TMI Blog1998 (6) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the preference dividends were received by the assessee in its own right and thereafter used for certain purposes?" The assessee is a non-resident company. The assessment year under consideration is 1975-76. The previous year for the assessment year under consideration is calendar year December 31, 1974. The assessee's accounting system is mercantile. The assessee is incorporated under the laws of the United States of America and is carrying on business of manufacturing pharmaceutical products in several countries. Initially, the assessee's business of manufacturing pharmaceutical products in India was carried on through Martin and Harris (I.) Ltd. In year 1963, a company in the name of Warner Hindustan Ltd., came to be incorporated in India (said company is hereinafter referred to as the Indian company for short). In the year 1967, the said company went into production. The assessee is holding 50 per cent. of the issued equity share capital and the entire preferential share capital of the Indian company. Till June, 1964, the Indian branch of the assessee carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rried on by Warner Hindustan Limited." (emphasis supplied). Thus, the assessee of its own volition agreed to use the dividends receivable on the preference shares as contribution to finance the research activity of the Indian company. The assessee was to get royalty in consideration of the grant of right of manufacturing of products considered by the parties for production in India. Paragraph 11 of the aforesaid letter reads as under : "Para 11 : It is Warner Lambert's policy to expand its research and development activities not only in the United States, but to extend them also to major foreign countries. It is contemplated, therefore, that Warner Hindustan Ltd. will commence activity in the field of research and development not later than two years following the start-up date of its operations. Such activities, which are expected to be financed primarily out of the company's undistributed profits and the interest yielded by the preference shares proposed to be issued to Warner Lambert, will in part be conducted by the staff and on the premises of the company, but emphasis will be given, by means of a suitable grant or otherwise, to participation in research projects and co-op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee challenged the order of the Income-tax Officer by filing an appeal before the Commissioner of Income-tax (Appeals), who by his order dated March 2, 1979, dismissed the appeal. The Commissioner of Income-tax (Appeals) in his order has observed that it is not free from doubt as to whether the dividend restriction ordinance is applicable to the preference dividend already declared and the assessee will not be entitled for the reliefs as prayed for. The assessee preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal by following its own order dated January 18, 1973, in Income-tax Appeals Nos. 460 and 461 (Bom) of 1971-72 and I. T. A. No. 624 (Bom) of 1971-72 in the assessee's own case dismissed the appeal. The Tribunal in its earlier order dated January 18, 1973, came to the conclusion that dividend received by the assessee against the preference shares will have to be taxed in the hands of the assessee, that the Indian company has no exclusive right to the amounts of preference dividends and this is a case of receipt first by the assessee in its own right and using the amount for certain purposes. The Tribunal held that this is not a case of diversion of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing research activity of the Indian company. Thus the Government only gave approval to the utilisation of the blocked amount on the basis of the proposal given by the assessee and by Desai and Vakil. The assessee's claim is based on the ground that the amount was not includible in the total income as under a contractual obligation for the disbursement of research and development expenditure it had been diverted at source by an overriding title. Learned counsel appearing on behalf of the assessee contended that the preference dividends did not represent the assessee's income because of a charge or an overriding title thereto. As per learned counsel a charge was created in respect of preferential dividend paid by the Indian company, therefore, this income has not accrued to the assessee. He submitted that the dividend paid by the Indian company was diverted at source by an overriding title, therefore, this income did not belong beneficially to the assessee and consequently the same is not assessable in the hands of the assessee. He further submitted that the Tribunal committed in error in holding that the preference dividend was received by the assessee in its own right and used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution of marriage and in view of the tripartite agreement between the assessee, his daughters and the partners, this court came to the conclusion that the assessee created a charge in favour of his daughters and because of an overriding title, money paid to the daughters ceased to be the remuneration and/or profit of the assessee, hence, it could not be taxed in his hands. Thus on the facts of the said case, this court came to the conclusion that the income was diverted at source by an overriding title. This court in the case of CIT v. Nariman B. Bharucha and Sons [1981] 130 ITR 863, on facts found that in a firm consisting of a father and two sons, the partnership deed provided for the sons continuing as partners but subject to giving a share in the profit to their mother after the death of the father. On the facts of the case, this court came to the conclusion that a charge was created over the partnership assets in respect of the payment made on the death of the father and the money payable to the mother was diverted at source by overriding title. Thus on the facts of the case this court came to the conclusion that a charge was created over the partnership assets, there is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assistance to the assessee as in the present case, no charge is created in favour of the Indian company nor is there a diversion of income at source by overriding title. Dividend income is received by the assessee in its own right, thereafter it is transferred to the Indian company for research activity. Thus in law the said income is first received by the assessee, and then applied for the research activity of the Indian company, therefore, will have to be taxed in its hands. The Supreme Court in the case of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 has observed that the true test for application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted, in truth, never reached the assessee as his income. The nature of the obligation is the decisive fact. There is a difference between an amount which the 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 applied to discharge an obligation after such income reaches t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '. This clearly indicates that the monies which have to be put into the contingencies reserve reach the electricity company and are not diverted away from it." This court in the case of CIT v. V. G. Bhuta [1993] 203 ITR 249, to which Dr. B. P. Saraf J. was a party, has considered the clause in a deed of partnership that on the death of a partner, the firm was not dissolved but the surviving partners were empowered to continue the partnership on payment to the widow of the deceased partners of : (a) a share of profits of the deceased accrued to him up to his death, (b) an amount equal to the share of the profits which would have accrued to him for a period of one year from the date of his death, (c) the amount standing to the credit of the deceased in the books of account; and (d) the amount of the share of the deceased in the reserve fund with accumulated interest. On consideration of the various decisions and tests laid down by the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367, this court came to the conclusion that this was not a case of diversion of income by overriding title but this was a case of application of income in fulfilling of a legal obligat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to apply the income accrued, arisen or received amounts merely to the apportionment of income and the income so applied is not deductible. 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 his income. 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. The obligation to apportion the income in a particular manner cannot be termed as diversion of income by overriding title." Considering the decisions of the Supreme Court in the case of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367, and in the case of Associated Power Co. Ltd. v. CIT [1996] 218 ITR 195 and of this court in the case of CIT v. V. G. Bhuta [1993] 203 ITR 249, in the case of Mrs. Meherbai N. Sethna v. CIT [1994] 209 ITR 453, and in the case of Colaba Central Co-operative Consumers' Wholesale and Retail Stores Ltd. v. CIT [1998] 229 ITR 209, it will have to be concluded that on the facts of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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