TMI Blog1987 (4) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in the circumstances of the case, 25% of the dividend income was exempt from assessment under section 11(1)(a) of the Income-tax Act, 1961 ? (5) Whether, on the facts and in the circumstances of the case, the assessee, had a right of appeal against the levy of interest under section 215 of the Income-tax Act, 1961 ? (6) Whether, on the facts and in the Circumstances of the case, the assessee had a right of appeal against the levy of interest under section 217 of the Income-tax Act, 1961 ? " Relevant facts in brief are that Apostolos Raptakos was a Greek, who later on became a naturalised Indian and adopted India as his place of domicile. He owned 69,000 shares out of a total 78,000 issued shares of a company named " Raptakos Brett Co. Ltd. " which he had himself floated. He settled 59,500 shares out of his holding on trust under three different trust deeds. We are concerned herein with two out of three deeds executed by him, being trust deeds Nos. 217 and 307. He settled 6,000 ordinary shares on trust under a trust deed dated June 11, 1947 (for short "Trust No. 217 "). The Imperial Bank was appointed as the sole trustee. The shares were transferred in its n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n February 28, 1952. The assessments herein relate to the assessments on the sole trustee in respect of income of the trusts Nos. 217 and 307 for the assessment years 1965-66 to 1969-70 covering the period from April 1, 1964, to March 31, 1969, that is, the period practically after the death of the settlor. On September 20, 1964, the State Bank as the sole trustee of the aforesaid two trusts filed estate duty returns at the instance of the Assistant Controller of Estate Duty. The value of the estate held by it as trustee was disclosed at Rs. 45,78,000 and exemption was claimed from estate duty in respect of the estate, perhaps, on the ground that the estate was held by the trustee for charitable purposes. By his letter dated December 6, 1965, the Assistant Controller, however, informed the State Bank that the estate left by the deceased was not exempt from estate duty and called upon it to pay Rs. 29,24,157, being the estate duty payable on the basis of the principal value of the estate shown in the return. It appears that the executors of the will and the State Bank as the sole trustee sought legal opinion from an expert in or about June, 1965, as to whether the estate was liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty liability on the estate, it was not possible to apply the income for charitable purposes as envisaged in the two trust deeds. The claim was rejected by the Income-tax Officer who completed all the five assessments in March, 1970, holding the assessee-trusts to be liable for income-tax. He also charged interest under sections 215 and 217 of the Income-tax Act, 1961. The Appellate Assistant Commissioner dismissed the appeals. However, by its impugned order dated December 8, 1970, the Income-tax Appellate Tribunal (in short " the Tribunal held that the dividend income did not constitute the real income of the assessee-trusts, that in any event, section 74 of the Estate Duty Act created a charge on the property passing on the death of the late Raptakos and, therefore, the dividend income was not liable to assessment in the hands of the assessee, as it was diverted by an overriding statutory charge. According to the Tribunal, the income of the assessee-trusts was also exempt from income-tax under section 1l(1)(a) of the Income-tax Act, 1961. However, the Tribunal disallowed the assessee's alternative claim that at least to the extent of 25%, the income was exempt under section 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other hand, reiterated what was urged before the Tribunal. In support, he strongly relied on this court's decision in CIT v. C. N. Patuck [1969] 71 ITR 713 and the Gujarat High Court decision in the case of Udayan Chinubhai v. CIT [1978] 111 ITR 584. On carefully going through the above decisions as well as other decisions cited at the Bar, we find that the principle of law in this regard is now well settled. The Supreme Court has, in the case of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367, observed at page 374 " 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 conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessees claimed that to the extent of the interest paid, they were entitled to deduction. The Gujarat High Court rejected the claim for deduction in respect of interest under section 57 of the Estate Duty Act, but accepted the alternative contention that the income received by the assessees from the properties received on partition did not represent their real income as to the extent of interest paid on amounts due to the creditors, income was diverted at source by an overriding title. In this context, it is desirable to refer to certain observations made by the court at page 612 : " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Apart from the fact that both the Raja and his step-mother had some kind of rights in the family estate and the assessment was being made on the Raja, the payments made were periodical and in fact were made. In the other decisions also, namely, IRC v. Wemyss [1924] 8 TC 551 and CIT v. Travancore Sugars and Chemicals Ltd. [1973] 88 ITR 1 (SC), referred to by Mr. Dastur in the course of his submission, the facts are materially different. While in the former case, income by way of dividend in excess of 12 1/2% free of tax was transferred to a firm in discharge of the