TMI Blog1968 (11) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... e, inter alia, from house property. He executed a settlement deed with respect to his property at 1/21 Asaf Ali Road, New Delhi, in favour of his father, Atma Ram. The said deed is a registered document. The preamble of the said document, inter alia, recites : " ....and whereas the grantor in consideration of his natural love and affection and filial duty for the grantee is desirous of making provision for the maintenance of his father who owing to old age naturally depends upon the grantor, for the life-time of the grantee... " Clauses 1, 2, 3 and 4 of the deed also deserve reproduction and read : " 1. The grantor for the purposes of maintaining the grantee according to the parties' social status, transfers in favour of the grantee for the lifetime of the said grantee the right to the usufruct and income of the said hereditaments and for that purpose transfers in his favour and authorises him to exercise all the powers and rights of an owner that the grantor himself possesses and enjoys ; 2. By way of clarification it is further stipulated that the grantee will be entitled to receive all the rents and income from the existing leases or any future leases, to enter into con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee continued to be the legal owner of the property ; (b) it was not a case of diversion of income by an overriding title but only that of application of income after it has accrued to the assessee and (c) the income in the hands of the assessee was, in the circumstances, assessable under section 9 of the Act. " The Income-tax Officer also decided that, in any event, the assessee derived indirect benefit out of the income from the property in dispute in the form of receipts under his father's trust deed of the same date and, therefore, the case was not covered by the third proviso to section 16(1)(c). In appeals before the Appellate Assistant Commissioner the assessee disputed the finding of the Income-tax Officer that he continued to be the owner of the property notwithstanding the execution of the settlement deed and again raised the same contentions as raised before the Income-tax Officer but the Appellate Assistant Commissioner affirmed the findings of the Income-tax Officer. The assessee preferred appeals before the Income-tax Appellate Tribunal and again reiterated the same pleas. The Tribunal disposed of the three appeals by a consolidated order as mentioned hereinbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he third proviso thereto, would not be otherwise taxable in the settlor's hands and it did not prevent income from being taxed in the hands of the settlor who, under the general law, would be taxable in respect of such income. In short, Mr. Kirpal's argument on this aspect was that if 'A' applied his income after it had accrued to him, the said income would be taxable in A's hands as tax is attracted the moment income accrues ; that such application of income will not be exempt by virtue of the third proviso to section 16(1)(c) and that the said section 16(1)(c) read with the third proviso would come into play only where diversion of income was made by an overriding title at the source before it became the income of the transferor ; and (3) since tax on property had to be paid by the owner of the property irrespective of the nature of diversion by him of the income, i.e., either at source or by applying the same after accrual, no overriding title could be created with respect to the property taxable under section 9 and, consequently, section 16(1)(c) could have no application to such property. As to whether or not the assessee continued to be the owner of the property notwith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefrom. That, according to Mr. Karkhanis, negatived the contention of the revenue that the assessee was its owner. The assessee was, before the execution of the settlement document, the owner of the said property and the question to be seen is whether he transferred that ownership or merely the income. If the conclusion be that he transferred only the income, the residue, namely, the ownership, will still continue to vest in the assessee. I may also add that in that situation even the test laid down by the Full Bench would be satisfied, as it would be a case of a person capable of earning income but choosing not to do so. It is also to be borne in mind that the question before the Full Bench was different, namely, the impact of the evacuee legislation in Pakistan on the ownership of the assessee. I will now proceed to examine the terms of the settlement deed. One of the clauses in the preamble indicates the object of the settlement, namely, the desire of making a provision for the maintenance of the assessee's father who owing to old age depended on the assessee for the lifetime of the father. The preamble proceeds to say, " ......and whereas the grantor for the purpose of suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not exclude from the assessee's total income such sums as are paid by him, which are, apart from section 16, a part of his income and amount merely to an application of his income. It follows that, if an assessee applies his income and does not divert it at source before becoming his income, it would continue to be taxable in the hands of the transferor and will not be excluded from his total income by operation of the third proviso. In A. R. Rangachari v. Commissioner of Income-tax, the Madras High Court held that if a certain sum is taxable in the hands of an assessee, though applied in a particular manner under a binding obligation, no question can arise of applying the provisions of section 10 which section only deems income to be his when apart from this provision it is not his income. It was observed : " It is only in cases where there is no transfer of an asset but merely a disposition of income that the position becomes a little ambiguous. The question is whether the distinction which formerly obtained between an application of income and its diversion, as we have endeavoured to state a little earlier, continues still to be crucial. On the one hand, the contention urge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable in respect of those shares for the term of the wife's life. Their Lordships of the Supreme Court held that it was a case of application of income after it had accrued and was taxable in the hands of the assessee. It was observed : " If this is the true construction of the document, then it is clear to us that the answer given by the High Court to the question referred to it is correct. The High Court rightly pointed out that the company paying the dividend can pay it only to the registered shareholder or under his orders (see Hourah Trading Co. Ltd. v. Commissioner of Income-tax) ; therefore, section 16(1)(c) of the Income-tax Act was not attracted nor the third proviso thereto and the income continued to accrue to the assessee, but was thereafter paid over to his wife under the terms of the contract. The income was, therefore, assessable in the hands of the assessee, because it was part of his income though applied subsequently towards payment to the wife under the terms of the contract. The position that emerges from the reading of section 16(1)(c), the third proviso thereto and the various decisions referred, to hereinbefore is this : section 16(1)(c) contemplates i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration before the Bombay High Court in D. R. Shahapure v. Commissioner of Income-tax. Kania J. (as his Lordship then was) dealing with this very argument observed : " The proviso opens with the words 'provided further that this clause shall not apply....' There is no warrant for reading the word 'clause' as applicable only to the second half of clause (c), and not the first half also. In my opinion, the last words of the proviso, quoted above, also do not help the Commissioner, because the power to revoke may be equally applicable to the income, which is payable, as to the assets which are transferred. In proviso (1) the transfer of income and assets are treated, so far as this section is concerned, on the same footing. It appears therefore that the third proviso, as worded, can equally well apply to the first part of section 16(1)(c). It was next argued that having regard to the words 'revocable or not' used in the first part of clause (c), the third proviso cannot apply until there was a revocable transfer of assets. No authority is cited to support this construction, which is against the very words of the clause. The words 'revocable or not', in my opinion, are used in contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided it is a legally enforceable charge. The purpose of the charge would be indifferent. That lends a further support to the view that I am taking, namely, that owner has to pay tax on property covered by section 9, even when he has diverted his income at source. He will, however, be entitled to deduct the annual charge. Such an annual charge may comprise a charge created on the property for the payment of annual sum to the assessee's mother out of natural love and affection (Prince Khanderao Gaekwar of Baroda v. Commissioner of Income-tax) or charge created to secure payment of alimony to the assessee's wife (Commissioner of Income-tax v. State Bank of India). The other view would result in an anomalous position and defeat the very purpose of section 9. Take a case where the property is self-occupied and yields no income. If the owner has diverted his income from such property by an overriding title the transferee will not have to pay tax as there is no income from the property and the transferor will escape liability by reason of creation of an overriding title with respect to income. The nature of deduction on account of annual charge shows that the legislature intended to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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