tribunal for the second time, the Tribunal accepted the claim observing that the will left the assessees with no option but to utilise the income of the estate for discharging the debts and liabilities of the deceased. In the Tribunal's view, a trust in favour of the creditors was created under the will. The creditors were the beneficiaries of the estate as well as its income. The estate received the income with an obligation to utilise it for discharging the debts. In other words, according to the Tribunal, the income was received by the assessees not in their own right. For these and other observations made in the impugned order, the Tribunal held that, till such time as the debts liabilities of the deceased were discharged, the trust for charitable objects could not take effect and till then the income stood diverted before its accrual by an overriding title and could not, therefore, be assessed in the hands of the assessee.
5. Neither the will nor the deeds of partnership are made annexures to the statement of the case. From the relevant extracts referred to in the various orders, it is evident that the will says nothing more than directing the executors and trustees to discharge the deceased's debts and liabilities in the first instance and to apply the remaining assets, if any for charity. No doubt, under the will, it was open to the trustees and the executors to wind up the partnership businesses in so far as it concerned the deceased or to carry them on. There was, however, nothing in the will to indicate how the said income was to be utilised. Placing reliance on the Supreme Court decision in the case of CIT v. Sitaldas Tirathdas , Shri Jetley stated that the mere fact that the assessee had an obligation to discharge the debts and liabilities of the deceased did not, by itself, mean that there was any charge on the income or that the income did not accrue to the assessee or that it was diverted by an overriding obligation. He also placed reliance on out court's judgment in the case of CIT v State Bank of India [1988] 169 ITR 298. In that case, the question involved was whether, to the extent of estate duty liability, income could be said to have been diverted. Our court had held that it was not diverted. Reliance was also placed on other decision such as Vibhuti Glass Works v. CIT and CIT v. Smt. Kamlabai Juthalal [1977] 108 ITR 755 (Bom), which we have not found to be of much assistance.
6. Shri Dalvi, learned counsel for the assessee, on the other hand, strongly relied on the order of the Tribunal. He pointed out that the Tribunal had not only referred to and relied on the will of the deceased but also to the provisions of section 325 of the India Succession Act. According to Shri Dalvi, the two Gujarat decisions in Udayan Chinubhai v. CIT [1978] 111 ITR 584 and Matubhai C. Patel v. CIT [1982] 133 ITR 303, squarely supported the assessee's claim. The principle laid down in those cases, it was pointed out, was that where the assessees had an obligation to discharge certain liabilities, the estate and its income stood diverted to that extent. The assets were received by the assessee in one case on partition, in another case on death along with the liabilities. The assets received were said to have been encumbered to the extent of liabilities and, therefore, to the extent it was necessary, the income must be said to have been diverted at source or received by the assessee on behalf on the creditors. He, however, fairly admitted that, in both the cases, the question involved was that of interest and not of the principal liabilities.
7. So far as section 325 of the Indian Succession Act is concerned, we do not find anything more than what can be taken as an ordinary obligation of any person inheriting the estate. At best, it codifies the ordinary liability of a person who receives the estate of the deceased, that is, both the assets and the liabilities. The provisions in the will also, as referred to by different authorities, to our mind, do not create any further obligation. The will only requires that the estate should first be applied for the purpose of discharging the deceased's liabilities. Apart from the fact that it does not contain any provision by which diversion of assets can be spelt out, there is no whisper whatsoever in the will about the income that accrued to the estate. At best, the income of the estate is liable to be utilised for discharging the liabilities of the estate. There is no special charge or obligation on the income as distinct from the estate. It cannot, therefore, be accepted that the income was not received by the assessees as the income of the estate or that it was received on behalf of other persons or that it was diverted at source. No doubt the two Gujarat High Court decisions Matubhai C. Patel v. CIT [1982] 133 ITR 303 and Udayan Chinubhai v. CIT [1978) 111 ITR 584, relied upon by Shri Dalvi, contain some general observations which, considered out of context, support his claim. It is, however, seen that, in both the cases, it was the interest on the liabilities actually paid which was the subject-matter of consideration and not the principal amount of liabilities. This court had an occasion to consider the Gujarat High Court's first decision in Udayan Chinubhai v. CIT [1978] 111 ITR 584 in the case of CIT v. State Bank of India [1988] 169 ITR 298 (Bom). The Division Bench of our court, to which one of us (T. D. Sugla J.) was a party, commented upon the Gujarat decision thus (page 307 of 169 ITR) :
"With respect, we find it difficult to appreciate how the conclusion arrived at follows from the earlier observations. That apart, the claim in the Gujarat case was with regard to interest only and not the principal amount of loan and interest was in fact paid. It was certainly not a case of a mere claim in respect of an apprehended liability as in the case before us."
8. In the present case, the claim is not with regard to interest. It is with regard to the principal amount of liabilities. In our judgment, the Supreme Court decision in CIT v. Sitaldas Tirathdas , if applied properly, goes against the claim.
9. At this stage, Shri Dalvi stated that the claim for interest at least to the extent of interest on the principal amount of liabilities, if any, should be directed to be allowed. We are afraid, that in the absence of any material on record, it is not possible to accept Shri Dalvi's submission, particularly as there is not discussion about this claim in the order of the Tribunal and the questions of law referred to us do not cover this aspect.
10. Accordingly, the first question of law is answered in the negative and in favour of the Revenue. In view of our answer to question No. 1, question Nos. 2 and 3 do not survive. Hence, they are not answered.
11. No order as to costs.