S.K Kapur, J.:— This is one consolidated reference made to us by the Income-tax Appellate Tribunal in the case of L. Hans Raj Gupta and of M/s. H.G Gupta and Sons arising out of the order of the Tribunal dated 19th November, 1962, in Income-Tax Appeal Nos. 6841 and 7177 of 1961-62. The relevant year of assessment is 1956-57, the accounting year in both the cases being ending 31st March, 1956. The questions referred to us in the case of Hans Raj Gupta are—
1. “Whether in view of the clause 12 of the partnership deed dated 30th March, 1954, it could be said that there was an overriding title in favour of Messrs H.G Gupta and Sons and, therefore, the sum of Rs. 55,664 should have been excluded from Shri Hansraj Gupta's total income ?”
2. “Whether, in any case, the aforesaid sum of Rs. 55,664 could be claimed as permissible deduction under section 10(2) of the Indian Income-tax Act, 1922 ?” and in that of Messrs H.G Gupta and Sons are—
3. ”Whether the amount of Rs. 55,664 has been properly included in the assessment of the firm ?”
4. “Whether in view of the observations of the Appellate Assistant Commissioner, the order of the Tribunal amounts to an enhancement of the income of the firm ?”
The facts giving rise to the reference may now be stated. The two assessees are—firstly, Hans Raj Gupta, and secondly, the registered firm Messrs H.G Gupta and Sons (hereafter referred to as the assessee firm). The assessee firm was a registered firm Constituted under an instrument of partnership dated 30th March, 1954. The said firm had three partners, namely, Hans Raj Gupta, Des Raj Gupta and Shiv Raj Gupta, their shares in the profits being 2/3rd, 1/6th and 1/6th respectively. On August 4, 1965, Hans Raj Gupta entered into another partnership under the name and style of Messrs D.S Bawa and Company with four other persons. The said firm was brought into being for executing certain contracts at Indian Industries Fair held in New Delhi in the year 1955. Hans Raj Gupta's share in the said firm was 5/6 in the rupee. In the relevant assessment year the profit of Hans Raj Gupta in the firm Messrs D.S Bawa and Company was determined by the Income-tax Officer at Rs. 55,664. Clause 12 of the instrument of partnership constituting the assessee firm provides—
“That none of the parties shall without the written consent of all the other parties start any new business either individually or in partnership, and in case of infringement of this condition, the profits earned in such business shall belong to the firm and the losses, if any, shall be borne by such party”.
In view of the said clause 12 the entire share of income received by Hans Raj Gupta from Messrs D.S Bawa and Company was credited to the profit and loss account of the assessee firm. Hans Raj Gupta was also assessed in his individual capacity and in the return for the relevant assessment year he made a note to the effect that the share income (Rs. 55,664) from the firm Messrs. D.S Bawa and Company belonged to the assessee firm. If this contention had been accepted by the Revenue the result would have been that out of the amount of Rs. 55,664 only a sum of Rs. 37,110 being 2/3rd share of Hans Raj Gupta in the assessee firm, would have been included in the hands of Hans Raj Gupta. The Income-tax Officer, however, decided that the entire amount of Rs. 55,664 was taxable in the hands of Hans Raj Gupta. He, therefore, added Rs. 18,554 as the income of Hans Raj Gupta. So far as the assessee firm is concerned, its assessment was completed before the assessment of Hans Raj Gupta and the entire sum of Rs. 55,664 was treated as the income of the assessee firm. The assessee firm went up in appeal before the Appellate Assistant Commissioner and it was inter alia contended that the entire amount of Rs. 55664 having already been assessed in the hands of Hans Raj Gupta as individual the same should be excluded from the assessment of the assessee firm. Hans Raj Gupta also preferred an appeal before the Appellate Assistant Commissioner and contended before him that the entire amount of Rs. 55,664 should not have been included in his assessment. The Appellate Assistant Commissioner held that there was no over-riding title in favour of the assessee firm over the sum of Rs. 55,664 and the said amount was rightly taxed by the Income-tax Officer as the income of Hans Raj Gupta. In the appeal of the assessee firm, however, the Appellate Assistant Commissioner made a reservation that—
“If, however, this income is ultimately held by the Appellate Authorities to belong to L. Hans Raj Gupta then the Income-tax Officer should give the consequential relief to the assessee firm by excluding the income from the total income of the firm.”
Against the orders of the Appellate Assistant Commissioner both Hans Raj Gupta and the assessee firm filed appeals before the Tribunal. It was contended before the Tribunal on behalf of Hans Raj Gupta that in view of the over-riding title created by clause 12 of the instrument of partnership, the income of 55, 664 was assessable in the hands of the assessee firm and not of Hans Raj Gupta.
