The Judgment of the Court was delivered by

Ramanujam, J.:— At the instance of the assessee, the following question of law has been referred to this court, for its opinion by the Income-tax Appellate Tribunal:

“Whether, on the facts and in the circumstances of the case, the inclusion of the income from the properties transferred to the trust under an agreement of gift, dated February 9, 1969, in the hands of the applicant is justified in law?”

2. On March 14, 1957, the assessee along with his wife, two sons and their wives founded a trust known as the “Raja Muthiah Chettiar Charitable and Educational Trust” by means of a trust deed. Under the said deed of trust, the assessee, his two sons and two other persons were constituted trustees. Clause 10 of the trust deed provided that the trustees may receive from the parties thereto or from any other persons any further sums of money or shares or assets of any description that may be given by them or any one of them for the purposes and objects of the said trust on such terms and conditions as may be imposed by the donors. On February 9, 1969, the assessee executed a deed styled as “agreement of gift” in favour of the said trust on a stamp paper of the value of Rs. 250. It was mentioned therein that the assessee was desirous of transferring further assets described in the schedule to the agreement, hereinafter called the “Chettinad Colony properties” to the trust as provided in cl. 10 of the trust deed, dated March 14, 1957. Clause 5 of the agreement of gift stated that the donor had put the trustees of the trust in possession of the said properties from that date and that he had also undertaken to execute a document of gift and register the same as soon as exemption was obtained from the Government of Tamil Nadu for the stamp duty payable therefor. The assessee thereafter applied to the Government of Tamil Nadu on April 24, 1969, for exemption from payment of stamp duty for the gift deed, which he proposed to execute in favour of the trust conveying the “Chettinad Colony properties” to the trust. The Government of Tamil Nadu by G.O Ms. No. 557, Revenue Department, dated February 25, 1971, granted the exemption prayed for. The notification waiving the stamp duty payable on the gift deed that was to be executed by the assessee in favour of the trust was also issued under s. 9(1)(a) of the Indian Stamp Act, 1899. Thereafter, the assessee executed a gift deed on March 8, 1971, and had it registered. The assessee filed a return disclosing, inter alia, a sum of Rs. 22,104 as income from the property for the assessment year 1970-71. In so doing, he had not included the income from the “Chettinad Colony properties” for that year on the ground that he had ceased to be the owner thereof by reason of his having transferred the same to the trust. The ITO, however, did not accept that contention. He held that the assessee having executed a gift deed only on March 8, 1971, was the owner of the Chettinad Colony properties till that date and that so long as the assessee continued to be the owner of those properties during the assessment year, the income received by the trust from those properties should be taken to be the income of the assessee. In this view, he determined the income assessable under the head “Income from property” for the assessment year 1970-71 as Rs. 24,046.

3. Aggrieved by the said assessment, the assessee preferred an appeal to the AAC reiterating his contention that he was not the owner of the properties in question during the assessment year and that consequently the income from those properties should not be assessed in his hands. The AAC having rejected the said contention, the assessee took the matter in appeal to the Income-tax Appellate Tribunal reiterating the same contention. The Tribunal took the view that the agreement, dated February 9, 1969, could not be treated as a gift deed, as it was not a registered instrument, that the ownership in the Chettinad Colony properties passed from the assessee to the trust only under the gift deed, dated March 8, 1971, and that so long as the assessee continued to be the owner of these properties till March 8, 1971 notwithstanding the execution of the agreement of gift, dated February 9, 1969, the income from the said properties could only be assessed in the hands of the assessee. The Tribunal further held that the fact that the assessee did not receive the income from these properties but the trust was collecting the income from them, was not material for the purpose of assessment under the head “Income from property” as the assessee continued to be the owner of these properties and it is only in the owner's hands the income from these properties has to be assessed, notwithstanding the fact that the trust was in [receipt of the income from the said properties. The further contention of the assessee was that no document is necessary for making a valid gift, if the intention of the donor to dedicate properties for a charitable object is clear and that since in the present case the agreement of gift, dated February 9, 1969, clearly sets out the intention of the donor, there is a valid dedication of the properties to the trust even on February 9, 1969. In support of the said contention the assessee relied on the decisions of this court in Jai Narayan Jai Govind v. CED, [1963] 49 ITR (ED) 105 and S. Devaraj v. CWT, [1973] 90 ITR 400. The Tribunal rejected the said contention, holding that the said decisions did not apply to the facts of this case, that here, there has been a transfer of immovable properties from a donor to the trustees of an existing trust and that in such a case unless the transfer is by a registered document, it will not be operative. In this view, the Tribunal upheld the conclusion of the authorities below that the income from the Chettinad Colony properties should be assessed in the hands of the assessee: for the assessment year 1970-71. Aggrieved by the decision of the Tribunal, the assessee has obtained a reference to this court on the question set out above.

