1. Order of the Court was made by Hegde, J.:—
Statement of case.
2. One B. Munivenkatappa was carrying on two businesses in partnership, one entitled Narayanaswamy & Sons, with his five sons under a deed of partnership dated 20-2-1953. He was also carrying on another business under a partnership deed of the same date with four other sons, Sreenivasamurthy, one of the son being left out in this. The partners had equal shares in both cases. On the 14th May 1958, he left a Will, a copy of which is annexed as Appendix ‘A’ and forms part of the case. Under this, he directed that in each of the partnerships, the share belonging to him shall, on his demise, be taken over by the other partners subject to the condition that they should pay Rs. 200 monthly to his daughter Sharadamma for her life time only.
3. The relevant clause in the Will appertaining to the instant case in paragraph 3 and reads as follows:
“I am also carrying on partnership under Partnership deed dated 20-2-1953, along with my four sons namely, (1) B.M Govindaswamy, (2) B.M Ramamurthy, (3) B.M Narayanaswamy, (4) B.M Lakshmana Murthy under the name and style of ‘Woodlands Company’ in Cinema Company. In the properties and assets belonging to this Partnership I own 1/5th share. This share shall belong after me exclusively to my four sons who are at persent the other partners in the said firm, subject to the condition that they should pay Two Hundred Rupees monthly to my daughter Shrimathi Sharadamma for her life time only. None of my other heirs shall be entitled to any other claim from this 1/5th share of mine in the said concern. He died on 17-10-1960. On the 18th of October, 1960, Govindaswamy, Ramamurthy, Narayanaswamy and Lakshmanamurthy, the other partners of the firm of Woodlands Company gave effect to the wish of their father expressed in the extract above by entering into a new deed of partnership between themselves. A copy of this partnership deed is annexed as Appendix ‘B’ and forms part of the case. Clause 5 thereof reads as follows:
“According to the directions in the Registered Will of our deceased father Rao Sahib B. Munivenkatappa dated 14th May 1958, the partners shall pay to their sister Shrimathi B.M Sharadamma for her life time only a sum of Rs. 200 monthly. This amount shall be a charge on the assets of the partnership.”
4. A sum of Rs. 2,400 was paid to Sharadamma and the assessee claimed it as a charge on the assest and resources of the partnership and the profits due for the assessment year 1962-1963. The Income-tax Officer held that it is clear from the reading of Clause 3 of the Will that this payment cannot be made a charge on the profits of the business. He held it was not an admissible allowance. A copy of the order of the Income-tax Officer is annexed as Appendix ‘C’ and forms part of the case.
5. The Appellate Assistant Commissioner held that the payment was directly related to the acquisition of the partnership interest subsisting in the old firm of B. Munivenkatappa by the continuing partners who constituted the new firm by the deed of 18-10-1960. A copy of the grounds of appeal before the Appellate Assistant Commissioner is annexed as Appendix ‘D’ and forms part of the case. He distinguished the decision in Raj Bejoy Singh Dudhuria v. Commissioner of Income-Tax, Bengal . 1933 1 I.T.R 135., thus:
“that there was no acquisition of any capital asset; associated along with the transactions leading to the creation of the charge in the case of Raja Bejoy Singh Dudhuria because the assets always vested in him whereas in the present case, the charge was created so as to synchronise with the acquisition of a capital asset i.e, 1/5th interest in the assets and income of the old firm;
(ii) the charge in the Raja's case had been directly and related to the earning of income and took the form of maintenance to be paid to the step mother out of the income of the estate, but in the present case, there was no contract or immediate relationship between the payment and the earning of the income or, in other words, whether the assessee earned income or sustained loss, was matter of no consequence at all, so far as Saradammal was concerned;
(iii) that the income but for this bequest would have accrued to the legal heirs and representatives of the deceased and not to the assessee and so, it could not be contended that the amount of Rs. 2,400 represented income diverted at source.”
He agreed with the Income-tax Officer. A copy of the order of Appellate Assistant Commissioner is annexed as Appendix ‘E’ and forms part of the case. For the various reasons given in its order, a copy of which is annexed as Appendix ‘G’ and forms part of the case, the Tribunal allowed the assessee's appeal.
7. The question of law is:
“Whether on the facts and in the circumstances of the case, sum of Rs. 2,400 formed part of the assessee's income?”
The question of law referred for the opinion of this court is:
“Whether on the facts and in the circumstances of the case, the sum of Rs. 2,400/- formed part of the assessee's income?”
The assessee in this case is a firm of partners. The partners in question are the partners of two different firms. One of the partnerships consisted of five partners, namely, the existing four partners and their late father B. Munivenkatappa. The other partnership consisted of aforementioned B. Munivenkatappa and his five sons. In this case we are concerned with the former partnership. The said Munivenkatappa died on 17-10-1960. Prior to that, by means of his Will dated 11-5-1958, he bequeathed his share in the second partnership referred to earlier to his four sons who were the remaining partners in that firm, subject to the condition that they should pay to his daugther, Sharadamma every month a sum of Rs. 200 during her life time. After the death of Munivenkatappa, his four sons who are the partners of the firm, entered into a fresh deed of partnership on 18-10-1960. Clause 5 of the partnership deed provides:
“According to the directions in the Registered Will of our deceased father Rao Sahib B. Munivenkatappa dated 14th May 1958, the partners shall pay to their sister Shrimathi B.M Sharadamma for her life time only a sum of Rs. 200 monthly. This amount shall be a charge on the assets of the partnership.”
It may be noted that the bequest under the Will referred to earlier, was subject to the payment to be made to Sharadamma. The same was evidently accpeted subject to the condition mentioned above. Therefore, the asset bequeathed should be charged with the liability of paying to Sharadamma a sum of Rs. 200 per month. In these circumstances, we have to see whether the assessable profits of the firm have to be computed after deducting the amount to be paid to Sharadamma.
The true principle which should guide us in deciding matters like the one before us, has been laid down by the Supreme Court in Commissioner of Income-Tax, Bombay City II v. Sitaldas Tirathdas. . Therein it is laid down that the true test for the application of the rule of diversion of income by the overriding charge, 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 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 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.
If we apply the ratio of the above decision to the case before us, it is clear that the payment made to Sharadamma was not in the discharge of any personal obligation of the partners concerned. It is something that had to be paid out of the assets of the partnership. Hence it was charge on the partnership income. Therefore its assessable income had to be computed after deducting the amounts payable to Sharadamma. In other words, even before the income of the partnership reached the hands of the assessees, the payment to Sharadamma had to be deducted. It is only the balance that could be considered as the income of the partnership. This is not a case where the payment to Sharadamma was to be made from out of the income of the assessees.
The facts of the present case fall within the rule laid down by the Judicial Committee of the Privy Council in Raja Bejoy Singh Dudhuria v. Commissioner of Income Tax, Bengal.
Our above conclusion also receives support from the decision of the Bombay High Court in Commissioner of Income Tax, Bombay v. D.R Naik . 1939 I.T.R 362..
For the reasons mentioned above, our answer to the question referred to us is that on the’ facts and in the circumstances of the case, the sum of Rs. 2,400 did not form part of the assessee's income.
The assessee is entitled to his cost of this Proceedings. The Advocate's fee Rs. 250.