1. The question referred for our decision in this reference is :
'Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 3,000 paid to the unmarried daughter from his total income of the previous years relating to the assessment years 1957-58 and 1960-61 ?'
2. The circumstances under which this question comes to be referred are as follows : C. N. Patuck was assessed as an individual in the relevant assessment years. He was a partner of a firm known as Messrs. Patuck and Sons. From this firm he derived an income from two sources. He had a one-third share in the profits of the partnership and was receiving Rs. 400 per month as his salary.
3. The assessee was a married man but some time in 1951 his marriage with his wife came to be dissolved and a divorce was granted to him with other consequential reliefs. The suit was Suit No. 16 of 1951, before the Parsi Chief Matrimonial Court at Bombay and it was decreed on 2nd April, 1951, by consent of both of parties. As a result of this compromise the assessee made certain provisions for the two unmarried daughters by that marriage and that arrangement has given rise to the present reference. Since the real question arising in this reference is a to the construction of the terms of the decree passed in that case and the subsequent agreement entered into as envisaged in that decree, we set forth verbatim the operative part of that decree. Clause 4 was as follows :
'4. The plaintiff agrees to pay to his daughter, Jeroo, a monthly sum of Rs. 250 and to his daughter Sooni, a monthly sum of Rs. 250. Such sums shall be paid to each of them till her marriage. The payments shall be made on or before the 10th day of each month. In the event of the marriage of each of the said daughters, Jeroo and Sooni, the plaintiff shall pay to each of them a sum of Rs. 10,000 on the marriage of each of them. In order to secure regular payment of the above sums an agreement will be entered into between the plaintiff, the said two daughters and the partners of Messrs. Patuck Sons and Co., agreeing to pay to each of them the monthly sum of Rs. 250, respectively, out of the remuneration and profits payable to the plaintiff from the partnership firm. In the event of the retirement of the plaintiff from the said partnership or in case of his death the payment of the said sums mentioned in this clause shall constitute a first charge on the share of the plaintiff in the said partnership and if when required the plaintiff will execute a document for that purpose.'
4. The decree contemplated that an agreement would be entered into and such an agreement was entered into on the 4th April, 1951. It was a tripartite agreement between the firm of Messrs. Patuck and Sons, the assessee himself and his two daughters and the relevant portion of that agreement was as follows :
'By a Deed of Partnership dated 23rd October, 1944, and entered into between Mr. Cowasji Nusserwanji Patuck and ourselves a monthly sum of Rs. 400 as and by way of remuneration and one-third share in the profits of the partnership business is payable to Mr. Cowasji Nusserwanji Patuck as a partner. We have been informed and taken notice of the following provision made for you by out partner Mr. Cowasji Nusserwanji Patuck as a part of the consent terms in Parsi Chief Matrimonial Suit No. 16 of 1951 between him and his wife Shera Cowasji Patuck :
'The plaintiff (i.e., Cowasji Nusserwanji Patuck) agrees to pay his daughter Jeroo a monthly sum of Rs. 250 and to his daughter Sooni a monthly sum of Rs. 250. Such sums shall be paid to each of them till her marriage. The payments shall be made on or before the 10th day of each month. In the event of the marriage of each of the said daughters Jeroo and Sooni, the plaintiff (i.e., Cowasji Nusserwanji Patuck) shall pay to each of them a sum of Rs. 10,000 on the marriage of each of them. In order to secure regular payment of the above sums an agreement will be entered into between the plaintiff (i.e., Cowasji Nusserwanji Patuck), the said two daughters and the partners of Messrs. Patuck Sons and Co. agreeing to pay each of them the monthly sum of Rs. 250 respectively out of the remuneration and profits payable to the plaintiff (i.e. Cowasji Nusserwanji Patuck) from the said partnership firm. In the event of the partnership firm being dissolved or in the even of the retirement of the plaintiff (i.e., Cowasji Nusserwanji Patuck) from the said partnership or in case of his death the payment of the sums mentioned in this clause shall constitute a first charge on the share of the plaintiff (i.e., Cowasji Nusserwanji Patuck) in the said partnership and if and when required the plaintiff (i.e., Cowasji Nusserwanji Patuck) will execute a document for that purpose.'
In consideration of the above premises and in further consideration of the sum of Rs. 5 paid to us by Mr. Cowasji Nusserwanji Patuck and Rs. 5 paid to us by you two we agree to pay to each of you out of the remuneration and one-third share in the profits of the aforesaid partnership, such payment to be made by cheque on or before the 10th of each month.'
5. During the accounting year the assessee's share of profits in the firm and his salary according to the statement of the case were first credited to his account and then the assessee made the payment to his daughters direct, though the receipts obtained from his daughters mentioned that the payments were made by the firm. The statement of the case also clarifies that 'the firm assured itself that the payments were duly made to the two daughters regularly. The bona fides of this arrangement and the factum of payment are not in dispute.' One of the daughters, it is stated, has got married and, therefore, the question which arises in the reference is limited only to the amount paid to the remaining unmarried daughter.