4. Before us, the learned counsel for the assessee raised the same contentions as were urged before the Tribunal and they are:

(1) The ownership in the Chettinad Colony properties should be taken to have passed from the donor to the trust even on February 2, 1969, when the agreement of gift was executed and the possession of the properties was handed over by the donor to the trust on the same day as per the terms of the said agreement, and it is not necessary to have a document in writing and have it registered for the purpose of validating a gift made by a donor in favour of a trust and mere oral declaration is sufficient to validate in favour of a public charity as in the present case.

(2) Even if the ownership in the properties was not transferred from the donor to the trust on February 9, 1969, since the trust has been in enjoyment of the income from those properties as per the direction given by the donor in the document, dated February 9, 1969, the trust should be taken to be the beneficial owner and, therefore, the income from the properties which the assessee did not receive cannot be assessed in his hands.

(3) The income received by the trust should be taken to amount to a diversion of income by overriding title in which case the income received by the trust cannot be taken as the income of the assessee and assessed in his hands.

5. We will deal with the said three contentions advanced on behalf of the assessee seriatim.

6. Taking up the first contention it is true that the agreement of gift, dated February 9, 1969, purports to proceed on the basis that the gift has been effected on that day and delivery of the properties referred to therein has been given to the trust on that day itself. But it is clear that the parties did not intend that document to be one of completed gift, as the agreement of gift itself provided for execution of a valid gift deed at a later point of time after getting the requisite exemption from stamp duty from the Government. Thus, the parties have proceeded only on; the basis that the agreement of gift, dated February 9, 1969, did not amount to a gift deed as such, and that the gift deed was to be executed on a future date after complying with certain formalities. It is, therefore, clear that the parties themselves did not treat the agreement of gift as a completed gift. Clause 5 of the agreement of gift specifically provides: “The donor undertakes to execute a document of gift and register the same as soon as exemption is obtained from the Government of Tamil Nadu for the stamp duty payable for the deed.” It is clear from the above extract that the parties did not contemplate the agreement of gift as a document of gift, as the said agreement specifically provides for execution and registration of a document of gift at a future point of time. Notwithstanding this fact, the learned counsel for the assessee raised the plea that no document of gift is necessary, if the intention of the donor to dedicate the properties is clear and that in this case such an intention is clear from the agreement of gift, dated February 9, 1969. In support of this plea, the learned counsel relied on the decisions of this court in Jai Narayan Jai Govind v. CED, [1963] 49 ITR (ED) 105 and S. Devaraj v. CWT, [1973] 90 ITR 400. But we entirely agree with the view taken by the Tribunal that the said two decisions have no application to the facts of the present case.

7. In S. Devaraj v. CWT, [1973] 90 ITR 400 (Mad), a question arose as to whether for the purpose of dedication of a certain religious public charity a document by way of gift is necessary. This court has held that it is well established that no express words of gift in writing either directly or indirectly in the shape of a trust are required to create a dedication that all that is necessary is that the religious purpose or object of the donor should be clearly specified, that the property intended for the endowment should be set apart and dedicated to these purposes and that it is also well established that the existence of a trust can be established even by the conduct of parties.

8. The aforesaid two cases dealt with the creation of a public trust and the question was whether such a trust could be created without a formal document and the answer was in the affirmative. In the present case, we are not concerned with the creation of a trust for the first time or initial dedication of properties in favour of a trust or for a specific purpose. We are here concerned with the transfer of properties by a donor in favour of an already existing trust. The donor in this case donated certain properties in favour of an existing trust by way of addition to, or enlargement of, the trust properties. We are also not concerned with the question whether a trust could be created without a document in writing or not, for, in this case, the trust has already been created and the donation has been made under a document in writing.

