TMI Blog1976 (4) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that such interest as was disallowed was not admissible deduction under section 12(2) of the Indian Income-tax Act, 1922 ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the said interest should not be taken into account while determining the real income of the appellant ? " We are concerned in these cases with assessment years 1951-52, 1952-53 and 1954-55 to 1961-62. The facts leading to these five references are as follows : Sir Chinubhai Madhavlal, the second baronet, filed a suit in the High Court of Bombay on its original side in 1948 against his three sons, Udayan Chinubhai, Kirtidev Chinubhai and Achyut Chinubhai, his wife, Lady Tanumati Chinubhai, and his mother dowager, Lady Sulochana Chinubhai, for a declaration for severance of the joint status of the joint family of the plaintiff and the defendants to that suit. The family had considerable movable and immovable properties. Out of these, very substantial properties were held in trust as part of what is known as Baronetcy Trust and the trustees were the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies to Sir Chinubhai Madhavlal and certain other properties to Lady Tanumati and her three sons. He also determined that certain debts, liabilities, claims and demands should be taken over by Sir Chinubhai Madhavlal while some other specific debts were to be taken over by Lady Tanumati and her three sons. There was no separate allocation either of the assets or the liabilities amongst Lady Tanumati and her three sons. In connection with this very family, it has been held by the Supreme Court in the case of Joint Family of Udayan Chinubhai v. Commissioner of Income-tax [1967] 63 ITR 416, that Lady Tanumati and her three sons did not constitute a Hindu undivided family after the consent decree as the original Hindu undivided family had no existence. Lady Tanumati and her three sons did not succeed to the properties as members of the Hindu undivided family but held the properties allotted to them as tenants-in-common. After the partition, in the case of Lady Tanumati herself and each of her three sons it was claimed that interest paid on the liabilities which had been allotted to Lady Tanumati and her three sons on partition should be allowed as a deduction in computing the total in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... title. The second ground which was in the alternative to the first one was that the interest payment was admissible allowance under section 12(2) of the Indian Income-tax Act, 1922. The third ground which was in the alternative to the above two grounds was that the real income of each of these four assessees would be the gross income from assets received from the Hindu undivided family under the award less the interest payable in respect of liabilities which the assessee got on partition of the Hindu undivided family and it was contended in this connection that each of the four assessees was entitled only to his or her share in the net assets of the joint family At the time of partition, but instead he or she received assets attached with liabilities and hence only the real income from these sources was assessable as the total income of each of these four assessees. Each of these three alternative arguments was rejected by the Income-tax Officer. Against these decisions of the Income-tax Officer in respect of each of these ten assessment years under reference, the assessees concerned filed appeals. The Appellate Assistant Commissioner held that there was no diversion of income and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay only note for the purposes of this judgment that by Bombay Act No. 8 of 1924, the Baronetcy Trust was created for settling certain properties and securities which were formerly the property of Sir Chinubhai Madhavlal Ranchhodlal, the first baronet, who by 1924 was dead, so as to accompany and support the title and dignity of a baronet lately conferred on him by His Majesty King George V. By Bombay Act No. 16 of 1936, certain amendments were made to Bombay Act No. 8 of 1924. Further amendments were made by Bombay Act No. 27 of 1939 and ultimately by Bombay Act No. 1 of 1957, Sir Chinubhai Madhavlal Ranchhodlal Baronetcy Act, 1924, was repealed and the Baronetcy Trust was dissolved. In order to appreciate the contentions urged before us in the course of the hearing of the references and also in order to approach the legal point from the correct angle, it is necessary to refer to the salient features of the provisions of the consent decree passed on March 8, 1950, and provision of the interim award dated August 3, 1950, and the final award which is also referred to as the second interim award given on February 15, 1951. The consent decree provided that as from October 15, 1947, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in full satisfaction of their respective shares in the said joint family properties subject as regards the properties described in Part II of the schedule " A " to the provisions of the Baronetcy Act which was then in force provided that the fourth defendant, that is, Lady Tanumati, was to take her share and interest in the said properties as a limited estate equivalent to a limited