On behalf of the assessee firm it was inter alia argued that in case it be held that the amount represented the income of Hans Raj Gupta consequential relief may be granted by excluding Rs. 55,664 included in the assessment of the assessee firm since the same amount had been assessed twice. In the case of Hans Raj Gupta the Tribunal decided that it was case of application of income by Hans Raj Gupta and there was no over-riding title making it the income of the assessee firm. Regarding the appeal of the assessee firm, the Tribunal held that by Hans Raj Gupta having applied his income and made it over to the assessee firm amount became the income of the assessee firm also.
The point for determination may be put thus; was the sum of Rs. 55,554 the income of Hans Raj Gupta and payment thereof to the assessee firm an application of that income or was it an allocation of the sum of Gupta's revenue before it became the income in his hands. The analysis of clause 12 of the instrument of partnership show that if a partner starts any new business without the written consent of all other partners, the profits earned in such business shall belong to the firm. What we have been called upon to decide is : Does this create an over-riding title in favour of the assessee firm ? The first case on the subject is Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, Bengal 1933 1 ITR 135. In that case Raja Bejoy Singh Dhudhuria succeeded to certain ancestral estate on the death of his father. His step-mother filed a suit for maintenance and the assessee submitted to a consent decree under which he was obliged to pay every month a fixed sum to the step-mother by way of maintenance. The said maintenance was to be a charge on the estate in the hand of the assessee. It was held by the Judicial Committee that the amount of maintenance was the allocation of a sum out of the assessee's revenue before it became income in his hands. The decision proceeds on the finding that the Court by charging the assessee's resources with a specific payment had diverted the assessee's income from him and directed it to his step-mother and to that extent what the assessee received on account of his step-mother was not his income. It was observed—
“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 this revenue before it becomes income in his hands.”
Their Lordships of the Judicial Committee, interpreted the Indian Income-tax Act, to mean that it intended to tax only the real income of a tax payer and not to tax what is a charge upon the the assessee's income. In Seth Moti Lal Manekchand v. Commissioner of Income-tax, Bombay North, (2) Hindu Joint family was partitioned and with it was partitioned the managing agency belonging to the said family. The partition deed provided that two of the members of the family shall be entitled to the managing agency remuneration in equal shares but each one of them shall pay to the wife of one of the members 2 annas 8 pies out of his half share in the managing agency. The said two members constituted themselves into a registered firm and continued to act as the managing agents. The argument of the partners in the managing agency firm was that in determining their real income as partners the amount paid by them to a member's wife was excepted on the ground that a portion of the managing agency commission payable to the two partners was diverted to a member's wife before it became the income of the partners. The ratio of the decision is that in ascertaining the income of an assessee his real income should be determined and every part of that income, which may ostensibly seem to be the income of the assessee but is, in fact, not his income by reason of its diversion, should be excluded. It was observed:—
“It is sufficient for the purpose of this reference if we come to the conclusion that Bhargirathi Bai had a legal enforcible right against the partner in respect of her 2 annas and 8 pies share and that the partner was under a legal obligation to pay that amount.”
The matter has been considered on more than one occasion by their Lordships of the Supreme Court. In Commissioner of Income-tax, Bombay City II v. Sitaldas Tirathdas, (3), the assessee claimed to deduct from his income sums paid by him as maintenance to his wife and children under a consent decree which did not create any charge on the property of the assessee. Their Lordships of the Supreme Court came to the conclusion that it was a case of application of a portion of the income and the assessee was, therefore, not entitled to the deduction claimed. Hidayatullah, J. (as his Lordship then was) laid down the test to be applied in determining such a question in the following words:
“These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. 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 consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. In our opinion, “the present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The case is one of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of another's income. The matter in the present case would have been different, if such an overriding charge had existed either upon the property or upon its income, which is not the case.”
In Murlidhar Himatsingka and Another v. Commissioner of Income-tax, Calcutta 1966 62 I.T.R 323 S.C. Murlidhar Himatsingka was carrying on business in shellac, jute, hessian, etc. under the name and style of “Fatehchand Murlidhar.” He was also a partner in a registered firm “Messrs Basantlal Ghanshyamdas,” having 2 annas 8 pies share. An instrument of partnership was entered into by Murlidhar Himatsingka and his two sons and a grandson and clause 5 of the deed provided that the profits and losses of Murlidhar Himatsingka as a partner in the firm Messrs. Basantlal Ghanshyamdas shall belong to the new partnership and shall be divided and borne by the parties in accordance with the shares specified in the deed but the capital with its assets and liabilities will belong exclusively to Murlidhar Himatsingka. The same very question arose before their Lordships of the Supreme Court and it was held that there was an over-ridding obligation and the income of Murlidhar Himatsingka from the old firm did not remain his income but became the income of the new firm. It was observed—
“In our view, in the case of a sub-partnership the sub-partnership creates a superior title and diverts the income before it becomes the income of the partners. In other words, the partner in the main firm receives the income not only on his behalf but on behalf of the partners in the sub-partnership.”