9. A Division Bench of this court in one of the earliest cases in Pallayya v. Ramavadhanulu, [1903] 13 MLJ 364, has held that a declaration of trust in relation to immovable property for a public religious purpose is not governed by the Indian Trusts Act which by s. 1 is declared inapplicable to a religious endowment and that, therefore, a dedication of an idol and land for the building of a temple for the same is not a gift within s. 122 of the Transfer of Property Act.

10. In Ramalinga Chetti v. Sivachidambara Chetty, [1918] ILR 42 Mad 440, another Division Bench of this court has expressed the view that there are three modes of giving property to a temple and one is by giving it to the trustees in which case the provisions of the Transfer of Property Act must be complied with and another is by dedication to the idol itself. The court was also of the view that though there can be an oral valid dedication to the idol, if the dedication is in writing, it is open to argument that by virtue of the Registration Act, no title would pass unless the document is registered. The court has also observed that the third mode, which is a dedication, offering, or oblation as it is called, is generally made on occasions of death or marriage in a Hindu family, that the usual form is to take a leaf of the tulasi plant in hand and with water offer the property in the presence of the persons assembled and that it is not usually done before the temple or in the presence of the trustees. According to this decision, this third mode, in the nature of things, does not require any writing or no writing could be thought of and if a writing is insisted upon, that will be regarded as detracting from the sanctity of the proceeding. This decision is authority for the proposition that even though a dedication may be made orally without any document in writing, if the parties choose to bring into existence a document in writing, then the provisions of the Registration Act would come in the way and no title would pass under the document unless it is registered.

11. A Full Bench of this court in Narasimhaswami v. Vewkataliwgam, [1927] ILR 50 Mad 687 : AIR 1927 Mad 636, is also in point. In that case a Hindu executed an agreement, which recited that a person had been constituted trustee and certain lands had been dedicated to God Ramachandra Moorti, that he would execute a formal conveyance and put him in possession of the lands, whenever the trustee required and that he would, in the meantime, be accountable for the rents. When a creditor of the donor attempted to attach the said properties contending that no trust or gift was validly created for want of a registered document, the court held that as the document was merely one which recorded a past transaction and gave another party a right to call for a formal document, it was exempted from registration under s. 17(2)(v) of the Registration Act, that the document constituting a trust of property for a public religious purpose fell within the saving clause of s. 1 of the Indian Trusts Act and that consequently s. 5 of the Act, which relates to creation of trusts and requires registration of deeds of trust, did not apply to the document. In this decision the Full Bench has taken the view that a gift to God Almighty is not a gift to a living person within the meaning of the Transfer of Property Act and that consequently s. 123 read with s. 5 of the Act does not apply to such a gift so as to require a registered document for its creation. The Full Bench has also held that though an idol is considered by a fiction of law as a juristic person clothed for some purposes with rights of persons, yet a juristic person is not a living person for the purpose of the Transfer of Property Act.

12. In Ramanathan Chettiar v. Palaniappa Chettiar, [1945] ILR 1945 Mad 500 : AIR 1945 Mad 473, 477, a Division Bench of this court has observed as follows (p. 512):

“There are three modes in which a voluntary transfer of property in favour of a temple can be validly and effectually made. Firstly, by dedication of the property directly to the deity. This mode is sanctioned by Hindu law and needs no compliance with the provisions of the Transfer of Property Act, there being no transfer of property to a ‘living person’ within the meaning of section 5 of that Act. See Gangi Reddi v. Tammi Reddy, [1927] ILR 50 Mad 421 (PC), Sooniram Ramniranjandass v. Alagu Nachiyar Koil, [1939] Rangoon LR 59 : AIR 1938 PC 259 and Narasimha swami v. Venkatalingam, [1927] ILR 50 Mad 687 [FB]. The subject-matter of a dedication must, however, be some specific property or asset and a mere, credit entry in a book of account cannot be the subject of a dedication. Secondly, property may be transferred by way of a gift to the trustee or trustees of a temple. Such a transfer, being one made to a living person, must comply with, the requirements of s. 123 of the Transfer of Property Act.”

