Y.S. Tambe, J.
1. The is a reference under section 66(1) of the Income-tax Act (hereafter referred to as the 'Act') on two applications made by the assessee and the question referred to this court is in the following terms :
'Whether on the facts and in the circumstances of the case the entire amount of dividend of Rs. 17,265 (Rs. 20,718 for the assessment year 1953-1954) was the income of the assessee ?'
2. As already stated, the reference arises out of two applications made by the assessee, one arising out of his assessment case relating to the assessment year 1952-53, and the other arising out of his assessment case relating to the assessment year 1953-54. To appreciate the contentions of the parties and the question raised before us, it is not necessary to state the facts relating to both the years. The facts are similar. The matter arises in this way : A partnership firm of five brothers, the assessee being one of them, doing business under the the Consolidated Electric Agencies Private Ltd. A dispute arose between the five brothers, and a suit was filed in this court, being Suit No. 728 of 1943, for dissolution of the said partnership. In this suit, a settlement it was, inter alia, agreed between the partners that the assessee should take over all the shares coming to the share of the other four partners at a price of Rs. 108 each. It was further agreed that the assessee should pay Rs. 11,000 as earnest money, of which Rs. 5,000 should be in cash, and the balance should be paid by debiting the account of the assessee in the partnership books and crediting equal portion thereof in the accounts of the remaining four partners. It was further agreed that the balance of the purchase money should be paid by the assessee within nine months from the date of the agreement, time being essence of the contract. Terms No. 6 of the agreement is an important term and the decision of this reference turns on the true construction of that term. It is in the following terms :
'6. The sale to be completed on payment of the said balance when certificates in respect of all the 3,453 shares shall be delivered to Navnitlal (the assessee) with duly signed transfer forms. At the time of completion, all the dividends declared out of revenue profits up to the date of the sale, the same shall be distributed among the five brothers in equal shares on realisation.'
3. In accordance with these terms of the agreement, the assessee paid the earnest money of Rs. 11,000 and the balance of the purchase price was paid by the assessee on 21st September, 1951. On 27th December, 1951, the Consolidated Electric Agencies Private Ltd. declared dividend relating to the company's profits of the year ending with 31st March, 1951. As a result of the declaration of this dividend, the assessee received a net dividend amounting to Rs. 17,265. On 12th December, 1952, the company declared another dividend for the year ending with 31st March, 1952. In consequence of this declaration, the assessee received a net dividend amounting to Rs. 20, 718 for that year. After receiving the aforesaid dividends, the assessee distributed them amongst his four brothers and himself in accordance with the sixth terms of the agreement reproduced above. In his return, the assessee showed an amount of Rs. 3,453 as his dividend income from the company, whereas as per the dividend warrant filed by him, he had received a dividend income of Rs. 17,265 during the relevant accounting year ending with 31st March, 1952. The contention of the department was that the entire amount of Rs. 17,265 was the income of the assessee and, therefore, liable to tax. While, according to the assessee, the entire amount of Rs. 17,265 did not constitute his income, but his income was only 1/5th amount thereof, 4/5th out of it was the income of his other four brothers, to whom he had to pay 1/5th amount each in accordance with the sixth terms of the agreement which we have already reproduced above. The contention of the assessee was not accepted by the Income-tax Officer. The Income-tax Officer held that the assessee was legal owner of the dividends on the date the dividends were declared and, therefore, the entire amount of Rs. 17,265 was the income of the assessee, and anything that the assessee may have agreed to give to his brothers out of that income would constitute only an application of that income, after it had arisen and accrued to the assessee. The assessee took an appeal to the Assistant Commissioner, but the Assistant Commissioner confirmed the view of the Income-tax Officer. A second appeal was taken by the assessee to the Tribunal and the contention raised by the assessee before the Tribunal was that, though the assessee was the legal owner of the shares on the date when the dividend was declared, there was an overriding charge or a legal obligation created by the agreement between the five brothers and he was bound to give to his four brothers their 4/5th shares; the 4/5th shares given by him to his brothers, therefore, did not constitute his income. This contention of the assessee then made an application under section 66(1) of the Act and the Tribunal has referred the above-mentioned question to this court.
