1. The question of law referred for the opinion of this court is :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,400 formed part of the assessee's income ?'
2. The assessee in this case is a firm of partners. The partners in question are the partners of two different firms. One of the partnerships consisted of five partners, namely, the existing four partners and their late father, B. Munivenkatappa. The other partnership consisted of the afore-mentioned B. Munivenkatappa and his four sons. In this case we are concerned with the former partnership. The said Munivenkatappa died on October 17, 1960. Prior to that, by means of his will date May 14, 1958, he bequeathed his share in the second partnership referred to earlier to his four sons who were the remaining in partners in that firm, subject to the condition that they should pay to his daughter, Sharadamma, every month a sum of Rs. 200 during her lifetime. After the death of Munivenkatappa, his four sons, who are partners of the firm, entered into a fresh deed of partnership on October 18, 1960. Clause 5 of the partnership deed provides :
'According to the directions in the registered will of our deceased father, Rao Sahib B. Munivenkatappa, dated 14th May, 1958, the partners shall pay to their sister, Shrimati B. M. Sharadamma, for the lifetime only a sum of Rs. 200 monthly. This amount shall be a charge on the assets of the partnership.'
3. It may be noted that the bequest under the will referred to earlier was subject to the payment to be made to Sharadamma. The same was evidently accepted subject to the condition mention above. Therefore, the asset bequeathed should be charged with the liability of paying to Sharadamma of sum of Rs. 200 per month. In these circumstances, we have to see whether the assessable profits of the firm have to be computed after deducting the amount to be paid to Sharadamma.
4. The true principle which should guide us in deciding matters like the one before us has been laid down by the Supreme Court in Commissioner of Income-tax v. Sitaldas Tirathdas. Therein, it is laid down that the true test for the application of the rule of diversion of income by an overriding charge is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is 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 preacher the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can rely 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.
5. If we apply the ratio of the above decision to the case before us, it is clear that the payment made to Sharadamma was not in the discharge of any personal obligations of the partners concerned. It was something that had to be paid out of the assets of the partnership. Hence, it was a charge on the partnership income. Therefore, it assessable income had to be computed after deducting the amounts payable to Sharadamma. In other words, even before the income of the partnership reached the hands of the assessees, the payment to Sharadamma had to be deducted. It is only the balance that could be considered as the income of the partnership. This is not a case where the payment to Sharadamma was to be made from out of the income of the assessees.
6. The facts of the present case fall within the rule laid down by the Judicial Committee of the Privy Council in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax.
7. Our above conclusion also receives support from the decision of the Bombay High Court in Commissioner of Income-tax v. D. R. Naik.
8. For the reasons mentioned above, our answer to the question referred to us is that, on the facts and in the circumstances of the case, the sum of Rs. 2,400 did not form part of the assessee's income.
9. The assessee is entitled to its cost of these proceedings. The advocate's fee, Rs. 250.