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K.A Ramachar And Ano... v. Commissioner Of Inco...

Supreme Court Of India

Jan 10, 1961

Judgment

CaseIQ

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Factual and Procedural Background

A.R. Rangachari was a partner in the firm “Messrs. Chari and Ram” entitled to a six-anna share of its profits. On 22 September 1947 he executed three identical deeds of settlement assigning, for eight years, one-fourth of his share of profits (but not losses) to each of three beneficiaries: his wife, an adult married daughter, and a minor daughter. For the assessment years 1947-48 and 1948-49 the firm first credited the full profits to Rangachari’s account and then transferred the allotted one-fourth shares to the separate accounts of the beneficiaries.

The Income-tax Officer included the transferred amounts in Rangachari’s taxable income. His appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal failed. At Rangachari’s instance the Tribunal referred the following question to the Madras High Court under section 66(1) of the Income-tax Act, 1922: “Whether the inclusion in the assessee's total income of the profits settled by him on his wife and two daughters is justified in law?” The High Court answered in the affirmative. Rangachari’s legal representatives appealed to the Supreme Court with a certificate from the High Court.

Legal Issues Presented

Whether the one-fourth shares of partnership profits assigned to Rangachari’s wife and daughters could nonetheless be included in his total income for assessment purposes.
Whether the assignments constituted a diversion of income by an overriding title falling within the principle of Bijoy Singh Dudhuria or, alternatively, were excluded by the third proviso to section 16(1)(c) of the Income-tax Act, 1922.
Whether section 16(1)(c) or section 16(3) of the Act applied to the transfers.

Arguments of the Parties

Appellants / Assessee (Rangachari’s legal representatives)

The assigned profits never became Rangachari’s income because the deeds created an overriding title in favour of the beneficiaries; therefore the amounts were diverted before accrual.
Reliance was placed on the Privy Council decision in Bijoy Singh Dudhuria v. CIT, Bengal and on the third proviso to section 16(1)(c) to exclude the sums from assessment.

Respondent / Commissioner of Income-tax

Under partnership law profits accrue only to partners; strangers, even assignees, have no direct claim. Hence the income first accrued to Rangachari and was merely applied thereafter.
Section 16(1)(c) was inapplicable because it concerns income that accrues directly to the transferee, not income first accruing to the assessee.
The deeds effected only a post-accrual application of income, attracting tax in Rangachari’s hands.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Provat Kumar Mitter v. CIT, West Bengal (1961) 3 SCR 37	Assignment of dividend income to spouse does not invoke s. 16(1)(c); no overriding title.	Court followed this reasoning to hold that s. 16(1)(c) was not attracted to Rangachari’s case.
Tulsidas Kilachand v. CIT, Bombay (1961) 3 SCR 351	Trust of shares for wife’s benefit considered under s. 16(3)(b), not s. 16(1)(c).	Confirmed distinction between provisions and reinforced inapplicability of s. 16(1)(c).
CIT, Bombay v. Sitaldas Tirathdas (1961) 2 SCR 634	Overriding title doctrine applies only when income is diverted before it accrues to the assessee.	Court applied this case to reject the assessee’s reliance on overriding title.
Bijoy Singh Dudhuria v. CIT, Bengal (1933) 1 ITR 135 (PC)	Income diverted by paramount title is not includible in assessee’s income.	Held inapplicable because profits accrued to Rangachari before application; thus no such diversion.
P.C. Mullick v. CIT, Bengal (1938) 6 ITR 206 (PC)	Further illustration of the distinction between diversion and application of income.	Cited in conjunction with Sitaldas Tirathdas to clarify the correct test.

Court's Reasoning and Analysis

The Supreme Court undertook a textual and factual examination of the deeds. Each deed expressly referred to profits “payable to” Rangachari, confirming that accrual to him preceded any payment to the beneficiaries. Under partnership law only a partner can claim profits; an assignee has no direct enforceable right against the firm. Therefore the deeds could not effect a pre-accrual diversion.

