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M.L. Shukla and Co. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Allahabad
Decided On
Judge
Reported in(1983)3ITD502(All.)
AppellantM.L. Shukla and Co.
Respondentincome-tax Officer
Excerpt:
1. the above appeal has been referred to this special bench by the president of the tribunal under section 255(3) of the income-tax act, 1961 ('the act').2. the assessee is a firm. it was constituted under an instrument of partnership dated 27-3-1973 having retrospective effect from 15-2-1973.it consists of the following four partners : shri madan lal shukla and shri suresh chandra shukla were partners in their representative capacity on behalf of their respective hufs.clauses 11 and 12 of the above deed are relevant and are reproduced below : 11. that the parties to this deed have also agreed to create a paramount charge amounting to 6.25 per cent on the profit accruing in the business in favour of lok sewa mission, a charitable institution of kanpur. hence onwards the said 6.25 per.....
Judgment:
1. The above appeal has been referred to this Special Bench by the President of the Tribunal under Section 255(3) of the Income-tax Act, 1961 ('the Act').

2. The assessee is a firm. It was constituted under an instrument of partnership dated 27-3-1973 having retrospective effect from 15-2-1973.

It consists of the following four partners : Shri Madan Lal Shukla and Shri Suresh Chandra Shukla were partners in their representative capacity on behalf of their respective HUFs.

Clauses 11 and 12 of the above deed are relevant and are reproduced below : 11. That the parties to this deed have also agreed to create a paramount charge amounting to 6.25 per cent on the profit accruing in the business in favour of Lok Sewa Mission, a charitable institution of Kanpur. Hence onwards the said 6.25 per cent shall be received by the firm and the partners as trustees for the benefit of Lok Sewa Mission. Further that the Lok Sewa Mission shall be entitled to get the said profits amounting to 6.25 per cent by virtue of this paramount charge created in its favour and until the date of actual payment the same shall be held by firm and partners in trust for the Lok Sewa Mission.

12. That at the end of every year a profit and loss account shall be prepared and the net profit ascertained after the deduction of the said charge created in Clause 11 hereof, or the net loss, as the case may be, shall be distributed amongst the partners as follows : Name of the partner ShareShri Madan Lal Shukla the first part 30 paiseSmt. Janak Dulari Shukla the second part 25 paiseShri Suresh Chandra Shukla the third part 25 paiseSmt. Manju Shukla the fourth part 20 paise 3. Lok Sewa Mission is a trust, which was registered under the Societies Registration Act, 1860 on 13-6-1958. It was also granted registration under Section 12A of the Act by the Commissioner, Agra on 12-4-1977. It had seven trustees. Shri Madan Lal Shukla was its Managing Trustee. He was given the power of overall supervision and management of the trust. Besides, his two sons Shri Suresh Chandra Shukla and Shri Vinod Kumar Shukla were also trustees. It will, thus, be seen that the trustees of the above trust are also directly or indirectly interested in the assessee-firm.

4. In pursuance of Clauses 11 and 12 of the partnership deed quoted above, the assessee debited a sum of Rs. 11,844 as donation to Lok Sewa Mission in its profit and loss account for the assessment year 1974-75.

This amount was claimed as deductible in the computation of the total income of the assessee in that year. It was claimed before the ITO that the above amount did not represent expenditure on charity, but it was a charge created by the partners on the profits of the firm for being paid to Lok Sewa Mission. The ITO held that this was a self-created charge devoid of any sanctity. He further held that this was only an attempt to divert the profits of the firm to Lok Sewa Mission. He accordingly rejected the assessee's claim.

