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Darab Ruttonshaw Shroff v. Commissioner Of Income-Tax, Bombay City Ii
Structured Summary of the Opinion (Tendolkar, J.)
Factual and Procedural Background
The assessee is Darab Ruttonshaw Shroff. His father, Ruttonshaw Dhunjibhoy Shroff, carried on business as a wine merchant under the name "Shroff & Co." From the commencement of Samvat Year 2002 (assessment year 1947–48) the father admitted his two sons, Darab and Boman, as partners. The profit shares at that time were: father 9 annas, Darab 4 annas, and Boman 3 annas. A partnership deed was executed on 17 December 1945 providing that the goodwill of the business belonged exclusively to the father.
The partnership continued until 20 August 1948 (during assessment year 1949–50), when Boman retired; thereafter Ruttonshaw and Darab were partners with shares of 10 and 6 annas respectively. A new partnership deed was executed on 6 October 1948; Clause 11 provided that "The goodwill of the firm shall always be the property of the said Ruttonshaw Dhunjibhoy Shroff," and Clause 12 dealt with nomination on the death of Ruttonshaw.
The partnership term was initially for a definite period ending 21 October 1949 and thereafter at will; in fact, it continued until Ruttonshaw's death on 12 November 1952 (during Samvat Year 2009). Ruttonshaw made a will on 25 October 1948. Clause 6 of the will recorded an agreement "as agreed between me and my partner, Darab" that, from and after Ruttonshaw's death, the net profits would be divided: one-fourth to Mrs. Dinbai (the wife) during her lifetime and the remaining three-fourths to Darab, with Darab to have the goodwill. Clause 7 provided that if the business were stopped or went out of Darab's hands, Darab would pay Rs. 20,000 absolutely to Dinbai.
Accounts were prepared for the accounting year 19 October 1952 to 6 November 1953 and profits apportioned between the period on and after Ruttonshaw's death (12 November 1952) and before. The apportionment resulted in a payment due to Mrs. Dinbai equivalent to 25% of the net profits for the period from 13 November 1952 to 6 November 1953, amounting to Rs. 5,877. The reference question posed to the court was whether this Rs. 5,877 is assessable to tax in the hands of Shri D.R. Shroff (Darab), who carried on the business during the relevant period.
Legal Issues Presented
- Whether the amount of Rs. 5,877 representing 25% of the net profits of the business of Shroff & Company for the period 13th November, 1952 to 6th November, 1953 is assessable to tax in the hands of Shri D.R. Shroff, who carried on the said business during the relevant period?
Arguments of the Parties
Assessee's Arguments (as presented by Mr. Kolah)
- The sum of Rs. 5,877 never formed part of the assessee's income; it was diverted out of that income by an overriding title and therefore is not liable to be included in the profits of Shroff & Company taxable in the hands of the assessee.
- Reference was made to a number of decided cases; the principal ratio relied upon was from Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, Bengal ([1933] 1 I.T.R. 135), which stands for the proposition that where an income is diverted by an overriding title to someone other than the assessee, it never reaches the assessee as income and is not taxable in his hands.
The opinion does not set out a detailed, separately stated case for the Revenue within the text; it does, however, note that the Department had already taxed the amount in the hands of Mrs. Dinbai.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, Bengal, [1933] 1 I.T.R. 135 | The principle that "when the act by section 3 subjects to charge 'all income' of an individual, it is what reaches the individual as income which it is intended to charge." If part of an income is diverted by an overriding title to someone else, it never reaches the assessee as income and thus cannot be taxed in his hands. | The Court applied this precedent as the controlling ratio to determine whether the payment to Mrs. Dinbai was an amount that never reached Darab (i.e., diverted by an overriding title) or was instead an obligation undertaken by Darab (an application of his income). The Court concluded that the Dudhuria principle required distinguishing "overriding title" from a voluntary obligation; applying that distinction, the Court held the amount was assessable in Darab's hands. |
Court's Reasoning and Analysis
The court proceeded by identifying the true nature of the transaction that produced the Rs. 5,877 and then applied the Dudhuria ratio to those facts.
- The court began by noting the partnership deed provisions: the goodwill of the firm belonged to Ruttonshaw, and he also had a 10-anna share at the time he made his will. He possessed a power of nomination under the partnership deed.
- The court observed that, instead of exercising the power of nomination directly, Ruttonshaw had entered into an agreement with Darab prior to making his will. The will itself states "As agreed between me and my partner, Darab..." and thus the agreement pre-existed the will.
- The court analyzed the substance of that agreement as reflected in the will: Ruttonshaw transferred (or agreed that) the goodwill would belong fully to Darab; in return Darab agreed that during the lifetime of Dinbai she would receive one-fourth of the net profits of the firm, and in the event of the business being discontinued Darab would pay Rs. 20,000 to Dinbai. The court treated these provisions as reciprocal — an exchange whereby Darab received the goodwill and the ten-anna share in return for undertaking the obligation to pay Dinbai.