The Court observed that the firm’s books credited the entire profit to Rangachari’s khata before transfers were made, evidencing mere application of income. Consequently:

Section 16(1)(c) was inapplicable because it contemplates income that arises to the transferee directly, which was not the case.
The third proviso to section 16(1)(c) was likewise irrelevant.
Applying Sitaldas Tirathdas, the claimed overriding title did not exist; the principle in Bijoy Singh Dudhuria was therefore unavailable.

Accordingly, the amounts transferred remained taxable in Rangachari’s hands at the point of accrual.

Holding and Implications

Appeals dismissed; the inclusion of the assigned profits in the assessee’s total income was upheld.

Immediate effect: Rangachari’s legal representatives remain liable for tax on the full partnership profits for the years in question. Broader implication: partners cannot avoid tax by assigning fractions of their prospective partnership profits to family members; such arrangements constitute post-accrual application of income, not diversion by overriding title, and fall outside section 16(1)(c).

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PETITIONER:

K. A. RAMACHAR AND ANOTHER

Vs.

RESPONDENT:

COMMISSIONER OF INCOME TAX, MADRAS.

DATE OF JUDGMENT:

10/01/1961

BENCH:

HIDAYATULLAH, M.

BENCH:

HIDAYATULLAH, M.

KAPUR, J.L.

SHAH, J.C.

CITATION:

1961 AIR 1059 1961 SCR (3) 380

CITATOR INFO :

RF 1965 SC 59 (6)

D 1967 SC 383 (10,14)

ACT:

Income-tax--Assessee assigning portion of his profits of partnership firm to his wife and daughters--Such profits, if can be included in the assessee's total income for purposes of assessment--Income-tax Act, 1922 (11 of 1922), s. 16(1)(c).

HEADNOTE:

One Rangachari, a partner of a partnership firm, assigned by means of a deed of settlement a fourth share of the profits of the firm each to his wife, a married adult daughter and a minor daughter for 8 years with the right to receive the said share of profits absolutely and exclusively from the firm. The question which arose before the High Court on a reference under s. 66(1) of the Income-tax Act was " Whether the inclusion in the assessee's total income of the profits settled by him on his wife and two daughters is justified in law ?" The assessee Rangachari relying on the rule laid down by the Privy Council in Bijoy Singh Dudhuria's case claimed that the amounts payable to his wife and two daughters never became his income, being diverted by an overriding title and that those amounts could not be included in his total income for the purposes of assessment being excluded by reason of the third proviso to s. 16(1)(c) of the Income-tax Act. The High Court held that the third proviso was not attracted and that the income had accrued to the assessee in the first instance, and had then been applied for payments under the deeds. On appeal with a certificate of the High Court:

Held, that the answer given by the High Court was correct.

381

An examination of the deeds of settlement showed that the disponer had stated that from the profits " payable to him "

certain amounts in specified shares were to be paid to his wife and two daughters. No doubt, the assessee in those deeds created a right in favour of the disponees to get the amounts direct from the firm, of which he was a partner. The tenor of the document In, showed that the profits were first to accrue to him and were then applied for payments to

the disponees. Under the law of partnership, it is the partner and the partner alone who is entitled to the profits. A stranger, even if he were an assignee, has not and cannot have a direct claim to the profits. By the deeds in question, the assessee merely allowed a payment to his wife and daughters to constitute a valid discharge in favour of the firm, but what was paid was, in law, a portion of his profits or, in other words, his income.

The rule in Bijoy Singh's case was not applicable to this case, and in view of the decision of this court in Sitaldas Tirathdas's case it cannot be said that the profits were diverted by an overriding title before they accrued to the assessee.

Provat Kumar Mitter v. Commissioner of Income-tax, West Bengal [1961] 3 S.C.R. 37.

Tulsidas Kilachand v. The Commissioner of Income-tax [1961]

3 S.C.R. 351.

The Commissioner of Income-tax, Bombay v. Sitaldas Tirathdas [1961] 2 S.C.R. 634, applied.