6. The assessee claimed that the amount paid to his daughter under the terns of the decree and the agreement did not constitute his income at all and was not liable to tax. He claimed that the amount was at source diverted and ceased to be his income, because of the overriding title created in his daughter. The Income-tax Officer held that, though the payment was legally enforceable against the assessee, the payment of the above sum amounted to nothing more than the discharge of a personal obligation and that there was no provision in the Income-tax Act to allow expenses of a personal nature. He held that Sitaldas's case had not decided the point whether expenses to meet 'personal obligation of a personal nature can be allowed as a deduction..... ' The order of the Income-tax Officer deals with the sum of Rs. 6,000, namely, the amount of the payment to both the daughters, but since the order of the Income-tax Officer, as we have said, one daughter got married and, therefore, the question regarding her does not survive. In appeal, the Appellate Assistant Commissioner reserved the decision of the Income-tax Officer and allowed the claim of this court in Seth Motilal Manekchand's case. He held :
'The point for consideration is whether the Income-tax Officer was justified in not allowing the sum of Rs. 3,000 paid to one of the daughters of the appellant. Here there is a legally enforceable right against the appellant on whom there is an obligation to pay the sum of Rs. 3,000 as maintenance, which could be enforced in a court of law.
The appellant was therefore entitled to deduct such sums. This is the view held by their Lordships of the Bombay High Court in the case of Sitaldas Tirathdas and in the case of Seth Motilal Manekchand. That being the position of the law, the Income-tax Officer was not justified in not allowing the maintenance allowance of Rs. 3,000 paid to one of the appellant's daughters. He is directed to allow it.'
7. The department went up in appeal to the Income-tax Appellate Tribunal at Bombay and before the Tribunal it was pointed out that the decision of this court upon which the Appellate Assistant Commissioner had relied, namely, Sitaldas Tirathdas v. Commissioner of Income-tax 1, had by then been reversed by the decision of the Supreme Court in Commissioner of Income-tax v. Sitaldas Tirathdas 3. Nonetheless the Tribunal confirmed the decision of the Appellate Assistant Commissioner and dismissed the department's appeal. The view which the Tribunal took was that the provisions of the decree and the agreement created an overriding charge on the salary and the share of profits of the assessee, which charge could be legally enforced, and, as a consequence of that charge, the receipts from the partnership payable to the assessee had to the extent of the charge ceased to be his income. There was thus a diversion of his income at source and it could not be said that it was income taxable in his hands. They relied upon the decision of the Privy Council in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax and upon the decision of the Supreme Court in Sitaldas's case.
8. On behalf of the Commissioner Mr. Joshi has disputed all these findings of the Tribunal. He has urged that, in the first place, the Tribunal has erred in the construction of the two documents before it and that having regard to the provisions of those two documents its conclusion that they gave rise to a charge upon the assessee's share of profits in the partnership was wrong, and that, in the circumstances of this case, a charge could never arise. The manner in which the parties dealt with the profits shows that the profits were first paid to the assessee and then the assessee himself distributed the profits to his two daughters. The whole arrangement was merely made in order to ensure to the two daughters their maintenance. It was paid out of the remuneration and the profits and, therefore, it could not be said that the profits were diverted at source and ceased to be the income of the assessee.
9. He has also urged that this being a partnership the assessee who was a partner therein could not, in law, divert any part of the profit by creating a superior title in any one. Upon the authority of a decision of the Supreme Court he urged that the profits could only be payable to a partner and to no one else. Therefore, even legally, the arrangement was not valid. Lastly, he has urged that, in any case, the income from the partnership accrued to the assessee before the charge possible could attach itself to that and, therefore, the charge would not effect that income. Before the charge could operate, the amount of the profits has already become the income of the assessee. The principle that income which could be charged to tax in the case of the individual must be his income flows from the provisions of section 3 of the Income-tax Act itself. By that section the charge of income-tax falls on 'the total income of the previous year of every individual.....' 'Total income' is defined in section 2(15) and means 'total amount of income, profits and gains referred to in sub-section (1) of section 4 computed in the manner laid down in this Act'. Obviously that implies that it must be an individuals's own total income before it could be taxed in his hands. If then either by act of parties or by operation of law it is taken away from an individual at source and never becomes his income, it cannot be taxed as his income. This principle is variously referred to in the authorities, to which we shall presently refer, as the principle of real income or the diversion of income at source by virtue of an overriding title in some on else as opposed to the assessee.