- Applying Dudhuria, the court focused on the legal distinction between (a) an overriding title that diverts income before it reaches the alleged recipient (so it never becomes his income), and (b) an agreement by the recipient to apply or pay part of his income to another (which is an application of his income and does not prevent it from being his income).
- The court concluded that the facts fell within the second category: Darab had undertaken an obligation to pay one-fourth of his income to Dinbai in exchange for the benefit he received (goodwill and increased partnership share). The obligation was an application of Darab's income rather than an overriding title that prevented the income from ever being his.
- On that basis the court held the sum of Rs. 5,877 was assessable to tax in the hands of Darab. The court noted as a factual point that the Department had taxed the same amount in the hands of Mrs. Dinbai; it observed that this sometimes occurs as a precaution and expressed the expectation that tax paid by Dinbai would be refunded once the answer becomes final and conclusive between the parties.
Holding and Implications
Holding: The question was answered in the affirmative — the Court held that the Rs. 5,877 representing 25% of the net profits for the relevant period is assessable to tax in the hands of Shri D.R. Shroff (Darab). The Court also directed that the assessee pay costs.
Implications:
- The direct effect is that the amount of Rs. 5,877 is taxable in the hands of Darab; the assessee (Darab) was ordered to pay costs.
- The opinion notes that the Department had already assessed the amount in the hands of Mrs. Dinbai; the Court indicated that the Income-tax authorities would, when the answer becomes final and conclusive, refund any tax paid by Dinbai (as the Department sometimes taxes in two hands as a precaution).
- This opinion applies the established distinction in the Dudhuria precedent between diversion by an overriding title and a recipient's voluntary obligation to apply his income; the Court treated the present case as the latter. The opinion does not state that it creates a new precedent beyond applying that existing ratio.
Tendolkar, J.:— The assessee before us is Darab Ruttonshaw Shroff. His father Ruttonshaw was carrying on business as wine merchant under the name and style of Shroff & Co. From the commencement of Samvat Year 2002 (assessment year 1947–48) he took his two sons, Darab and Boman, as partners in the business and the shares of the father and the two sons were 9 annas, 4 annas and 3 annas respectively in the income of the business. A deed of partnership was executed on the 17th of December, 1945, the relevant provision of which, for the purposes of this reference, is that the goodwill of the business belonged exclusively to the father. This partnership continued till the 20th of August, 1948, which date falls in the assessment year 1949–50 when Boman retired, leaving Ruttonshaw and Darab as the two partners with shares of 10 and 6 annas respectively. A partnership deed was executed on the 6th of October, 1948, and the relevant provisions of the partnership deed are:
“Clause 11: The goodwill of the firm shall always be the property of the said Ruttonshaw Dhunjibhoy Shroff.”
“Clause 12: On the death of Ruttonshaw Dhunjibhoy Shroff his nominee or nominees appointed by him in writing signed by him and attested by one witness shall be admitted as partner or partners as the case may be taking his share in such proportion as may be mentioned by him and on such nominee or nominees executing an agreement and executing all necessary writings evidencing the continuation of the partnership and agreeing to observe, perform and fulfil all terms conditions and obligations of the partnership the person or persons so agreeing shall be entitled to the share of the deceased in profits and income and also the assets of the partnership including goodwill in the shares appointed by the nomination writing and shall also be liable for the share in losses of the deceased partner……”
2. This partnership was for a definite period ending with Samvat Year 2005, that is, the 21st of October, 1949, and thereafter at will; but, in fact, the partnership continued until the death of Ruttonshaw, which took place on the 12th of November, 1952.
3. On the 25th October, 1948, Ruttonshaw had made a will and in that will the relevant clauses for our present purpose are clauses 6 and 7, which are as follows:
“6. At present I am doing business in foreign wine, and general business wherein my son Darab is my partner. The said business is run in two shops (1) at 307, Corner Grant Road in wholesale foreign spirits, wines and beer and general merchandise in the name and style of Shroff and Company, and (2) at York House, Colaba, for the retail sale of foreign spirits, wines and beer in bottles, in the name and style of Shroff and Company. The shares in the net profits of myself and Darab in the said firm of Shroff and Company are in the ratio of 10 : 6. As agreed between me and my partner, Darab, from and after my death my wife, Dinbai, during her lifetime shall receive one-fourth in the net profits of the said firm and the remaining three fourths of the net profits shall belong to my son, Darab. From and after Dinbai's death my son, Darab, shall be entitled to the entire profits of the said firm.
“The goodwill of the firm which belongs to me shall belong fully to my son, Darab; and my wife, Dinbai, or anyone else shall not have any share in the same.”
“7. In case the said business of Shroff and Company is for any reason stopped or goes out of the hands of my son Darab and my wife, then I direct that my son Darab shall pay Rs. 20,000 absolutely to my wife Dinbai if she is then alive.”