Their Lordships also dealt with the effect of section 23(5)(a) of the Income-tax Act, 1922, but since no arguments were addressed to us on this aspect, I need not deal with the same. This decision, in my opinion, is the nearest to the case before us.
In the other decision cited before us, namely, Commissioner of Income-tax, Mysore, v. Woodlands Co.(5) the same principles have been applied.
The principles deducible from the above decisions are that if a person has assigned his source of income in such a manner that it ceases to be his he cannot be taxed on that income but if, on the other hand, he merely applies the income in such a manner that it passes through him and goes over to another person he may be taxable on the income notwithstanding the legal obligation to apply it for the transferee. Profits attract tax as soon as they come into being and the subsequent application thereof would be indifferent. But if there is an over-riding title created to divert the income from the assessee it cannot be considered as the income of the assessee at all. Such diversion by over-riding title may be created either by a will or by law or by any other document. The crux of the problem always being——is it an application of income or a diversion at the source before becoming the income of the assessee. It was suggested on behalf of the Revenue that if creation of an over-riding title be that simple then anyone liable to heavier burdens of tax may divert it to avoid liability. The answer to that is that everyone has the freedom to manage his own affairs so as to legitimately avoid the rigours of taxation law and the Courts should not be too astute to strike down such transactions merely on the ground that they have the effect of depriving the Revenue of a lucrative source. Of course, the matter has to be decided on the construction of the deed, document or law creating the title. On principle I see no difference between this case and the decision of their Lordships of the Supreme Court in Murlidhar Himatsingka's case.(4) By clause 12 of the instrument of partnership, Hans Raj Gupta had clearly agreed that in case he starts any business without the written consent of other parties to the partnership deed, the profits earned in such business shall belong to the said firm. In other words, as soon as he entered into a business in violation of clause 12, the income earned thereafter was not his but belonged to the assessee firm. In my opinion, therefore, an over-riding title was created and the income could not have been taxed in the hands of Hans Raj Gupta. The answer to the first question must, therefore, be in the affirmative and in favour of the assessee.
Mr. Kirpal, the learned counsel for the Revenue, strongly pressed on us to call for a further statement from the Tribunal as to whether or not Hans Raj Gupta started the new venture without the written consent of his other partners. He referred us to a letter dated 20th December, 1960, recited in the assessment of the Income-tax Officer, the relevant part of which reads—
“No written consent was ever obtained, and in view of this provision the profits were handed over to the firm. As a matter of fact, the share was held by me as a representative of the firm and all the partners had contributed to the earning of the profits. Mr. Des Raj Gupta and the “undersigned supervised the fabrication of Steel and Mr. Shiv Raj Gupta supervised accounts and finances.”
From this Mr. Kirpal wanted us to deduce that there was an implied consent by Des Raj Gupta and Shiv Raj Gupta, the only other two partners in the assessee firm. Apart from the question whether that amounts to consent or not, it is not open to me to go into questions of fact. This aspect of the case does not appear to have been presented before the Tribunal. The Tribunal after referring to the appellant's contention that Hans Raj Gupta had not obtained a written consent of other partners of the assessee firm proceeded to discuss the question of over-riding title. It is a possible view to take that the Tribunal proceeded on the assumption that there was no written consent. In any case, written consent was never set up by the Revenue before the Tribunal. If we were to call for a further statement of case on this point, that would change the very nature of the question referred so much so that if it be found that there was a written consent, the first question may not arise at all. Besides the letter mentioned above, admittedly there is nothing else on the record to show that there was a written consent. In the circumstances, and particularly the circumstance that this contention was never put forth before the Tribunal, I am not inclined to agree with Mr. Kirpal and send for a fresh statement of case.
In view of my answer to the first question, the second question does not arise. So far as the third question is concerned, it must be held that the income was properly included in the assessment of the firm. The fourth question also does not, in the circumstances, arise.
I answer the questions as discussed above with no order as to costs.
T.V.R Tatachari, J., I agree.
A.N.K Order accordingly.