13. Paragraph 790 of Mayne's Treatise on Hindu law and Usage, 11th Edn. (pp. 920-921), explains as to how a dedication can be effected and the relevant portion which deals with various principles as culled out from the decisions referred to above and others is this:

“A dedication of property, whether movable or immovable, for a religious or charitable purpose, may, according to Hindu law, be validly made verbally. No writing is necessary to create an endowment except where the endowment is created by will, in which case the will must be in writing and attested by at least two witnesses if the case is governed by the Indian Succession Act, section 57. A dedication may be made by a gift inter vivos or by a bequest or by a ceremonial relinquishment. But a mere credit entry without setting aside and appropriating the sum credited is insufficient to constitute an endowment under the Hindu law. A dedication of land for a public temple is not a gift requiring a registered deed and is not governed by section 123 of the Transfer of Property Act. But property may be transferred by way of gift to the trustee or trustees of a temple. Such a transfer being one made to a living person must, however, comply with the requirement of this section. The Indian Trusts Act, 1882, does not apply to public or private religious or charitable endowments.”

14. It is thus well established that where a transfer is effected inter vivos by a donor to a living person, that will have to satisfy the requirements of the Registration Act Even in a case where no document of gift is necessary, if the parties chose to reduce the transaction to writing, then the requirements of s. 123 read with s. 5 of the Transfer of Property Act as also the provisions of the Registration Act must be satisfied. In the present case even if the [agreement, dated February 9, 1969, is taken to be actually evidencing the transaction of a gift, as contended by the learned counsel for the assessee, then for want of registration the said document will be ineffective to transfer the title from the donor to the trust. We cannot, therefore, agree with the learned counsel for the assessee that the agreement of gift, dated February 9, 1969, results in the transfer of ownership from the donor to the trust and, therefore, the income received by the trust after that date should not be taken as the income of the assessee.

15. Coming to the second contention that even though the transfer of ownership had not taken place on February 9, 1969, since under the terms of the agreement of gift, dated February 9, 1969, the properties had been handed over to the trust with a right to collect the income therefrom for the purposes of the trust, that would show that notwithstanding the continuance of the ownership in the donor till the gift was actually executed as contemplated by the agreement, dated February 9, 1969, the beneficial ownership had been vested in the trust, as it was given the right to collect and appropriate the income from the properties for charitable purposes. But it is well established that Indian law does not recognise the theory of beneficial ownership and it recognises only legal ownership.

16. In Hall and Anderson (P.) Ltd. v. CIT, [1963] 47 ITR 790 (Cal), the Calcutta High Court has expressed the view that under s. 9 of the Indian I.T Act, 1922, an assessee has to pay tax under the head “Income from property” in respect of the bona fide annual value of the property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax subject to allowances mentioned. The principle laid down in that case was whether the assessee was in receipt of rents or not from the property, he has to pay tax under the head “Income from property” based on the annual valuation of his property.

17. In CIT v. Ganga Properties Ltd., [1970] 77 ITR 637 (Cal), there was a sale agreement in respect of a house property followed by delivery of possession in 1956. However, the sale deed was executed only in the year 1958. A question arose as to whether the income from the house property during the interval between 1956 and 1958 could be assessed in the hands of the vendor on the ground that the vendor continued to be the owner till the year 1958. One of the points urged on behalf of the assessee in that case was that since the purchaser on the basis of the sale agreement was entitled to receive and enjoy the income from the property till the sale deed was executed, the sale agreement should be taken to confer on the vendee the beneficial ownership and, therefore, the income from the house property received by such beneficial owner cannot be assessed in the hands of the vendor. In rejecting this contention, the court pointed out (p. 646);

“As we all know, the English doctrine of equitable ownership is not recognised in India. According to section 3 of the Indian Trusts Act, 1882, the ‘beneficial interest’ or ‘interest’ of the beneficiary is the right against the trustee as owner of the trust property. In other words, what would be in English law the equitable estate of the cestui qui trust is the benefit of an obligation annexed to the ownership of property. In English law, an agreement for the sale of land leaves the legal estate in the seller but creates an equitable estate in the buyer. These equitable estates were the creation of the Court of Chancery. A cestui qui trust when in possession was protected in his enjoyment of the rents and profits and treated as if he were the owner, and the Court of Chancery continued to treat him as having an estate in land when out of possession. Again, the relation created by contract between a vendor and a purchaser was described as that of trustee and cestui qui trust and the contract was held to give the purchaser an equitable estate in land: vide Mulla's Transfer of Property Act, 5th Edn., pp. 50, 51. In India the leading case on the subject is the case of J.M Tagore v. G.M Tagore, [1872] LR IA Supp 47, which the Judicial Committee decided in 1872.”