assessee's obligation under an ante-nuptial agreement, in the latter case, a percentage of profits was given to the State Government in lieu of certain business units taken over by the assessee-company over and above the payment of cash consideration. Having regard to the facts and the ratio of the decisions indicated by us above, we hold that none of the decisions relied upon by Mr. Dastur really supports his submissions. Further, on analysing the nature and content of the " charge " created under section 74(2) of the Estate Duty Act, the position becomes all the more clear and against the assessee. Section 74(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duty was in fact paid, we find it extremely difficult to accept that there was any diversion of income, far less a diversion by an overriding title. The first two questions are, therefore, answered in the negative and in favour of the Revenue. Before concluding this part of the judgment, it may be desirable to observe that the Tribunal has referred to the concept of real income in the context of the Supreme Court decisions in : (i) CIT v. Messrs. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC), (ii) CIT v. Kalooram Govindram [1965] 57 ITR 630 (SC), and (iii) Murlidhar Himatsinghka v. CIT [1966] 62 ITR 323 (SC). and this court's decision in H.M Kashi Parekh and Co. v. CIT [1960] 39 ITR 706, in paragraph 13 of its order. However, so far as its conclusion that the ostensible income is not the real income of the assessee trusts is concerned, the only reason given by the Tribunal is that to the extent of estate duty payable, the income was diverted by overriding title because of the statutory charge created by section 74(1) of the Estate Duty Act. In the circumstances, it is not necessary to refer to these decisions in detail. Now, we come to the third question of law. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w referred to us for opinion is framed leaves no scope for doubt that the first condition was satisfied and the question of law referred to us is with regard to the second condition only. The second condition for exemption is the application of such income for such purposes in India. The exemption is available to the extent such income is applied. There is no dispute that factually no part of the income is applied for charitable purposes, that is, for either of the institutions nor for any other purpose, including making payment towards estate duty payable. On the face, of it, therefore, such income cannot be said to be exempt from tax. The arguments advanced and accepted by the Tribunal in this behalf are : (i) if no income is available for application, this condition does not come in the way of granting exemption. It was stated that in the face of the huge estate duty liability outstanding and the legal opinion of the expert obtained in June, 1965, advising the assessee not to fritter away the income until the question of estate duty liability is finally decided, no prudent person would touch the trust income. In support, reliance was placed on the well-known decision of the Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exus. In any event, in the Madras case reported in CIT v. Janaki Ammal Ayya Nadar Trust [1985] 153 ITR 159, income-tax was not only payable in the theoretical sense, but statutory demand was raised and the assessee had actually paid the taxes and the income was not in fact available for application. As against that case, in the case before us, there was no legally enforceable demand outstanding in respect of " estate duty payable " and no payment was in fact ever made. Income thus continued to be factually available for application. The Madras decision in CIT v. Janaki Ammal Ayya Nadar Trust [1985] 153 ITR 159 does not, therefore, support the assessee's contentions. Moreover, the second condition implies that such income is applied for charitable or religious purposes in India. Even assuming that the payment of estate duty could be treated as application of income for such purposes, namely, for the two institutions for which the corpus is held by the assessee-trusts, it is difficult to accept particularly, when one institution is in India and the other is outside India, that this condition is satisfied. Mr. Dastur had contended that the will executed by the deceased on February 28, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we agree with the Tribunal that the income of the assessee-trusts to the extent of 25% would not be exempt from tax on the ground of accumulation. Accordingly, the question is answered in the negative and in favour of the Revenue. This takes us to the fifth and sixth questions of law. It is fairly conceded by Mr. Dastur, learned counsel for the assessee, that the questions involved herein are covered by the Supreme Court decision in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961, where it has been held that the levy of interest under section 139(8) or section 215 is a part of the process of assessment. It is open to an assessee to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy at all. In the present case, what was urged before the Appellate Assistant Commissioner as well as the Tribunal was that the levy of interest under section 215 and/or section 217 of the Income-tax Act should have been waived or reduced in terms of rule 40 of the Income-tax Rules, 1962, and the contention was not that the assessee was not liable to the levy at all. Accordingly, the above two questions are also answered in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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