10. The leading case is Privy Council case in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax. in that case the Raja, who had succeeded to the ancestral estate of the family on the death of his father, was sued by his step-mother for maintenance and in the suit a consent decree was passed directing him to make a monthly payment of fixed sum to his step-mother and declaring that the maintenance was to be a charge on the ancestral estate in his hands. The Raja claimed that in computing his income the amounts paid by him to his step-mother under the decree should be excluded. The Privy Council negatived the contention that the liability of the Raja under the decree fell under any of the exemption or allowances under section 7 to 12 of the Indian Income-tax Act, but nevertheless they allowed the deduction on the ground that the sums paid by the Raja to his step-mother were not his income at all. They held that the decree of the court by charging his entire estate with a specific payment to his step-mother had to that extent diverted his income from him and had directed it to his step-mother. To that extent, therefore, what he received for her was not his income. It was not a case of the application by the appellant of part of his income in a particular way, but it was rather the allocation of a sum of his revenue before it became income in his hands.
11. The High Court of Calcutta had held that the Raja's liability towards his step-mother was of the same kind as his liability to provide for his wives and daughter and the position was the same as if the Raja 'had received his various properties, securities and businesses under a bequest from his father upon the terms that these assets were charged with an annuity for the maintenance of the widow'. The Privy Council met this reasoning by saying (see page 138) :
'.......... their Lordships do not agree with the learned Chief Justice in his rejection of the view that the sums paid by the appellant to his step-mother were not 'income' of the appellant at all. This is their Lordships' opinion is the true view of the matter.
When the Act by section 3 subjects to charge 'all income' of an individual, it is what reaches the individual as income which it is intended to charge. In the present case the decree of the court by charging the appellant's whole resources with a specific payment to his step-mother has to that extent diverted his income from him and has directed it to his step-mother; to that extent what he receives for her is not his income. 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 his revenue before it becomes income in his hands.'
12. The Privy Council in this respect emphasized the difference between the provisions of the English Income Tax Code and the Indian Income-tax Act. The important difference which they pointed out was that, after a certain date, in the English system of income-tax legislation, the principle of deduction of tax at source was introduced and, therefore, deductions which were formerly authorized were prohibited, but under the Indian Income-tax Act there was no similar provision for deduction of tax at source and the consequent reimbursement of the taxpayer in the case of such a charge as that to which the revenues of the assessee in that case were subject and then their Lordships observed :
'While their Lordships are disinclined to entertain any argument from the system to the other, they would infer, if any inference were permissible, that the omission from the Indian Act of any such provision points rather to an intention to tax, in Lord Davey's phrase, only 'the real income' of the taxpayer, than to an intention to impose, without right of reimbursement, a tax on what is a charge upon his income.'
13. This leading case is referred to in almost every authority in India to which our attention has been invited.
14. Before we go to these authorities, one thing may be noted regarding this decision of the Privy council. It was a case where there was an express charge created by the consent decree itself. As we shall presently show in several decisions of the High Courts in India, this authority was applied in cases where there was no express charge declared, on such case being the decision of this court in Sitaldas Tirathdas v. Commissioner of Income-tax. That was also a case where the assessee, Sitaldas, had paid in the relevant assessment years 1953-54 and 1954-55 two amounts of Rs. 1,350 and Rs. 18,000 as maintenance to his wife and children under a decree of a court, but the decree had not made the payment of the maintenance a charge on any property. It was expressly contended by counsel on behalf of the assessee that the assessee claimed a deduction of that amount from his total income because his real total income was whatever had been computed, which he did not dispute, less the amount of the maintenance paid under the decree. The Division Bench accepted this contention relying upon an earlier decision of this court in Seth Motilal Manekchand v. Commissioner of Income-tax. They pointed out that in that case this court had in terms laid down that it is not essential that there should be a charge but that it was quite sufficient if there was a legally enforceable claim and that if that test was to be applied to the facts of that case the decree in that case would undoubtedly constitute a legally enforceable claim. It was contended in that case that the test was whether the property was subjected to a valid and legal charge which could be validly challenged in a court of law and the Division Bench negatived that contention.
15. Sitaldas's case went up to the Supreme Court upon a certificate under section 66A(2) of the Income-tax Act and the Supreme Court reversed the decision of this court. This decision of the Supreme Court is now the leading case on this subject so far as India is concerned. The Supreme Court referred to the decision of the Privy Council in Dudhuria's case and emphasised the distinction drawn by the Privy Council between a case of the application by the assessee of a part of his income in a particular way and a case where the assessee allocates a sum out of his revenue before it becomes income in his hands and quoted the same passage from Dudhuria's case to which we have referred above. Then the Supreme Court discussed a number of decisions of different High Courts and a decision of the Supreme Court itself and proceeded to state the test in cases of this kind as follows at page 374 :
'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 is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income 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.'