4. Mr. Palkhivala, learned counsel for the assessee, contends that the Tribunal was in error of law in holding that the entire amount of Rs. 17,265 constituted the income of the assessee. According to him, by virtue of the sixth terms of the agreement between the parties, there was an overriding charge that diverted the 4/5th amount out of the said amount of Rs. 17,265 to his brothers before it reached him as his income. The assessee, therefore, was not liable to pay tax on anything more than 1/5th of the said sum of Rs. 17,265, i.e., Rs. 3,453. In support of his contention, Mr. Palkhivala placed reliance on the decisions in Commissioner of Income-tax v. Sitaldas Tirathdas and in Seth Motilal Manekchand v. Commissioner of Income-tax. Mr. Joshi, on the other hand, for the revenue, contends that on a true construction of the sixth terms of the agreement between the parties, the assessee had become on 21st September, 1951, not the full owner of all the shares, but had also become the full owner of the dividend income received by him subsequent to that date. He had only undertaken an obligation to pay, out of the dividend income received to in the sixth terms. The assessee, therefore, was the owner of the entire amount of Rs. 17,265 and was liable to pay tax on the said amount. He referred us to a decision in Provat Kumar Mitter v. Commissioner of Income-tax. In our opinion, the contentions raised before us by Mr. Palkhivala, on behalf of the assessee, are well founded.
5. Now, it is an admitted position that the assessee was not originally the owner of 16 annas share in all the 3,453 shares. On the other hand, the five brothers, i.e., the partners of Messrs. N. R. Brothers, jointly were the owners, the assessee being one of them. The assessee, therefore, had ownership right in only 1/5th share. The assessee became the full-fledged owner of these shares as a result of the agreement between the five partners the corpus of these shares as a result of the agreement between the five partners reached on 21st December, 1950, on payment of the price mentioned therein. The rights of the assessee in these shares both as regards the corpus of those shares as well as their income would, therefore, naturally be governed by the terms of that agreement. A registered holder of shares has a bundle of rights in the company of which he holds the shares : (1) a right to vote; (2) right to participate in distribution of assets on dissolution or liquidation of the company; (3) right to participate in the profits, i.e., dividends which might be declared. We are here concerned with the last right, viz., right to participate in the profits, i.e., right to receive dividends which might be declared. As already stated, that right was jointly held by the five partners, of which the assessee was one, each having a right to receive 1/5th of the dividend amount as his income. Unless the four partners part with their right to receive their share in the dividend declared, the assessee cannot get the right of receiving, as his income, the entire dividend amount of the said 3,453 shares. The latter part of term No. 6 makes it clear that the remaining partners did not part with their right of receiving their share in the dividends, unless and until they had received their shares in the dividends due out of the revenue profits of the company accruing up to the date of the sale. The date of sale is 21st September, 1951. It is, therefore, clear that unless and until the other four partners have received their due share in the dividends due out of the revenue profits up to 21st September, 1951, the assessee is not entitled to receive the entire dividend amount as his income. Till that event or contingency occurs, 4/5th dividend income gets diverted to the other four partners before that amount reaches him as his income.
6. It is true that on 21st September, 1951, the assessee became the owner of the shares and he was, from that date, the sole registered holder of the said 3,453 shares. In that capacity, no doubt, he was the person to whom dividend would be payable by the company. But the ownership of the property and the right to receive or collect its income does not necessarily lead to the conclusion that the entire income of the property is the income of the owner. In each case, it has to be seen whether there is any obligation attached to the right, which diverts the entire income or its part to the other person before it reaches the owner. The decision in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax is an illustrative example. In that case, the assess succeeded to the family ancestral estate on the death of his father. Subsequently, his step-mother brought a suit for maintenance against him, in which a consent decree was made directing the assessee to make monthly payment of a fixed sum to his step-mother and declaring that maintenance was a charge on the ancestral estate in the hands of the assessee. In computing his income, the assessee claimed that the amounts paid by him to his step-mother under the decree should be excluded. His contentions failed. Ultimately, the matter went in appeal to the Privy Council, the appeal was allowed and the assessee's contentions were accepted. The Privy Council observed :
'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.'