4. Ruttonshaw's death on the 12th of November, 1952, was during Samvat Year 2009, which was the previous year to the relevant assessment year. There was a succession to the business of Shroff and Company therefore, in the middle of that year, that is, from the 12th of November, 1952. Accounts of that business were not made up as on that date, but they were made up for the entire accounting year from the 19th of October, 1952, to the 6th of November, 1953; and the profit and loss apportionable to the first 25 days of the partnership between Ruttonshaw and Darab and the subsequent period were apportioned.
5. On apportionment of these profits, the payment to Mrs. Dinbai, the mother, equivalent to 25 per cent. of the net profits for the period of Samvat Year 2009 on and from the death of Ruttonshaw was Rs. 5,877. It is this amount which is the subject-matter of the reference before us and the question that has been referred to us is:
“Whether the amount of Rs. 5,877 representing 25 per cent. of the net profits of the business of Shroff and Company for the period 13th November, 1952, to 6th November, 1953, is assessable to tax in the hands of Shri D.R Shroff who carried on the said business during the relevant period ?”
6. Now, Mr. Kolah for the assessee has contended that this amount of Rs. 5,877 never formed part of the income of the assessee at all; but it was diverted out of that income by an overriding title, and, therefore, it is not liable to be included in the profits of Shroff and Company which are taxable in the hands of the assessee. Although Mr. Kolah referred to a number of decided cases on this question, the ratio applicable to a case of this nature was laid down by their Lordships of the Privy Council in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, Bengal [1933] 1 I.T.R 135., and that ratio, which has been adopted by a number of subsequent decisions of different High Courts in India, may shortly be stated to be that if part of an income is diverted by an overriding title to someone other than the assessee, it never reaches the assessee as income, and, therefore, it cannot be taxed in his hand. Lord Macmillan, who delivered the judgment of their Lordships of the Privy Council at page 138, in a passage which has been oft-quoted in subsequent Indian decisions, states:
“When the act by section 3 subjects to charge ‘all income’ of an individual, it is what reaches the individual as income which it is intended to charge. In the present case the decree of the Court by charging the appellant's whole resources with a specific payment to his step-mother has to that extent diverted his income from him and has directed it to his step-mother; to that extent what he receives for her is not his income. It is not a case of the application by the appellant of part of his income in a particular way, it is rather the allocation of a sum out of his revenue before it becomes income in his hands,”
7. We have really to apply this ratio to the facts of the case before us in order to determine the question that has been referred to us. For that purpose it is essential that we must determine the true nature of the transaction with which we are concerned; and in determining it, we have to remember at the outset that under the terms of the partnership deed the goodwill of the partnership belonged to Ruttonshaw. He had also a 10-anna share at the time he made his will and he had a power of nomination under the deed of partnership; but instead of directly exercising, as he had a right to do, the power of nomination, it appears that he entered into an agreement with Darab prior to the making of the will. This is clear from clause 6 of the will which I have reproduced above, which states: “As agreed between me and my partner, Darab………” It is not suggested that there was no such agreement, precedent to the making of the will, and the nature of the agreement must be gathered from the real nature of what was sought to be done. It was that the goodwill that belonged to Ruttonshaw was to belong fully to Darab and Darab agreed in his turn that so long as Dinbai lived, she shall receive from Darab one-fourth of the net profits of the said firm. That this one-fourth was in exchange for what Darab got from Ruttonshaw, namely, his ten-anna share, as well as the goodwill, becomes the more clear when one turns to clause 7 of the will under which, in the event of the business of Shroff and Company being discontinued, Darab was to pay Rs. 20,000 to Dinbai. Therefore, we are really dealing with the case of an agreement whereby Darab in exchange for getting the goodwill of his father as well as his ten-anna share in the partnership, agrees to pay to Dinbai during her lifetime one-fourth share in the net profits of the business during her lifetime, and if the business is discontinued, a sum of Rs. 20,000. That this agreement is subsequently embodied in the will does not appear to us to make any difference. Therefore, this appears to us to be a case where Darab undertook an obligation to pay part of his income during the lifetime of Dinbai to Dinbai and not a case where any overriding title was created in Dinbai whereby what went to Dinbai was diverted from the income of the business of Shroff and Company and never formed part of the income of Darab. In our opinion, therefore, applying the ratio of Dudhuria's case, this is a case of the application by Darab of his income in a particular way, he having agreed to do so with his father before the making of the will; and since this is so, quite obviously the sum of Rs. 5,877 is assessable to tax in his hands.
8. We gather from the assessee that this amount has already been taxed by the Department in the hands of Dinbai. It becomes necessary sometimes for the Department to tax the same income in the hands of two different individuals as a precaution against the Court in one of the assessments taking the view that the income could only be assessed in the hands of one of the two assessees; but we have always assumed that the State does not desire to tax the same income in the hands of two persons, and if and when the answer that we have given to the issue becomes final and conclusive between the parties, we have no doubt that the Income-tax authorities will refund the tax paid by Dinbai.
9. Our answer, therefore, to the question referred to us will be in the affirmative. Assessee to pay costs.
10. Question answered in the affirmative.
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