16. After laying down this test the Supreme Court applied the test to the facts in Sitaldas's case and held that the case was 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. After so holding, however, the Supreme Court made an important observation at page 375 which serves to emphasise the ground upon which the Supreme Court laid down that test and the important remarks was :
'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 our opinion, the case falls outside the rule in Bejoy Singh Dudhuria's case and rather falls within the rule stated by the Judicial Committee in P.C. Mullick's case.'
17. By that observation, in our opinion, the Supreme Court laid down that where a charge is created or, upon the facts and circumstances, a charge can be found, it would not be a case of mere application of a portion of his income by the assessee to discharge an obligation but a case in which an overriding charge is created by the assessee and he becomes only a collector of another's income. In other words, whenever a charge is created or exists, an overriding title is created in the charge-holder and, to the extent of the charge, the income of the assessee ceases to be his income, because the charge-holder has the paramount right by virtue of his overriding title to recover that income before it reaches the hands of the assessee. Of course, the decision of this court was reversed because the Supreme Court held that, in the circumstances of that case, there was no overriding title created-not that without a charge such an overriding title could never arise.
18. A consideration of the several case which the Supreme Court considered in Sitaldas's case and their observations with regard to those cases also show that they drew the same distinction. The Supreme Court referred to three cases where clearly a charge was created. In regard to Diwan Kishen Kishore v. Commissioner of Income-tax they observed (page 371) :
'It was held that the income never became a part of the income of the family or of the eldest member but was a kind of a charge on the estate.... In that case, the payment to the junior member was a kind of a charge which diverted a portion of the income from the assessee to the junior member in such a way that it could not be said that it became the income of the assessee.'
19. The second case was Commissioner of Income-tax v. D. R. Naik. In that case by a decree of the court the assessee was entitled to receive certain properties as a residuary legatee, subject, however, to certain payments of maintenance to widows. As regards this case the Supreme Court observed at page 372 :
'It appears from the facts of the case, however, that there was a charge for the maintenance upon the properties of the assessee. This case also brings out correctly the principles laid down by the Judicial Committee that if there be an overriding obligation which creates a charge and diverts the income to someone else, a deduction can be made of the amounts so paid.'
20. The third case which the Supreme Court considered in this same category was the case of Prince Khanderao Gaekwar v. Commissioner of Income-tax. In that case the two grand-sons of the settlor were entitled to a certain income from a family trust. By the trust it was also provided that if their mother lived separately, then the trustees were to pay her Rs. 18,000 per year. The mother lived separately and two deeds came to be executed by the two grand-sons whereby they agreed to pay her Rs. 15,000 per year and created a charge on the property. The sons, having paid Rs. 6,000 in excess of their obligations, sought to deduct the same from their assessable income which claim was allowed by this court holding that, though the payment was a voluntary payment, it was subject to a valid and legal charge which could be enforced in a court of law and the amount was thus deductible under section 9(1)(iv). As regards this case, the Supreme Court held (page 373) :
'There is no distinction between a charge created by a decree of court and one created by agreement of parties, provided that by that charge the income from property can be said to be diverted so as to bring the matter within section 9(1)(iv) of the Act.'
21. Thus in all the cases where there was a charge created the contention was upheld that the amount paid in respect of that charge ceased to be the income of the assessee because of an overriding title created in the chargeholder.
22. By contrast the Supreme Court referred to cases where there was no such charge created but the settlor or testator was merely under a personal obligation and pointed out that in most of those cases as were before it, it was held that the amount paid still remained the income of the assessee. Of this category of cases the first was P. C. Mullick v. Commissioner of Income-tax. In that case a testator had appointed the appellants as executors and had directed them to pay Rs. 10,000 out of the income of the estate on the occasion of his Addya Sradh. The executors paid an amount of Rs. 5,537 for such expenses and sought to deduct the amount from the assessable income. The Judicial Committee held that the disallowance of the deduction by the High Court was correct and observed that the payments were made out of the income of the estate coming to the hands of the executors and in pursuance of an obligation imposed upon them by the testator. Referring to this case, the Supreme Court observed that it was not a case in which a portion of the income had been diverted by an overriding title from the person who would have received it otherwise.
23. The next case in this category was V. M. Raghavalu Naidu & Sons v. Commissioner of Income-tax, where the assessees, who were the executors and trustees of a will, had paid maintenance allowances to the mother and widow of the testator. The Supreme Court approved of the decision of the Madras High Court that it was merely a case of personal obligation of the testator to maintain his wife and mother and, if he had spent a portion of his income on such maintenance, he could not have deducted the amount from his assessable income. It was not an allowance which was charged upon the estate by a decree of the court or otherwise which the testator himself had no right or title to receive.