Bijoy Singh Dudhuria v. Commissioner of Income-tax, Bengal [1933] 1 I.T.R. 135, held inapplicable.

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 142 and 143 of 1960.

Appeals from the judgment and order dated July 21, 1955, of the Madras High Court in C.R. No. 32 of 1952. G. S. Pathak and Naunit Lal, for the appellants. K. N. Rajagopal Sastri and D. Gupta for the respondent. 1961. January 10. The Judgment of the Court was delivered by

HIDAYATULLAH J.-These are two appeals by the legal representatives of one A. R. Rangachari, who died during the pendency, in the High Court at Madras, of proceedings in a reference under s. 66(1) of the Income-tax Act made by the Income-tax Appellate Tribunal, Madras Bench. The following question was referred to the High Court for its decision:

382

" Whether the inclusion in the assessee's total income of the profits settled by him on his wife and two daughters is justified in law ? "

The High Court answered the question in the affirmative. The appeals have been filed with a certificate granted by the High court.

Rangachari was one of five partners of a firm, Messrs. Chari and Ram, and held a six-anna share in the profits and loss of the partnership. On September 22, 1947, he executed three deeds of settlement, which are marked Exts. A, A-1 and A-2, in favour of his wife,, a married adult daughter and a minor daughter. To each of them, he assigned a fourth share of the profits of the firm payable to him (but not the losses), for a period of 8 years, vesting the right in them to receive the said share of profits absolutely and exclusively and declaring the settlements to be irrevocable during the above period. It is not necessary to refer to the three documents, because the terms are the same. A few clauses of the deed, Ex. A, may be quoted. After recitals which included the following:

" Whereas the Settlor has settled upon his minor daughter, Srimathi Meera Bai, one-fourth of his share of profits payable to him from

the firm for a period of eight years; And whereas out of natural love and affection, the Settlor is desirous of conferring upon the Beneficiary a similar portion of his share of profits from the firm ", the deed goes on to say

" Now this Indenture witnesseth as follows:

1.....The Settlor hereby assigns unto the Beneficiary all the rights of the Settlor in respect of one-fourth of his share of profits in the firm (but not the losses) payable to him during a period of eight years commencing from the date hereof to be taken and enjoyed by the Beneficiary in absolute and exclusive right.

2.....The Settlor shall not have any manner of right or interest in the said one-fourth share hereby settled and the right to receive from the firm one-fourth of

383

the Settlor's share during the said period of eight years shall exclusively vest in the Beneficiary.

3.....The Beneficiary shall be entitled directly to receive and collect from the firm the share of profits hereby transferred for the said period of eight

years.....................

8. This settlement shall be irrevocable."

For the assessment year 1947-48 corresponding to a previous year ending on April 13, 1947, the profits due to Rangachari amounted to Rs. 86,491-13-0. This amount was credited to the account of Rangachari, and Rs. 21,622-15-3, being one-fourth thereof, were transferred to the accounts of each of the three disponees. In the same way, the profits of the previous year ending April 13, 1948, were disposed of. The assessee claimed that these amounts could not be included in his total income for purposes of assessment, being excluded by reason of the third proviso to s. 16(1)(c) of the Income-tax Act. He also contended that the amount payable to his wife and two daughters never became his income, being diverted by an overriding title, and that the case was governed by the rule laid down by the Privy Council in Bijoy Singh Dudhuria v. Commissioner of Income-tax, Bengal (1). The assessee's contentions were not accepted by the Income-tax Officer, and his appeals to the Appellate Assistant Commissioner and the Tribunal also failed. In so far as the assessment year 1947-48 was concerned, the Income-tax Officer held that the income had already accrued to the assessee, because the deeds were executed five months after the close of the account year. He also held that the transfer to the minor daughter fell within s. 16(3), as there was no adequate consideration for the transfer. With regard to the wife and married daughter, he held that s. 16(1)(c) was not applicable, because what had been transferred was income first accruing to the assessee, while s. 16(1)(c)

contemplated income which accrued to a person, to whom the transfer was made. The same reasons (except the first) were given for rejecting the,

(1) [1933] 1 I.T.R. 135.

