TMI Blog1968 (1) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 is 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 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, Jeroo and Sooni, the plaintiff 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 plaintiff, the said two daughters and the partners of Messrs. Patuck Sons and Co. agreeing to pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 profits 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 in 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 arrangement and the factum of payments are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Sitaldas Tirathdas. Nonetheless the Tribunal confirmed the decision of the Appellate Assistant Commissioner and dismissed the department's 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 assessee, which charge could be legally enforced, and, as a consequence of that charge, the receipts from the partnership payable to the assessee 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 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 declaring 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 deduction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 taxpayer, than to an intention to impose, without right 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 in 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. 48,000 as maintenance to his wife and children under a decree of a court, but the decree had not made the payment of the maintenance a charge on any prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 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, a 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. In that case the two grand-sons of the settler 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 Rs. 6,000 in excess of their obligations, sought to deduct the same from their assessable income which claim was allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducted the amount from his assessable income. It was not an allowance which was charged upon the estate by a decree of the, court or otherwise which the testator himself had no right or title to receive. The third case in this category which the Supreme Court considered was the decision of this court in Seth Motilal Manekchand's case, to which we have already referred. In that case a managing agency belonged to a joint Hindu family composed of A, his son, B, and A's wife. When a partition took place between the members of the family the managing agency came to be divided and the partition deed provided that A and B would be entitled to the remuneration from the managing agency in equal shares but each of them should pay to A's wife 2 as. 8 pies, out of their respective 8 as. share in the managing agency. Thereafter, A and B continued to carry on the managing agency constituting themselves into a registered firm. In the, assessment of that firm and of each of the two individual partners it was claimed that the amount paid to A's wife by each of them being 2 as. 8 pies share of the income from the managing agency should be allowed to be deducted before ascertaining their taxable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and in our opinion the answer must be against the contention of the Advocate-General. " The words used by the Division Bench are closely similar to the words used by the Supreme Court in laying down the test in such cases. It was contended by Mr. Joshi on behalf of the department that Motilal Manekchand's case was followed by the Division Bench of this court in deciding Sitaldas's case and since the decision of this court in Sitaldas's case was reversed by the Supreme Court it must be held that Motilal Manekchand's case is also impliedly overruled. We are unable to accept this contention because in the decision in Sitaldas's case the Supreme Court expressly referred to Motilal Manekchand's case and discussed it on page 374 of 41 I.T.R. In regard to the several other cases which they discussed, the Supreme Court in Sitaldas's case stated whether those cases in their opinion were rightly decided or were incorrectly decided. For instance, in considering the case of Commissioner of Income-tax v. Makanji Lalji they stated that that case was open to serious doubt in view of Dudhuria's case. They also pronounced that D. R. Naik's case was correctly decided. So far as Motilal Manekch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not exhaustive of the nature of charges contemplated in Indian law as can be seen from a number of decisions in which charges have been held to be created even against property other than immovable property or against merely a particular fund. It is sufficient if, having regard to all the circumstances of the transaction, the document shows an intention to make the particular property or fund a security for the payment of the money mentioned therein. In Nathan Lal v. Durga Das a Division Bench of the Allahabad High Court held that, in order to constitute a charge, it is not necessary to employ any technical terms but where the intention of the parties concerned was to indicate in unambiguous language that a definite fund should be employed for the discharge of a particular debt or claim and there is no ambiguity either as to the amount of the debt or the amount of the claim out of which the debt has to be satisfied, the transaction amounts to a charge. In that case in a registered lease a provision was made that the lessee should deduct from the annual rent a certain portion as repayment of a sum of money already borrowed by the lessor from him and it was hold that such a stipula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and made security for the payment of a debt or the discharge of an obligation a charge would arise even though the property charged or the fund out of which the debt had to be satisfied " had not then come into existence ". In the light of these principles we turn to consider the provisions of the two documents-- the decree dated 2nd April, 1951, and the agreement entered into in consequence of the decree dated 4th April, 1951--to see whether any of them gives rise to a charge in the instant case. We have already reproduced the relevant portions of the two documents. The two important provisions of the decree must first of all be noticed. One provision is that contained in the words " In order to secure regular payment of the above sums in agreement will be entered into ...... " In other words, the amount of Rs. 250 payable to each of the two daughters monthly was to be secured by an agreement which was to be entered into.... ". The very fact that the parties contemplated security for payment of the debt or obligation by the assessee in favour of his two daughters would, in our opinion, give rise to a charge the moment the property which was to be a security for the payment is sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been made parties to the agreement. The fact that they were made parties to the agreement and agreed themselves to pay to each of the daughters the amounts of the maintenance due to them out of the remuneration and the one-third share in the profits of the partnership, clearly shows that it was the intention of the parties that the source or the profits should be bound. That part of the profits thus could never become the income of the assessee. Once a stipulation like this was made in the document it is clear to our mind that the profits could never have been obtained directly by the assessee himself. On the other hand, the daughters would be entitled directly to claim the maintenance out of the profits from the two partners who had agreed to pay the same to them and to that extent they would have a title superior to that of their father in the profits. That would constitute such an overriding title as would make that portion of the profits which was payable to them cease to be the profits of the assessee himself long before it became his income. In our opinion, the stipulation in the agreement whereby the two partners bound themselves to pay to the two daughters the maintenanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had already been created during the time that he continued as a partner and, therefore, the last paragraph of clause 4 had of necessity to be incorporated in the decree. After he had retired from the partnership and ceased to receive the salary and the profits, without an express recital, the daughters may not be safeguarded. So far as the payment to them from the profits of the partnership was concerned, it may be disputed and, therefore, it was stipulated in this paragraph that a fresh document for that purpose would be executed. It was with that purpose that this paragraph was incorporated in clause 4. We do not think that it negatives the existence of a charge as created by the earlier recitals of clause 4. Next it was contended that the authorities have found as a fact that the assessee's share of profits in the firm and his salary were first credited to his account with the partnership and paid over to him and then the assessee made the payments to his daughters directly, though the receipts granted by the daughters mentioned that the payments were made by the firm. This is clear from paragraph 5 of the statement of the case. In that paragraph itself it is also stated : " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p (firm B) and shall be borne and divided in accordance with the shares specified therein, but that as to the capital, it would belong exclusively to M. In the, relevant assessment years M's share in firm A was sought to be assessed in the individual assessment of M. It was held that there was an overriding obligation in this case and the income of M in firm A did not remain his income but was diverted before it became his income. The position of M after the deed of sub-partnership was thus indicated : " 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. 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-partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccrued or had arisen to the assessee and that the assessee merely applied it as his income (see page 43). The Allahabad case, moreover, was decided upon the particular terms of the document in that case which have been reproduced in detail at page 32 and that the terms contained in that agency agreement are in no way comparable to the terms of the agreement before us. Thirdly, in that case no question of the existence of a charge arose nor was it urged that the document gave rise to a charge as has been found in the present case. As we have indicated, the Supreme Court has clearly stated in Sitaldas's case at page 375, that the matter in that case would have been different if an overriding charge had existed either upon the property or upon its income. That was not the case before the Allahabad High Court, though it is the case here. If there had been a charge as there exists in the present case, even in M. K. Brothers' case the matter would have been different. We do not think, therefore, that the decision in M. K. Brothers'case assists the department. We hold, therefore, that the Tribunal was right in the view which it took that upon the two documents in this case the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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