24. The third case in this category which the Supreme Court considered was the decision of this court in Seth Motilal Manekchand's case, to which we have already referred. In that case a managing agency belonged to a joint Hindu family composed of A, his son, B, and A's wife. When a partition took place between the members of the family the managing agency came to be divided and the partition deed provided that A and B would be entitled to the remuneration from the managing agency in equal shares but each of them should pay to A's wife 2 as. 8 pies, out of their respective 8 as. share in the managing agency. Thereafter, A and B continued to carry on the managing agency constituting themselves into a registered firm. In the assessment of that firm and of each of the two individual partners it was claimed that the amount paid to A's wife by each of them being 2 as. 8 pies share of the income from the managing agency should be allowed to be deducted before ascertaining their taxable income. It was held that, even though the amount paid to A's wife could not be considered in the assessment of the firm, that would not prevent A and B as partners from claiming that their real income as partners was not an 8 as. share in the managing agency remuneration, but only 8 as. less 2 as. 8 pies, i.e., less by the amount of which A's wife was entitled to receive from them. It has to be noticed that there was no charge expressly created, but before the Division Bench a point was canvassed that it would amount to a charge because the amount representing the 2 as. 8 pies share was made realisable out of the profits of the firm represented by the managing agency remuneration. The Division Bench was inclined to accept the contention that by the partition deed a charge was created but they preferred to base their decision on the finding that, even without a charge, there was a legally enforceable right against the two partners in favour of A's wife in respect of the amount of 2 as. 8 pies share of the profit and that each partner was under a legal obligation to pay that amount. In other words, the Division Bench held that, even assuming that the document did not create a charge, there still arose an overriding title in favour of A's wife. At pages 740-41 the Division Bench held :
'There was some controversy as to whether the provision in the deed of dissolution that Bhagirathibai was entitled to this share out of the 8 annas share of the managing agency constituted a charge on this commission in favour of Bhagirathibai. We are inclined to accept the submission of Mr. Kolah that it does constitute a charge, but in our opinion it is unnecessary to decide this question because this question can only have relevance and significance if we were considering a claim made for deduction under section 9(1)(iv) of the Income-tax Act...It is sufficient for the purpose of this reference if we come to the conclusion that Bhagirathibai had a legal enforceable 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.'
25. At page 741 the Division Bench summed up the question before them by saying :
'But the whole question before us is, looking to the true nature of the transaction, can it be said that the whole of the managing agency commission ever become the real income of the two partners, and in our opinion the answer must be against the contention of the Advocate-General.'
26. The words used by the Division Bench are closely similar to the words used by the Supreme Court in laying down the test in such cases.
27. It was contended by Mr. Joshi on behalf of the department that Motilal Manekchand's case was followed by the Division Bench of this court in deciding Sitaldas's case and since the decision of this court in Sitaldas's case was reversed by the Supreme Court it must be held that Motilal Manekchand's case is also impliedly overruled. We are unable to accept this contention because in the decision in Sitaldas's case the Supreme Court expressly referred to Motilal Manekchand's case and discussed it on page 374 of 41 I.T.R. In regard to the several other cases which they discussed, the Supreme Court in Sitaldas's case stated whether those cases in their opinion were rightly decided or were incorrectly decided. For instance, in considering the case of Commissioner of Income-tax v. Makanji Lalji they stated that that case was open to serious doubt in view of Dudhuria's case. They also pronounced that D. R. Naik's case was correctly decided. So far as Motilal Manekchand's case is concerned, they referred to it and quoted the self-same passage to which we have adverted above, but did not say that it was incorrectly decided and though, no doubt, in a subsequent paragraph they generally stated with reference to the cases they had considered that some of them appeared to have applied the principle correctly and some, not, nevertheless we do not think that the Supreme Court's decision in Sitaldas's case can be held to have overruled Motilal Manekchand's case.
28. If the decision in Motilal Manekchand's case were to be followed, there is no doubt that even without it being held that a charge was created by the decree and the agreement, in the present case, it should be held also that an overriding obligation arose in favour of the two daughters of the assessee by virtue of the provisions contained in the two deeds and upon the other circumstances found in the case.
29. But we do not propose to base our decision on Motilal Manekchand's case alone. Since the Supreme Court has clearly laid down the test in Sitaldas's case we must to decide this case in the light of that test. Now, it is clear that the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. In deciding the question, the nature of the obligation created in each case is the decisive test. Where, however, coupled with an obligation the terms of the document give rise to an overriding charge, then there can be no doubt that there would be created in favour of the charge-holder such an overriding or superior title as would make the amount due under the charge cease to be the income of the assessee altogether. In the present case upon the findings of the Tribunal such a charge has been created but that finding has been disputed on behalf of the department and so we turn to consider the question whether, upon the circumstances of this case, the finding of the Tribunal that a charge was created in favour of the two daughters of the assessee is a correct finding.