interest which a Hindu woman gets on partition between her sons. It was further provided in the consent decree that the debts and liabilities binding on the joint family were as shown in schedule " B " to the consent decree. Further, the claims and demands including income-tax, super-tax and excess profits tax liabilities made against the said joint family or against the plaintiff, Sir Chinubhai Madhavlal, the second baronet, as father and karta of the said joint family and arising out of his dealings and transactions as such prior to October 15, 1947, were as shown in schedule " C " and the debts and liabilities incurred by Udayan Chinubhai and Lady Tanumati Chinubhai for the maintenance, support and/or education of the three sons and also for the maintenance and support of the defendants or any of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re taken over by them in pursuance of the award or awards made by the arbitrator and they were to indemnify and from time to time keep indemnified Sir Chinubhai Madhavlal in respect thereof and the three sons and Lady Tanumati undertook to use their best endeavours to procure releases in respect of such debts, liabilities, claims and demands in favour of the plaintiff. It was also agreed that the plaintiff, that is, Sir Chinubhai Madhavlal, was to hand over to Udayan Chinubhai and Lady Tanumati, all documents, title deeds, papers and vouchers relating to or connected with the properties, debts and liabilities coming to the share of the three sons and Lady Tanumati under the consent decree. Thus, it is clear that so far as the properties were concerned, certain concerns were to go to Sir Chinubhai Madhavlal and all those properties which were described in part I to the schedule were to go to him. Properties mentioned in part II were to go to the wife and three sons and some of those properties were included in the Baronetcy Trust. Properties mentioned in part III were also to go to the three sons and Lady Tanumati and the arbitrator was to decide as to which liabilities, claims a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the consent decree and the two awards that no immediate payment of these outstanding debts and liabilities and claims against the joint family was provided for, but, at the time of distributing the properties amongst the five persons entitled to a share on partition of the joint family by metes and bounds, certain properties came to Lady Tanumati and her three sons together with liability to discharge the debts and liabilities of the joint and undivided Hindu family which they were directed to pay off by the arbitrator or by the consent decree. It is obvious from the scheme of the consent decree that no provision was made for payment of debts and liabilities at the time of effecting the partition. Ordinarily, when a partition of joint family takes place, sufficient properties are set apart for meeting the liabilities and outstanding dues and claims against the joint family so that out of the total assets of the joint family, after deducting those properties which are set apart to meet the liabilities, the net assets are available for partition and, ordinarily, what each person gets on partition under normal circumstances is his share on that total property less the debts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the partition took place... if it (partition) makes no arrangement or provision for the payment of the just debts payable out of the joint family property, the liability of the sons for payment of the pre-partition debts of the father will still remain. " Thus, it is obvious that Lady Tanumati and the three sons were, under the doctrine of pious obligation as well as under the doctrine of obligation to pay the debts of the joint family, liable under the general principles of Hindu law to pay the pre-partition debts incurred by Sir Chinubhai Madhavlal and the consent decree reflected this legal position by providing that the debts and liabilities of the joint family assigned to them should be paid by Lady Tanumati and her three sons. In Sidheshwar Mukherjee v. Bhubneshwar Prasad Narain Singh, AIR 1953 SC 487, 489, Mukherjea J., delivering the judgment of the Supreme Court, observed : " We do not find any warrant for the view that to saddle the sons with this pious obligation to pay the debts of their father, it is necessary that the father should be the manager or ' karta ' of the joint family, or that the family must be composed of the father and his sons only and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering into partition with their father, the sons cannot get rid of this pious obligation. " and the above quoted passages from the earlier decisions in Pannalal v. Mt. Naraini, AIR 1952 SC 170, and Sidheshwar Mukherjee v. Bhubneshwar Prasad Narain Singh, AIR 1953 SC 487, were relied upon and it was reiterated that if there is no proper arrangement for payment of such debts at the time when the partition was effected, although the father could have no longer any right of alienation in regard to the separated shares of the sons, even after partition, the sons could be made liable for the pre-partition debts of the father. In Virdhachalam Pillai v. Chaldean Syrian Bank Ltd., AIR 1964 SC 1425, the position