5. The assessee appealed to the AAC. It was claimed before him that there was an overriding title in favour of Lok Sewa Mission, a charitable institution and, therefore, the sum of Rs. 11,844 did not form part of the income of the assessee. The AAC tracing the history of the case pointed out that the management and control of Lok Sewa Mission Charitable Trust was vested in the hands of the partners of the assessee-firm, who were in full and complete charge of the trust and were also responsible for its supervision and management. He then held that the profits had first accrued to the business of the firm and only thereafter they were to be received by the trust. According to him, therefore, it was a case of application of income. He, thus, upheld the disallowance made by the ITO. His view was upheld by the Tribunal in IT Appeal No. 1246 (All.) of 1978-79. The Tribunal, in this connection, agreed with the view taken by it in the case of Mahendra Shukla Packaging Industries [IT Appeal No. 1848 (All.) of 1976-77 dated 15-1-1978], where also a similar claim was made. The Tribunal in that case had held that since Lok Sewa Mission was not a party to the agreement amongst the partners for payment of 6.25 per cent of the profits, it had no actionable claim, which could be enforced if the firm or the partners refused to make any such payment. This is what the Tribunal observed in this order : We have considered the rival submissions. It is necessary to point out that the obligation for payment of 6.25 per cent of the profits to Lok Sewa Mission was the agreement amongst the partners in the instrument of partnership to which the Lok Sewa Mission was not a party. Lok Sewa Mission, therefore, had no actionable claim which could be enforced if the firm or the partners refused to pay the amount. We also have the authority of the Hon'ble Supreme Court in the case of K.A. Ranchor v. CIT (supra) wherein their Lordships laid down that under the law of partnership it was the partner and the partner alone who was entitled to the profits and a stranger even if he were an assignee did not have and could not have any direct claim to the profits. Viewed in this context, it is obvious that what the instrument of partnership created was not an overriding charge but an obligation to apply 6.25 per cent of the profits for payment to Lok Sewa Mission. Section 60 of the Income-tax Act, 1961 has also laid down that if any income arises by virtue of a transfer where there is no transfer of the assets from which the income arises the income shall be chargeable to tax, as the income of the transferor and shall be included in his total income. Viewed in this context, what has been transferred in the instant case is a share of the income and not a part of the partnership interest, i.e., the source of the income. The revenue authorities, therefore, in our view were justified in holding that the assessee was not entitled to the claim of deduction of 6.25 per cent of the profits in computation of the total income of the assessee-firm. The claim, therefore, in our view was rightly rejected by the revenue authorities.

6. A similar claim for deduction of a sum of Rs. 12,822 was made by the assessee in the assessment year 1975-76. It was again disallowed by the ITO. The disallowance was confirmed by the Commissioner (Appeals) vide his order dated 30-5-1979 mainly following the decision of the AAC for the assessment year 1974-75.

7. In the year under appeal, the assessee has again debited a sum of Rs. 11,540 being 6.25 per cent of the total profits of the assessee-firm as donation to Lok Sewa Mission. It was again claimed as an allowable deduction before the ITO. The ITO, following his findings in the assessment year 1974-75, disallowed the claim. The disallowance was confirmed by the Commissioner (Appeals) following his predecessor's decision in the assessment year 1975-76.

8. The assessee has again appealed to the Tribunal. The question involved in the appeal was "whether there was overriding title and diversion at source in favour of Lok Sewa Mission, a charitable institution, Kanpur to the extent of 6.25 per cent on the profit accruing in the business carried on by the assessee as a partnership concern." The claim of the assessee was that there was overriding title and diversion of income at source. It was brought to the notice of the Bench (originally constituted) that the earlier Bench dealing with the appeal for the assessment year 1974-75 had held that it was only an application of income. The Bench was not able to readily agree with the view taken by the earlier Bench. It was also brought to its notice that the earlier Bench had no occasion to consider a later decision of the Supreme Court in the case of CIT v. Tollygunge Club Ltd. [1977] 107 ITR 776. The Bench of the Tribunal hearing the matter, therefore, felt that it required to be considered by a Special Bench. It was, in these circumstances, that the present Bench was constituted by the President.

9. The learned counsel for the assessee submitted before us that vide Clauses 11 and 12 of the partnership deed dated 27-3-1973 quoted above, a charge had been created in the course of carrying on of the assessee-firm's business and the partners had made themselves as trustees to the extent of 6.25 per cent of the total profit of the firm. According to him, the net profit of the firm could be ascertained only after deduction of the above charge, which was an integral part of the carrying on of the asses-see's business. He formulated some legal propositions, which, according to him, required consideration in deciding whether 6.25 per cent of the total profit of the firm could or could not be treated as the income of the assessee. The first legal proposition formulated by him was that the creation of charge diverted income at its source in favour of the beneficiary of the charge. In this connection, he referred to the following authorities : CIT v.Sitaidas Tirathdas [1961] 41 ITR 367 (SC), CIT v. C.N. Patuck [1969] 71 ITR 713 (Bom.), CIT v. Nariman B. Bharucha & Sons [1981] 130 ITR 863 (Bom.), CIT v. Mrs. Jayalakshmi Duraiswamy [1964] 53 ITR 625 (Mad.) and CIT v. Sita Ram [1973] OPTC 392.

10. We have carefully examined the above authorities. The Supreme Court in the case of Sitaldas (supra) has, after considering the various authorities, held as under : ...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 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.... (pp.

374-75) In the above case, the assessee had sought to deduct amounts paid by him as maintenance to his wife and children under a decree of Court passed by consent in a suit. No charge on any property of the assessee was created. It was held that this was a case in which the wife and children of the assessee, who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The case was, thus, 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. The Court, of course, observed that 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 was not the case. The Court also observed that the present case fell within the rule stated by the Judicial Committee in P.C.Mullick v. CIT [1938] 6 ITR 206.

