TMI Blog1984 (4) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal was justified in holding that the payment of half share of income from property at Jhandewalan was not an annual charge on the property and, as such, not allowable under section 24(1)(iv) of the I.T. Act, 1961 ? " One Smt. Kowshalya Wati was allotted a plot of land bearing No. 25 in the Jhandewalan Extension at Delhi by the Delhi Development Authority in the year 1958. Although the terms of the aforesaid allotment are not available on the record, it appears that the allottee was required to construct a commercial building on the aforesaid plot. Smt Kowshalya Wati entered into an agreement with one Victor Kaul for undertaking the construction of the building on the plot of land in question. However, the agreement with Victor Kaul could not mature and then Smt. Kowshalya Wati entered into another agreement on March 2, 1963, with Smt. Savita Mohan Nagpal, the assessee, for making constructions on the plot of land. The construction work started in March, 1963, and the building was completed in December, 1964. As Smt. Kowshalya Wati could not comply with the terms of the agreement and failed to make payment of the stipulated amount to Smt. Savita Mohan, the latter became the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be transferred by Smt. Savita Mohan to her son and in the absence thereof, she continued to remain as the sole owner of the entire property. According to the finding of the Tribunal, the income from the property in question could only be assessed in the hands of Smt. Savita Mohan under s. 23 of the I.T. Act, 1961, and if she chose to give half of the said income to her son out of love and affection or otherwise, it would amount to application of the said income on her part. Thus, the finding of the Tribunal was that the present was not a case of diversion of any amount by Smt. Savita Mohan before the same became the income of the assessee but it was a simple case of application of a part of the income by the assessee. The Tribunal also held that no overriding charge was created by virtue of the agreement in favour of Nitin Mohan. Smt. Savita Mohan Nagpal filed an application under s. 256(1) of the I.T. Act before the Tribunal for making a reference and as already stated three questions reproduced above have been referred to this court by the Tribunal, as arising out of its order dated August 18, 1972. The first question which requires consideration in the present case is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (p. 739) : " In the first place, this is not a case where a claim is made in respect of any deduction under the provisions of the Income-tax Act. If such claim had been put forward, then we would have to consider the various sections of the Act in order to determine whether the deduction is justified. But it is clear position in law, as we shall presently point out, that even though an assessee may not be allowed to claim a particular amount as a deduction falling within the provisions of the Act, he would be entitled to urge that his real income should be considered and if a certain amount is to be deducted in order to ascertain his real income, such deduction would have to be made notwithstanding that the Income-tax Act made no provision for such a deduction. In all cases of tax, what has got to be considered is what is the income of the assessee and when that question arises what has got to be considered is the real income and not any artificial income, and for the purpose of ascertaining that real income every part of that income which may seem to be his income, if in fact it is not his income, if that part has been diverted and never constituted his real income, has got to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e declared or which may be issued and payable in respect of those shares for the term of her natural life and agreed to deliver and endorse over to her any dividend warrant or any other document of title to such dividend or sum of money and to instruct the company to pay the dividends or sums of money to her. As the dividend income relating to the aforesaid income was included in the income of the assessee, he made a submission that the dividend income could not be deemed to be his income. The Calcutta High Court held in the aforesaid circumstances that the income continued to accrue to assessee and was assessable in his hands, even though it was clearly payable to his wife in the terms of the deed. Their Lordships of the Supreme Court, affirming the judgment of the Calcutta High Court, held that it was not case of diversion of any income before it had become the income of the assessee but was a clear case of application of his income by the assessee, after it had accrued to him. In this context, their Lordships of the Supreme Court observed as under (p. 629): " A transfer of property may take place not only in the present, but also in future ; but the property must be in existen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount right by virtue of his overriding title to recover that income before it reaches the hands of the assessee.... Now, it is clear that the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. In deciding the question, the nature of the obligation created in each case is the decisive test. Where, however, coupled with an obligation, the terms of the document give rise to an overriding charge, then there can be no doubt that there would be created in favour of the charge-holder such an overriding or superior title as would make the amount due under the charge cease to be the income of the assessee altogether. " The decision in Patuck's case [1969] 71 ITR 713 (Bom), was again followed by the Bombay High Court in CIT v. Nariman B. Bharucha Sons [1981] 130 ITR 863 (Bom). In that case, according to a particular clause in the partnership deed, after the death of one of the partners, the partnership business was to be continued by the other two partners, who were the Solis, in equal shares, but subject to paying their mother 25% of the net profits of the partnership. It was held that the document of partnership created an overr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween 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 form part of the income of the assessee. Where, on account of the obligation, income is diverted before it reaches the assessee, it does not at all constitute his income. But where the income is required to be applied to discharge the obligation, after the amount reaches the assessee, the same consequences do not follow in law. That is a case of application of such income. Of course, if the income or a part thereof falls within one of the clauses of s. 24, then it has to be deducted, but it is one thing to say that a particular amount did not constitute part of the income of the assessee and quite a different thing to say that such an amount was deductible from the income of the assessee on account of an overriding charge. In the first kind of cases, the amount as a matter of fact never reaches the hands of the assessee. In the second class of cases, the payment is made to fulfil an obligation to pay another person a portion of one's own income. In the first class of cases, the income never reaches the assessee, who even if he were to collect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. The Tribunal, having held as a fact that after the agreement dated November 5, 1964, the lessees had executed lease agreements in respect of portions of the building jointly in the names of Smt. Savita Mohan and Nitin Mohan, it cannot be lost sight of the fact that the agreement dated November 5, 1964, contained a stipulation that 50% of the net income of the building shall belong to Nitin Mohan. Thus, an overriding interest was created which may not be in the nature of a charge on the property, yet the same constitutes on obligation created by a paramount title. It may be pointed out that on account of the execution of the lease agreement pursuant to the agreement dated November 5, 1964, Nitin Mohan was entitled to get 50% of the net profits or rent of the building, even before the same reached the hands of the assessee, Smt. Savita Mohan. However, it constituted an enforceable obligation and Nitin Mohan could realise the rent from the tenants directly on the basis of the lease agreements. Thus, following the tests laid down by Chagla C.J. in Motilal Manekchand [1957] 31 ITR 735 (Bom) and by their Lordships of the Supreme Court in Sitaldas' case [1961] 41 ITR 367 (SC), we hold ..... X X X X Extracts X X X X X X X X Extracts X X X X
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