30. In the creation of a charge no particular words are necessary. A charge may be created even without a writing. Whenever a particular property or fund is earmarked or made a security for the payment of a debt a charge would arise on that property or fund. Section 100 of the Transfer of Property Act is no doubt limited to charges in immovable property only it is not exhaustive of the nature of charges contemplated in Indian law as can be seen from a number of decisions in which charges have been held to be created even against property other than immovable property or against merely a particular fund. It is sufficient if, having regard to all the circumstances of the transaction, the document shows an intention to make the particular property or fund a security for the payment of the money mentioned therein. In Nathan Lal v. Durga Das a Division Bench of the Allahabad High Court held that, in order to constitute a charge, it is not necessary to employ any technical terms but where the intention of the parties concerned was to indicate in unambiguous language that a definite fund should be employed for the discharge of a particular debt or claim and there is no ambiguity either as to the amount of the debt or the amount of the claim out of which the debt has to be satisfied, the transaction amounts to a charge. In that case in a registered lease a provision was made that the lessee should deduct from the annual rent a certain portion as repayment of a sum of money already borrowed by the lessor from him and it was held that such a stipulation creates a charge on the property leased and is not merely a personal covenant.
31. In Rustamalli Goharalli Mirza v. Aftabhuseinkhan Najafallikhan Mirza the agreement was by the owner of a share in a village to receive a lump sum out of the income of the village irrespective of the actual amount of income and a single judge of this court held that that created a charge on the income of the village in respect of the amount so agreed to be paid and he referred to the definition of a charge in Tancred v. Delagoa Bay and East Africa Railway Co.
'A document given by way of charge is not one which absolutely transfers the property with a condition for conveyance, but is a document which only gives a right to payment out of a particular fund or a particular property, without transferring that fund or property.'
32. That is the definition which is accepted directly or indirectly in all the cases to which we have been referred.
33. In Chatti Chalamanna v. Pundrangi Subbamma a Hindu executed a document entitled 'Sanad' agreeing to pay to his sister and after her death to her daughter, Rs. 10 per annum from the produce of an estate inherited by him from his material grandmother and it was held that such a stipulation bound the estate even in the hands of his widow because it created a charge on the profits of the estate (see page 24).
34. In Mangat Ram v. Piyara Lal a promissory note was executed and it was stipulated that the amount due under the promissory note should 'come out of the diar (deodar) timber' of the jungle. It was urged in that case that, although the fund out of which the debt was to be satisfied had been specified, the timber had not come into existence and, therefore, there could not arise a charge. Nevertheless it was held that it did create a charge on the timber in the jungle. Once again the classic definition of a charge in Tancred v. Delagoa and East Africa Ry. Co. was referred to with approval. The Division Bench held, after referring to those cases :
'These cases, therefore, are authorities for the proposition that it is competent to a party to create a security upon certain movable property which might come into existence at a future date.'
35. We have referred to these cases as illustrations to show that, even apart from section 100 of the Transfer of Property Act, a charge can arise and wherever a fund or other property is specified and made security for the payment of a debt or the discharge of an obligation a charge would arise even though the property charged or the fund out of which the debt had to be satisfied 'had not then come into existence'.
36. In the light of these principles we turn to consider the provisions of the two documents - the decree dated 2nd April, 1951, and the agreement entered into in consequence of the decree dated 4th April, 1951 - to see whether any of them gives rise to a charge in the instant case. We have already reproduced the relevant portions of the two documents. The two important provisions of the decree must first of all be noticed. One provision is that contained in the words 'In order to secure regular payment of the above sums an agreement will be entered into...' In other words, the amount of Rs. 250 payable to each of the two daughters monthly was to be secured by an agreement which was to be entered into. The very fact that the parties contemplated security for payment of the debt or obligation by the assessee in favour of his two daughters would, in our opinion, give rise to a charge the moment the property which was to be a security for the payment is specified. The second statement in the decree is '...agreeing to pay to each of them the monthly sum of Rs. 250 respectively out of the remuneration and profits payable to the plaintiff from the partnership firm.' By this provision of the decree the fund or property which was to be security or which was to secure regular payment of the monthly sums to the two daughters was specified. The fund or property is 'the remuneration and profits payable to the plaintiff from the partnership firm'.
37. Thus, so far as the decree is concerned, the creating of a charge was clearly contemplated. The agreement entered into two days later makes the position further clear. It begins by reciting that a monthly sum of Rs. 400 is payable by the firm to Cowasji Nusserwanji Patuck, the assessee, and one-third share in the profits of the partnership business as partner. Then the agreement proceeds to state that the assessee's other two partners have been informed and taken notice of the provisions which followed. The provisions which followed recite that Rs. 250 per month are to be paid to each daughter and 'the partners of Messrs. Patuck Sons & Co. agreeing to pay each of them the monthly sum of Rs. 250 respectively out of the remuneration and profits payable to the plaintiff....' Therefore, the amount of the maintenance was to be paid out of the remuneration and profits payable to the plaintiff. These are identical words such as were used in Mangat Ram v. Piyara Lal, where it was held that the fact that a payment is to come out of a specified fund results in the creation of a charge.
