CHANDURKAR, J. - The assessee in this case, along with some other members of the family, was a co-owner of a building known as "Sandoz Building" at Bombay. The owners entered into an agreement with the trustees of a Trust known as H.M. Dr. Syedna Sahar Saifuddin Memorial Foundation (hereinafter referred to as "the purchasers"), according to which the property was agreed to be sold to the purchasers for a consideration of Rs. 35 lakhs in the assessment year in question which is 1973-74. The property admittedly stood in the name of the co-owners who were the owners, and no sale deed was executed in that year in favour of the purchasers. On 1-1-1973, the co-owners received Rs. 21 lakhs as part of the sale price and it was further agreed between the purchasers and the co-owners that pending the registration of the sale deed, the co-owners would pay Rs. 30,000 per month by way of compensation out of the rental income of the said property to the trust. This arrangement is contained in a letter dated 20-12 1972 addressed by the solicitors of the purchasers to the solicitors of the co-owners. During the accounting year in question, the period for which, so far as the present assessment is concerned, is only 1-1-1973 to 31-3-1973, the co-owners paid a total amount of Rs. 90,000 to the purchasers and each one of the co-owners in his assessment claimed deduction of his proportionate share. The share of the assessee comes to Rs. 7,200.
2. The assessee returned an income of Rs. 63,554 which included income from house property, share income and income from other sources. Before the ITO the assessee claimed deduction of Rs. 7,200 from the assessee's share, of income from the house property, namely, Sandoz Building. This claim was negatived by the ITO, as not being permissible by the express provisions of sections 23 and 24 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The ITO, however, observed that "the claim of the assessee could be allowed as a deduction out of the interest income received by the assessee as her share of the part of the sale consideration received by the co-owners" and in respect of which income by way of interest was declared by the assessee. The ITO, however, found that since the assessee did not make such a claim for deduction from income from other sources, the amount of Rs. 7,200 was liable to be included in the total income of the assessee.
3. In appeal filed by the assessee, the AAC took the view that there was an overriding obligation to pay out of the property income and there was no question of deducting that amount from interest income. The addition of Rs. 7,200 made by the ITO was, therefore, deleted.
4. The department took the matter to the Tribunal in appeal. The Tribunal upheld the view of the AAC that the assessee was entitled to claim the deduction of Rs. 7,200 as there was a diversion of income on account of an enforceable legal obligation created by an agreement. The Tribunal further observed that the ITO was not justified in not considering the claim of the assessee against her income from other sources merely because such a claim was not made before him and that the ITO had taken too technical a view of the matter. The Tribunal observed that if a claim for deduction was made before the ITO and if he held that the claim could not be considered by way of deduction from income from the property, but could be considered against income from other sources, nothing prevented him from considering the claim against any other income.
5. The revenue, being dissatisfied with the finding recorded by the Tribunal, had sought reference in respect of two questions which has been made, the questions being as follows :
"1. Whether, on the facts and in the circum-stances of the case, considering the agreement dated 29-12-1977, there was an overriding obligation which diversed the income of source on of which ( sic) the assessee was entitled to claim a deduction of Rs. 7,200 ?
2. Whether, on the facts and in the circumstances of the case, a deduction can be allowed from income from other sources though not claimed by the assessee ?"