was again summarized by Rajagopala Ayyangar J., at page 1429, in paragraph 11, as follows : " (1) A father can by incurring a debt, even though the same be not for any purpose necessary or beneficial to the family so long as it is not for illegal or immoral purposes, lay the entire joint family property including the interests of his sons open to be taken in execution proceedings upon a decree for the payment of that debt. (2) The father can, so long as the family continu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in the latter case it would be inequitable to call upon the son to pay once again what he has virtually paid off by ample provision in the partition. But what is thus established is only the right of the father's creditor to proceed against the son's share after partition, and not form of the remedy by which that right can be enforced. The creditor can enforce the son's pious obligation even after partition by bringing a suit against him in respect of the father's pre-partition debt. " In his book Introduction to Modern Hindu Law, J. Duncan M. Derrett, has stated in paragraph 505 at page 312 : " Sons and other male issue cannot escape liability by separating between the incurring of the debt and a suit by the creditor. Though their separation is irrevocable, their separated shares are liable to meet the obligation proportionately. " In paragraph 550 at page 338 of his book, Derrett says that after the assets of the joint family are determined at the time of partition, deductions must be made for the following : " (i) debts binding upon the joint family including estate duty payable on the deaths of coparceners already dead ; (ii) debts binding upon the male issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enacted and thereafter by section 12(1A) which came into effect in 1959, income from other sources was to include dividends, and thus dividend income was " Income from other sources ". Under section 12(2) income falling under the head " Income from other Sources " was to be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains. As regards section 12(2), all relevant authorities bearing upon the point have been considered by this High Court in Income-tax Reference No. 35 of 1972 decided on December 3, 1973 [Padmavati Jaykrishna v. Commissioner of Income-tax [1975] 101 ITR 153 (Guj)]. The question involved in that reference was, whether the assessee in that case was entitled to claim deduction as regards the payment of interest to the extent of Rs. 10,279 against " income from other sources " under clause (iii) of section 57 of the Income-tax Act, 1961. It was found in that case on facts that the assessee had borrowed a loan and interest paid on the outstanding amount of the loan was Rs. 26,986. The assessee contended that the entire interest amount of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividend income or income from the rest of the properties which came to the share of Lady Tanumati and her three sons. It was sought to be argued on behalf of the assessees by the learned Advocate-General that if a part of the assets received by Lady Tanumati and her sons had been liquidated by them, they could have paid off the liabilities and to that extent the payment of the interest dispensed with (sic) the necessity of liquidating some of the assets received by them on partition and, therefore, this payment of interest could be said to be a deductable item under section 12(2). Even since the decision of the Bombay High Court in Bai Bhuriben Lallubhai v. Commissioner of Income-tax [1956] 29 ITR 543, such a contention has been consistently turned down. The decision in Bai Bhuriben Lallubhai's case [1956] 29 ITR 543 (Bom) has been followed by this High Court consistently and ultimately in Income-tax Reference No. 35 of 1972 [Padmavati Jaykrishna v. Commissioner of Income-tax [1975] 101 ITR 153 (Guj)], it has been held in terms by this court particularly in the light of the decision of the Supreme Court in Commissioner of Income-tax v. Malayalam Plantations Ltd. [1964] 53 ITR 140 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hips of the Privy Council, observed at page 138: " The learned Chief justice next examines the various exemptions and allowances conceded in sections 7-12 of the Act in respect of the several heads of income, profits and gains chargeable to tax under section 6 and reaches the conclusion that the appellant's liability to his step-mother does not fall within any of these exemptions or allowances. With this conclusion their Lordships are also in agreement. But 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 the 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." The same point came up for consideration aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be entitled to the managing agency remuneration in equal shares and that each of them should pay to A's wife 2 as. 8 pies out of their respective 8 as. share in the managing agency. A and B constituted themselves into a registered firm and carried on the managing agency. In the assessment of the firm and of each of the individual partners it was claimed that the 2 as. 8 pies share paid to A's wife by each of them should be deducted before ascertaining their taxable income. It was held