38. Another important circumstances is that the agreement is not merely an agreement between the father and the two daughters but it is a tripartite agreement and is signed also by the remaining two partners of the assessee in the firm of M/s. Patuck Sons & Co. In the last paragraph of the agreement it is recited that in consideration of Rs. 5 being paid by the assessee and Rs. 5 by the two daughters the partners 'agree to pay to each of you out of the remuneration and one-third share in the profits of the aforesaid partnership, such payment to be made by cheque on or before the 10th of each month'. Now if it were merely a case of the discharge of a personal obligation by the assessee in favour of his two daughters, we are at a loss to know why the two partners of the assessee should have been made parties to the agreement. The fact that they were made parties to the agreement and agreed themselves to pay to each of the daughters the amounts of the maintenance due to them out of the remuneration and the one-third share in the profits of the partnership, clearly shows that it was the intention of the parties that the source or the profits should be bound. That part of the profits thus could never become the income of the assessee. Once a stipulation like this was made in the document it is clear to our mind that the profits could never have been obtained directly by the assessee himself. On the other hand, the daughters would be entitled directly to claim the maintenance out of the profits from the two partners who had agreed to pay the same to them and to that extent they would have a title superior to that of their father in the profits. That would constitute such an overriding title as would make that portion of the profits which was payable to them case to be the profits of the assessee himself long before it became his income. In our opinion, the stipulation in the agreement whereby the two partners bound themselves to pay to the two daughters the maintenance due to them out of the remuneration and profits due to the assessee, is a special and a very important circumstances which distinguishes this case from any other case to which we have referred. It is a circumstances which puts it beyond any doubt that the source of the income was intended to be bound by the assessee in favour of his daughters giving rise to a charge.
39. On behalf of the department Mr. Joshi urged that the provision made both in the decree and in the agreement was merely to secure regular payment of the maintenance to the two daughters and that it was never the intention of the parties to create a charge. He relied upon the perambulatory clause 'In order to secure regular payment of the above sums.' We do not think that this is a mere introductory recital, but the integral part of the decree itself and this clause, read in the context of the remaining provisions of the decree, makes it clear that the intention has been expressed by the assessee that his daughters would have the security of his remuneration and the profits payable to him from the partnership to enable them to realise the monthly sums of maintenance.
40. Another argument against the existence of the charge was based upon the last paragraph of clause 4 of the decree which provides that, in the event of the retirement of the plaintiff from the partnership or in the case of his death, the payment of the said sums mentioned in clause 4 'shall constitute a first charge on the share of the plaintiff in the said partnership and if and when required the plaintiff will execute a document for that purpose.' It was urged by Mr. Joshi that where the parties intended to create a charge, they have clearly said so only in a particular contingency, namely, 'in the event of the retirement of the plaintiff from the said partnership or in case of his death', but they have not said so in the context of payment of the maintenance to the two daughters. We cannot construe the last paragraph of clause 4 in this manner. It is an integral part of clause 4 and the provisions of that clause should be read as a whole. Rather it seems to us that the last paragraph is complementary to the rest of the provisions of clause 4. Of course, in the event of retirement or in the case of his death, the assessee would cease to be a partner in the firm and then would arise the necessity of declaring the charge which had already been created during the time that he continued as a partner and, therefore, the last paragraph of clause 4 had of necessity to be incorporated in the decree. After he had retired from the partnership and ceased to receive the salary and the profits, without an express recital, the daughters may not be safeguarded. So far as the payment to them from the profits of the partnership was concerned, it may be disputed and, therefore, it was stipulated in this paragraph that a fresh document for that purpose would be executed. It was with that purpose that this paragraph was incorporated in clause 4. We do not think that it negatives the existence of a charge as created by the earlier recitals of clause 4.
41. Next it was contended that the authorities have found as a fact that the assessee's share of profits in the firm and his salary were first credited to his account with the partnership and paid over to him and then the assessee made the payments to his daughters directly, though the receipts granted by the daughters mentioned that the payments were made by the firm. This is clear from paragraph 5 of the statement of the case. In that paragraph itself it is also stated : 'But the firm assured itself that the payments were duly made to the two daughters regularly.' In other words, the firm having bound itself was seeing to it that the security given to the two daughters was being fulfilled.
42. On these facts a two-fold argument was advanced on behalf of the department. It was first of all urged that there can arise no question of diversion of the income from the partnership in this case, because the income from the partnership was being first credited to the account of the assessee and, therefore, the assessee received it and he became the full owner of that income. If he became the full owner of that income, then there was no question of diverting it afterwards. Secondly, it was urged that the assessee is being assessed upon an accrual basis, that is to say, he is being assessed to tax not when he actually received the cash but when the amount is deemed to be received by him and the credit of that amount into his account shows that the profits accrued to him. Therefore, he cannot afterwards divert those profits or create an overriding title in his daughters.