7. In that case a charge for payment of the maintenance had been created on the ancestral estate. But that was not a decisive factor. The decisive factor was the nature and character of the obligation attached to the ownership of the property. In the case of Seth Motilal Manekchand v. Commissioner of Income-tax, a managing agency belonged to a Hindu joint family composed of A, his son B, and A's wife. In a partition between the members of the family, the managing agency was also divided and the partition deed provided that A and B would be entitled to the managing agency remuneration in equal shares and that each of them should pay to A's wife 2 as. 8 pies out of their respective 8 annas share in the managing agency. A and B constituted themselves into a registered firm and carried on the managing agency. In the assessment of the firm and each of the individual partners it was claimed that the 2 annas 8 pies share paid to A's wife by each of them should be deducted before ascertaining their taxable income. The contention was not accepted by the department. The matter came to this court and it was held that even though the amount to be paid to A's wife could not be considered in the assessment of the firm, that would not prevent A and B from claiming that their real income as partners was not an 8 annas share in the managing agency commission but only 8 annas less the amount which A's wife was entitled to receive from them. At page 742 of the report, after considering the aforesaid Privy Council decision and the passage reproduced above, the learned Chief Justice observed :
'This passage can be applied to the facts of this case, if we were to substitute in place of the consent decree the deed of dissolution. As in the case before the Privy Council it was the consent decree which had diverted the income from the son to his step-mother, in this case it is the deed of dissolution that has diverted the income from the assessee to his wife, Bhagirathibai, and to the extent that this income has been diverted, the assessee has merely received the amount for her and it has never become his income.'
8. In our opinion, the aforesaid observation of the learned Chief Justice would apply with equal force to the present case. The principle and test to be applied have now been laid down by their Lordships of the Supreme Court in Commissioner of Income-tax v. Sitaldas Tirathdas. At page 374, it has been observed :
'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 first kind of payment which can truly be excused and not the second.'
9. As already stated, till the obligation mentioned in the latter part of the sixth term of the agreement is fulfilled, the assessee cannot become the owner of the entire dividend amount. And, that being the position, it is clear that the 4/5ths of the dividend amount did not reach him as his income, because he had not become the owner thereof till the happening of that event.
10. The decision on which reliance has been placed by Mr. Joshi, in our opinion, has no application to the facts of the present case and is distinguishable on facts. The facts in Provat Kumar Mitter v. Commissioner of Income-tax were that the assessee, who was the registered holder of 500 ordinary shares in a limited company, assigned to his wife, by a deed of settlement, the right, title and interest to all dividends and sums of money which might be declared or which may be due and payable in respect of those shares for the term of her natural life and covenanted to deliver and endorse over to her any dividend warrant or other document of tile to such dividends or sums of money and to instruct the company to pay such dividends and sums of money and to instruct the company to pay such dividends and sums of money to her. The assessee claimed deduction of the dividend amounts from his income. The assessee claimed deduction of the dividend amounts from his income. The department opposed. The assessee's contention was not accepted, the High Court holding that, on the facts and in the circumstances of the case, payment of dividend income by the assessee to his wife under the deed of assignment was merely a case of application of the assessee's income. This view of the High Court was affirmed by their Lordships of the Supreme Court on the construction of the deed. At page 629 it was observed :
'What the contract provided for was merely this : the beneficiary was given the right to receive from the assessee every dividend and other sums of money which may be declared or become due and payable in respect of the shares. If this is the true construction of the document, then it is clear to us that the answer given by the High Court to the question referred to it is correct.'
11. The facts of this case are entirely different. The assessee was not the full owner of the shares prior to the date of the agreement. It is only the agreement that provides for transfer of ownership to the assessee, and we are here concerned with one of the terms of that deed that confers ownership rights on the assessee, and the question that falls for consideration in this case is, at what point of time the assessee becomes the full owner of the entire dividend amount.
12. For the reasons stated above, in our opinion, the answer to the question should be in the negative. We answer accordingly. The department shall pay the assessee's costs of this reference.
13. Question answered in the negative.