18. The court also quoted in support of its view the following observations of the Judicial Committee in Webb v. Macpherson, [1904] LR 30 IA 238 : ILR 31 Cal 57 : (p. 646 of 77 ITR):

“‘The law of India, speaking broadly, knows nothing of the distinction between legal and equitable property in the sense in which that was understood when equity was administered by the Court of Chancery in England, and the Transfer of Property Act gives a statutory charge upon the estate to an unpaid vendor unless it be excluded by contract. Such a charge, therefore, stands in quite a different position from a vendor's lien. You have to find something, either express contract, or at least something from which it is a necessary implication that such a contract exists, in order to exclude the charge given by the statute.’”

19. Another passage from a decision in Chhatra Kumari Devi v. Mohan Bikram Shah, AIR 1931 PC 196, has also been quoted and it is as follows (p. 646 of 77 ITR):

“‘The Indian law does not recognise legal and equitable estates……. By that law, therefore, there can be but one “owner”, and where the property is vested in a trustee, the “owner” must, their Lordships think, be the trustee.’”

20. The learned judges of the Calcutta High Court in the decision mentioned above ultimately summarised their conclusions as follows (p. 650 of 77 ITR):

“In Indian law, beneficial ownership is unknown and there is but one owner, namely, the legal owner both in respect of vendor and purchaser and trustee and cestui qui trust.

And the expression ‘income from property’ used in sections 6 and 9 of the Indian Income-tax Act, 1922, refers to the income of the legal owner of the property who is the only person assessable to tax on the basis of the bona fide annual value thereof.”

21. The Delhi High Court has followed the same principle in CIT v. Hans Raj Gupta, [1982] 137 ITR 195, which arose under s. 22 of the Indian I.T Act, 1922. In that case there was an agreement for the sale of certain property. Even on the date of the agreement, a substantial portion of the consideration was paid and the property was put in possession of the vendee. There was an interval between the date of the agreement and the actual sale. A question arose whether the vendor was liable to be assessed to tax on the income from the said property even though the purchaser was in possession of the property without payment of rent. The court held that since the assessee's title to the property could not pass to the vendee till a conveyance deed was actually executed and registered, the assessee would be the owner of the property in spite of the fact that he was not earning any income therefrom and, therefore, the assessee alone was to be assessed in respect of the income from the said property. Dealing with the theory of beneficial ownership which was advanced by the assessee in that case, the court held that s. 22 of the Indian I.T Act, 1922, taxes the owner of a property in respect of a notional income from the property irrespective of the actual derivation of any income or enjoyment thereof by the owner and that there is no notion of beneficial ownership under the Indian law.

22. Hence, for the purpose of assessment under the head “Income from property” under the I.T Act, 1961, one has to go only by the ownership and not by the fact as to who is in actual receipt of the income from the property. We are not inclined to accept the third contention advanced on behalf of the assessee that there has been a diversion of income by overriding title in the present case and, therefore, the income from the Chettinad Colony properties cannot be assessed in the hands of the assessee. We do not see how the principle of diversion of income by overriding title could be invoked by the assessee, on the facts and in the circumstances of this case. Since the assessee's contention that the title had already passed from the donor to the trust on February 9, 1969, itself has not been accepted and it has been found that the title passed from the donor to the trust only on March 8, 1971, the assessee in this case continued to be the owner of the property till March 8, 1971, and, therefore, it is only the assessee who has to be assessed on the income from those properties. From the mere fact that the assessee has chosen to permit the trust to enjoy the income therefrom, it cannot be taken to be a diversion of income by overriding title.

23. In the light of the above discussion, we have to answer the question in the affirmative and against the assessee. The question is accordingly answered. The assessee will pay the costs of the Revenue. Counsel's fee Rs. 500 (Rupees Five hundred only).