43. Now the terms of the agreement, as we have said, create a right in the two daughters to receive the amount of the maintenance out of the remuneration and profits payable to the assessee. We have already shown that a charge may be created in respect of property which is still to arise in future and in the present case that was the nature of the charge created. As soon as the profit of the partnership each year is computed and the share of profit of the assessee indicated, the right in favour of the daughters would attach to that share. Even assuming for the sake of argument that when the amount of his share of the profits is credited to his account and it is an amount under his control, still it has been held that in such a case he must be held to have collected that amount for and on behalf of the true owner, the charge-holder.
44. The position of the assessee in a case of this kind is indicated in recent decision of the Supreme Court in Muralidhar Himatsinghka v. Commissioner of Income-tax. In that case M, who was a partner in a registered firm (firm A) entered into a sub-partnership (firm B) with his two sons and a grandson and the document of sub-partnership provided that the profits and losses of M in the main partnership (firm A) shall belong to the sub-partnership (firm B) and shall be borne and divided in accordance with the shares specified therein, but that as to the capital, it would belong exclusively to M. In the relevant assessment years M's share in firm A was sought to be assessed in the individual assessment of M. It was held that there was an overriding obligation in this case and the income of M in firm A did not remain his income but was diverted before it became his income. The position of M after the deed of sub-partnership was thus indicated :
'A sub-partner has definite enforceable rights to claim a share in the profits accrued to or received by the partner in the original partnership. When a sub-partnership is entered into, the partner changes his character vis-a-vis the sub-partners and the income-tax authorities, although other partners in the original partnership are not affected by the changes that may have taken place.
In the case of a sub-partnership, the sub-partnership creates a superior title and divert the income from the main firm before it becomes the income of partner. In other words, the partner in the main firm receives the income not only on his behalf but on behalf of the partners of the sub-partnership.'
45. The other principle laid down in this decision is that where a person creates in another an overriding title to a fund or property, that person, if he collects that fund or property, does so not only on his own behalf but for and on behalf of those in whose favour he has created that overriding title. The Supreme Court stated the principle at pages 331-32 as follows :
'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 partner. 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' .
46. If that be the true position, then it seems to us that the argument that because the amounts of the remuneration and profits of the assessee were credited in the account of the assessee with the firm, it became his property, must fail, because even though the amounts came to be credited in the account of the assessee with the partnership, the assessee must be deemed to have realised those amounts or those amounts must be deemed to have accrued to him for and on behalf of the two daughters in whom a right had been created. The same was the position indicated in Sitaldas's case when the test to which we have referred above was laid down, though it was not as specifically referred to as it has been in Murlidhar's case, because such an argument was not advanced in the former case. We have already quoted the passage from the judgment in that case, but the point which we are discussing was adverted to in the following sentence in that passage at page 375 : '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' (the underlining is ours). The point made by the use of the words which we have underlined was only further clarified in the decision in Murlidhar's case.
47. Mr. Joshi relied upon the decision of the Allahabad High Court in M. K. Brothers v. Commissioner of Income-tax to stress his contention that as soon as the amounts were credited to the assessee's account they became his property. In the first place, in that case, the court held that there was no diversion at source but that it was a simple case where the income accrued or had arisen to the assessee and that the assessee merely applied it as his income (see page 43). The Allahabad case, moreover, was decided upon the particular terms of the document in that case which have been reproduced in detail at page 32 and that the terms contained in that agency agreement are in no way comparable to the terms of the agreement before us. Thirdly, in that case no question of the existence of a charge arose nor was it urged that the document gave rise to a charge as has been found in the present case. As we have indicated, the Supreme Court has clearly stated in Sitaldas's case at page 375, that the matter in that case would have been different if an overriding charge had existed either upon the property or upon its income. That was not the case before the Allahabad High Court, though it is the case here. If there had been a charge as there exists in the present case, even in M. K. Brothers' case the matter would have been different. We do not think, therefore, that the decision in M. K. Brothers' case assists the department.
48. We hold, therefore, that the Tribunal was right in the view which it took that upon the two documents in this case the assessee created a charge in favour of his two daughters and that there arose an overriding right or title in favour of the two daughters to get the remuneration and profits which to the extent of that right or title ceased to be the remuneration and/or profits of the assessee. In that view it could not be taxed in his hands. Even assuming, however, that we are wrong in the construction of that two documents before us and that no charge has arisen, we think that the case will be clearly covered by the decision of this court in Motilal Manekchand's case which is binding upon us.
49. In the result, we answer the question referred in the affirmative. The Commissioner shall pay the costs of the assessee.