Shri Joshi, appearing on behalf of the revenue, has referred us to the provisions of section 23 as they were in force prior to the amendment by the Taxation Laws (Amendment) Act, 1975, with effect from 1-4-1976 and has contended that the annual value of the property, which is to be determined for the purpose of determining the income from house property, was, under section 23(1), a notional amount being a sum for which the property might reasonably be expected to be let from year to year. The learned counsel then contended that the only deductions permissible in the case of income from house property were those provided by section 24, and, according to the learned counsel, the only provision, which could be relevant for the purpose of the nature of the deduction sought by the assessee, was the one contained in clause (iv) of section 24(1) which provided for a deduction by the amount of the charge, where the property was subject to an annual charge (not being a charge created by the assessee voluntarily) or a capital charge. The learned counsel, therefore, contended that the amount of Rs. 7,200, which is now claimed by way of a deduction, is not an annual charge and on which there is no dispute and, therefore, apart from the provisions of section 24, no further deductions would be permissible. It was also argued that since sections 22 to 27 of the Act constitute a self-contained chapter with regard to the determination of income from house property which could be brought to tax, the concept of diversion at the source by overriding title could be imparted into these provisions. Now, having heard the counsel for the revenue and the assessee, it does not appear to us to be necessary to go into the question as to whether, in a given case, it is not permissible for the assessee to urge that even in respect of income from house property, there can be a diversion at the source by an overriding title, though it does appear from certain observations made by a Division Bench of the Court in Seth Motilal Manekchand v. CIT [1957] 31 ITR 735 that where such a deduction is sought by the assessee, the deduction is not sought on the footing that it is permissible deduction specifically provided by the provisions of the Act and that the ITO has to consider whether the amount, which he wants to treat as income of the assessee from the house property, is his real income. The Division Bench in that case has referred with approval to an earlier decision of a Division Bench in CIT v. D.R. Naik [1939] 7 ITR 362 in which the income of the assessee from immovable property was subject to certain payments which he had to make under a decree of the court to widows of the joint family and these payments were claimed by the assessee as not constituting his income. The Commissioner had rejected the claim on the ground that they were not deductions which fell within section 9 of the Indian Income-tax Act, 1922 and the Division Bench had observed as follows :
"But, in my opinion, the answer to the learned Commissioner's view is to be found in the decision of the Privy Council in Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 . Their Lordships there were dealing with a very similar case, in which the assessee's income, derivable in part from immovable property, was subject to charge in favour of a widow, and their Lordships held that although those charges could not be deducted under section 9, the question really was whether the income of the assessee was the whole income of the immovable property, or the income of the immovable property less the deduction, and they held that the real income, which was liable to tax, was the income subject to the deductions in respect of the charges." (p. 743)
6. The facts of the present case would show that the amount of Rs. 30,000 per month which was payable to the purchasers was not because of any title to the property which was agreed to be purchased. No sale deed having been executed, the co-owners continued to be in law the owners of property. They had, therefore, a right to receive the entire rent. As observed by the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367, the true test for the application of rule of diversion of income by an overriding charge is whether the amount sought to be deducted, in truth never reached the assessee. No part of the rent could be claimed by the purchasers in the absence of an execution and registration of the sale deed. If the co-owners were the only persons entitled to recover the entire rent and no right vested in the purchasers to any part of the rent, the entire rent has to be treated as the income of the co-owners. It is no doubt true that the amount of Rs. 30,000 was payable to the purchasers, but as it stated in the agreed statement of the case, it was "by way of compensation out of the rental income of the said property to the Trust". This compensation was obviously payable to the purchasers, because the purchasers had parted with a large sum of Rs. 21 lakhs which was available for utilisation by the co-owners, by arrangement between the co-owners and the intending purchasers, the payment was to be made because of retention of certain funds by the co-owners. The fact that the amount was paid out of rent did not mean that there was any overriding title created in favour of the purchasers in respect of the amount of rent which was legally recoverable from the tenants exclusively by the co-owners. As a matter of fact, the co-owners could have paid this amount out of their other income also. So far as their liability was concerned, the liability was only to pay this amount. From where they paid this amount was wholly irrelevant. The important fact which has some impact on the nature of the liability is that it is by way of compensation for retention of a sum of Rs. 21 lakhs. Such a transaction cannot, therefore, be construed on the facts of the present case to be creating any superior title to a part of the rent in favour of the purchasers. Consequently, in our view, the Tribunal was not justified in holding that the amount of Rs. 7,200 was deductible out of the income from property.
7. So far as the second question is concerned, it is difficult to see what fault could be found with the order of the Tribunal when the Tribunal held that there was a duty on the part of the ITO to consider whether the assessee was entitled to a deduction from income from other sources, though no such specific claim was made by the assessee. The jurisdiction of the ITO is to compute the total income which could be brought to tax in accordance with law. It is obvious that the Tribunal's observations that the ITO had been too technical are clearly justified, because, if in fact and in law, the assessee was entitled to a deduction which would have ultimately affected his or her total taxable income, the assessee could not be assessed on a large income.
8. In the view which we have taken, the two questions referred to this Court are answered as follows :
Question No. 1 - In the negative and in favour of the revenue.
Question No. 2 - In the affirmative and against the revenue.
In view of the equal success and failure of the department, there would be no order as to costs of this reference.