that even though the amount to be paid to A's wife could not be considered in the assessment of the firm, that would not prevent A and B from claiming that their real income as partners was not an 8 as. share in the managing agency commission but only 8 as. less the amount which A's wife was entitled to receive from them. It was further held that under the deed of partition what the parties really intended was that only a portion of the managing agency commission should be the income of A and B and that the remaining portion should be the income of A's wife; this was accordingly a case in which the portion of the managing agency commission payable to A's wife was diverted before it became the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 62 ITR 323 (SC), the earlier decision of the Bombay High Court in Seth Motilal Manekchand's case [1957] 31 ITR 735, must be read in the light of what has been stated by the Supreme Court regarding the correct test to be applied in cases like this. (Vide the Supreme Court decision in Sitaldas Tirathdas [1961] 41 ITR 367 (SC) and the Supreme Court decision in Himatsingka's case [1966] 62 ITR 323). In Commissioner of Income-tax v. Mrs. Indumati Ratanlal [1968] 70 ITR 353 (Guj), a Division Bench of this High Court was dealing with the following facts. The assessee's husband died leaving a will bequeathing half of his estate to his wife and the other half to his minor son. The estate consisted mainly of shares and securities. For the assessment year 1962-63, the assessee claimed that an amount of Rs. 15,397 being one-half of the interest on money borrowed for payment of estate duty was deductible under section 57(iii) of the Income-tax Act, 1961, from the dividends derived from the shares and securities. It was held that there is no difference between interest paid on money borrowed to pay income-tax and interest on money borrowed to pay estate duty. While the former is not paid for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he property and interest is paid on the borrowed moneys ? (Emphasis supplied). The learned Advocate-General, on behalf of the assessee, has also relied on the decision of the Division Bench of the Bombay High Court in Commissioner of Income-tax v. H. H. Maharahi Shri Vijaykuverba Saheb of Morvi [1975] 100 ITR 67. In that case, by a trust deed dated October 6, 1955, M created a trust in favour of his son, Prince M. The trust property comprised of shares and securities and the income of the trust was by way of dividends from shares and interest on securities. M died on August 17, 1957, within two years of the execution of the trust deed, and the property comprised in the trust was includible in the property passing on the death of which was liable to estate duty. The estate duty payable by the trustees, who were the assessees, was Rs. 8,25,300. The trustees paid the estate duty immediately on March 26, 1958, by borrowing the amount from the Bank of India Ltd. The trustees paid interest to the bank in the three assessment years 1959-60, 1960-61 and 1961-62 till the whole amount was repaid in 1962. The trustees claimed the amounts paid as interest as deduction against their income un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e against the assessee, holding that such income was liable for inclusion in the income of the family under section 9(1) of the Kerala Agricultural Income-tax Act, 1950. The Supreme Court held that section 9(1) of the Kerala Act was similar to section 16(1)(c) of the Indian Income-tax Act, 1922. If the income in dispute is considered as having been applied to discharge an obligation of the assessee, the same is liable to be included in the assessable income of the assessee but, if, on the other hand, the same had been diverted by an overriding charge, then it is not liable to be included in the assessable income of the assessee as it ceased to be his income. It was further held that where the income is the income of the family, it would reach the hands of the family as soon as it reached the hands of any member of the family who was entitled to receive it on behalf of the family. The members of the family received that income on behalf of the family and applied the same in discharge of an obligation of the family. When it is said that the income reached the hands of the karnavan, it does not refer to the physical act but to a legal concept, a receipt in law. It was held that the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor. Therefore, really speaking, neither in Venugopala Varma Rajah's case [1972] 84 ITR 466 (SC) nor in Ratilal Nathalal's case [1954] 25 ITR 426 (SC), the question of " real income " in the sense in which we are dealing with that question arose before the Supreme Court. In our opinion, therefore, it would be better to rely upon the decisions of Sitaldas Tirathdas's case [1961] 41 ITR 367 (SC) and Himatsingka's case [1966] 62 ITR 323 (SC) for the purpose of finding out the test to be applied for ascertaining the " real income " and finding out whether a portion of the income has been diverted by a overriding title before it reached the hands of the assessee. Mr. Kaji for the revenue has relied upon the decision of the High Court in Commissioner of Income-tax v. Badal Ram Laxmi Narain , Income-tax Reference No. 478 of 1973, decided on March 20, 1975. A summary of the decision of the Allahabad High Court is to be found in July, 1975, issue of Taxation, Vol. 40, Section 1, page 1. In that case a Hindu undivided family had been carrying on busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Shri K. M. Munshi and the consent decree the assessees in the different references before us got their shares of Hindu undivided family property subject to the liability to pay off the debts which were assigned to them. In Words and Phrases Legally Defined, second edition, volume 1, at page 239, it has been stated : " An ordinary meaning of the word ' charge ' is a liability to pay money. It is not limited to such a liability when it is imposed on property but is also applicable to such a liability imposed on a person. It was in this sense that the word was held to have been used in the lease which fell to be construed in Hartley v. Hudson [1879] 4 CPD 367. The word is frequently used in the Local Government Act in the sense of a liability to pay money laid upon real property. However, there is a cognate but distinct meaning of the word in the sense of cost or the price demanded for services or goods. These meanings are given separately in the Shorter Oxford English Dictionary. We have come to the conclusion that, when the word 'charge ' is in the Local Government Act used in conjunction with the word ' fee ' it is used in the latter sense, namely, as the price demanded for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tcy Trust, they could not be touched in any respect and that is probably the reason why instead of making provision for the payment of the debts and liabilities and other outgoings of the Hindu undivided family at the time of effecting the partition, the learned arbitrator, Shri K. M. Munshi, had to assign the debts as well as the properties and to leave it to the assessees gradually to pay off the creditors and others who were entitled to proceed against the Hindu undivided family both for liabilities of the family as well as for the debts of the father which were not tainted with illegality or immorality. As we have pointed out, it was only by the Bombay Act No. 1 of 1957, which came into effect on January 7, 1957, that the Baronetcy Trust was dissolved and thereafter the properties came into the hands of the assessees. Even after the properties assigned to them came to their hands, it took some time to gradually pay off the liabilities and in the interim period the assessees went on paying interest to the different creditors and other persons who were entitled to claim moneys from them by virtue of the assignment of debts and liabilities of the family made by the arbitrator, Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arbitrator " and instead of the legatees we substitute the words " the members of the Hindu undivided family " into the illustration (a) to section 94 of the Indian Trusts Act, it becomes clear that the assessees before us held the properties received by them for the benefit of the creditors to the extent necessary to meet the just demands of the creditors. As pointed out earlier, ordinarily provision has to be made for the creditors to discharge the liabilities of the Hindu undivided family and for the pre-partition debts of the father at the time when a partition takes place, but, if for some reason or other provision for discharging the liabilities has not been made or could not be made, the persons who get the properties on partition keep the properties in their hands subject-to the liability to satisfy the just demands of the creditors. In this sense, the sons and the mother, the assessees before us, hold the property for the benefit of the creditors and they were holding the assets which they received on partition for the benefit of the creditors to the extent necessary to satisfy the just demands of the creditors. Even from this point of view, therefore, it is clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diversion of part of the total receipts by an overriding title before the income reached the assessees' hands or is it a diversion of a part of the income after it reached the hands of the assessees ? As Hegde J. has pointed out in Venugopala Varma Rajah's case [1972] 84 ITR 466 (SC), the question is not of any physical receipt but what we have to consider is the legal concept of receipt in law and looked at in this sense, it must be held that the real income of the assessees consisted of only total receipts less the interest payable on the outstanding liabilities assigned to them under the terms of the consent decree and the award. In the light of these conclusions, we answer the questions referred to us in each of these references as follows : Question No. (1). In the negative, that is, in favour of the assessees and against the revenue. It must be observed that our entire decision is in respect of interest paid in respect of amounts due to unsecured creditors. Question No. (2). In the affirmative, that is, in favour of the revenue and against the assessees (sic). Question No. (3). In the negative, that is, in favour of the assessees and against the revenue. The Comm ..... 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