384

assessee's contentions in respect of the other assessment year.

It is not necessary to refer in detail to the decisions of the Appellate Assistant Commissioner, the Tribunal ,,,and the High Court. The High Court in an elaborate judgment pointed out that s. 16(1)(c) did not apply to these proceedings, and that the third proviso was, therefore, not attracted. It also held that the income had accrued to the assessee in the first instance, and had then been applied for payments under the deeds.

This Court has recently decided three cases which have a direct bearing in this connection. In Provat Kumar Mitter

v. Commissioner of Income-tax, West Bengal (1), the assessee had executed a deed of trust under which dividends from certain shares which continued to be his assets, were transferred to his wife. It was held that the case did not fall within s. 16(1)(c), and that the rule in Bijoy Singh Dudhuria's case (2) also did not apply. In Tulsidas Kilachand v. The Commissioner of Income-tax, Bombay(1), the husband had created a trust of the shares, constituting himself as the trustee to pay to the wife dividends from those shares for a period of seven years. It was held that the case was not governed by s. 16(1)(c) but by s. 16(3)(b). In The Commissioner of Income-tax, Bombay v. Sitaldas Tirathdas (4), the rule laid down by the Privy Council in Bijoy Singh Dudhuria's case was considered along with the case of the Privy Council in P. C. Mullick v. Commissioner of Income-tax, Bengal (5), and it was pointed out that the rule in Bijoy Singh Dudhuria's case (2) applied only to those cases where it could be said that by an overriding title the income was diverted in such a way as never to become the income of the assessee. These three cases, in our opinion, afford a complete answer to the contentions of the appellants.

An examination of the deeds of settlement shows that the disponer had stated that from the profits " payable to him "

certain amounts in specified shares were to be paid to his wife and two daughters. No

(1) [1961] 3 S.C.R. 37. (3) [1961] 3 S.C.R. 351.

(2) [1933] 1 I.T.R. 135. (4) [1961] 2 S.C.R. 634,

(5) [1938] 6 I.T.R. 206.

385

doubt, the assessee in those deeds created a right in favour of the disponees to get the amounts direct from the firm, of which he was a partner. The tenor of the documents shows that the profits were first to accrue to him and were then applied for payments to the disponees. Learned counsel for the appellants contended that what had been assigned was an actionable claim, to wit, the right to profits, and therefore the profits were diverted, before they accrued to the disponer. This, in our opinion, is neither in accord- ance with the law of partnership nor with the facts as we have found on the record. Under the law of partnership, it is the partner and the partner alone who is entitled to the profits. Astranger, even if he were an assignee, has not and cannot have a direct claim to the profits. By the deeds in question, the assessee merely allowed a payment to his wife and daughters to constitute a valid discharge in favour of the firm; but what was paid was, in law, a portion of his

profits, or, in other words, his income. A glance at the account books of the firm, Messrs. Chari and Ram, clearly shows that the amounts were first credited in the Khata of Rangachari and then under his directions were transferred from his Khata to those of his wife and daughters. The dispositions, therefore, were, in law and in fact, portions of the income of Rangachari, after the income had accrued to him, and tax was payable by him at the point of accrual. In view of the decision of this Court in Sitaldas Pirathdas's case (1), it cannot be said that the profits were diverted by an overriding title before they accrued to Rangachari; and the rule in Bijoy Singh Dudhuria's case (2) cannot be called in aid.

For the above reasons, we are in entire agreement with the High Court in the answer given and dismiss these appeals with costs.

Appeals dismissed.

(1) [1961] 2 S.C.R. 634.

(2) [1933] 1 I.T.R. 135.

386