11. The submission of the learned departmental representative as also of the connsel for the assessee was that the true test for deciding a similar issue had been laid down by the Supreme Court in the above case of Sitaldas (supra). If we examine the present case in the light of the principle laid down by the Supreme Court, then our conclusion obviously would be against the assessee. It cannot be said that 6.25 per cent profit which the assessee sought to deduct, in truth, never reached the assessee as its income. At the most, it could be said that the assessee was obliged to apply a part of its profit out of its income by way of payment as charity to Lok Sewa Mission. It cannot be said that that amount was not a part of its income. There was no such obligation on the assessee to hold that the said profit did not reach it or that it was diverted before it reached the assessee.

12. It is also no doubt correct that if there is an overriding charge either upon the property or upon its income, then the result might be different as held by the Supreme Court in Sitaldas' case (supra).

However, in our opinion there is no such overriding charge either upon the property of the firm or upon its income. Mere statement in Clauses 11 and 12, in our opinion, does not result in the creation of any such charge. The nature of such overriding charge will be clear from subsequent discussion of decided cases. In the present case, the partners of the assessee-firm themselves have described it as a charge on the income of the firm while, in fact, it does not amount to any such overriding charge.

13. The decision of the Bombay High Court in C.N. Patuck's case (supra) is clearly distinguishable and cannot help the assessee. In this case as a result of a compromise in the suit for dissolution of marriage between the assessee and his wife, each of his two unmarried daughters by that marriage had to be paid, inter alia, a monthly allowance of Rs. 250 till the time of her marriage. In order to secure regular payment of the above sums, an agreement was entered into between the assessee, two daughters and the partners of a firm in which he was a partner, under which the firm would pay to each of the daughters the monthly amount payable to them by the assessee out of the remuneration and share of profits due to him. One of the daughters having got married, the assessee claimed that the amount paid to his other daughter under the terms of the decree and the agreement, did not constitute his income at all and hence was not liable to tax on the ground that it was diverted at source by means of an overriding title created in favour of his daughter. It was held that there was an overriding right or title in favour of the daughters and hence the remuneration and profits, to the extent of that right or title ceased to be the remuneration and/or profits of the assessee and it could not be taxed in his hands. The Court while deciding the issue, followed the principle laid down by the Supreme Court in Sitaldas' case (supra). The distinguishing feature of this case has been pointed out in the following words : ...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 cease 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 circumstance which distinguishes this case from any other case to which we have referred. It is a circumstance 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. (pp. 728-29) In the present case, as pointed out above, there was no such overriding charge or title in favour of Lok Sewa Mission.

14. Similary the case of Nariman (supra) is also distinguishable on its own facts. In this case also Mrs. Aloo Nariman Bharucha had an overriding title to 25 per cent of the profits of the partnership for which there was consideration as the amounts standing to the credit of Mr. Nariman Bharucha in the capital and current account of the business of the partnership were divided between his two sons in equal shares and were to belong to them absolutely. There are no such facts in the present case before us. It was also found by the Court that this case was expressly covered by the decision in Patuck's case (supra).

15. The case of Mrs. Jayalakshmi (supra) is also similarly distinguishable on its own facts. In this case a person, who had a wife and three daughters died leaving a will by which he bequeathed to his wife the income from the corpus of his estate with power to utilise the income at her absolute discretion 'subject to the provisions for maintenance and education of his daughters. 'The will' contained certain provisions relating to the maintenance and education of the daughters. The wife claimed that the amounts spent by her out of the income of the estate for the maintenance and education of the daughters must not be included in her assessable income. It was held that upon the true construction of the 'will' the income of the estate was impressed with a trust for maintenance and education of the daughters and the decision of the Tribunal excluding the amounts spent by the assessee under the 'will' for such purpose from the total assessable income of the assessee, was correct. The principle laid down by the Supreme Court in Sitaldas case (supra) was again followed in this case also.

16. The last case of Sita Ram (supra) also stands distinguished. In fact, in this case there were a number of facts including a partnership deed by which the deity was made a partner in the firm. On a perusal of the facts of the case, it was held that the income of the business to the extent of one-half never belonged to the assessee and it went to the deity through an overriding title.

17. We are, therefore, of the opinion that the guiding principle for deciding the case continues to be the test laid down by the Supreme Court in the case of Sitaldas (supra). We have already held by applying this test that the profit to the extent of 6.25 per cent of the firm was not diverted by any overriding charge or title and that it continued to belong to the firm till it was paid to Lok Sewa Mission.

18. The next proposition of law formulated by the learned counsel for the assessee was that the assessee-firm was a separate entity and that it was receiving its income only subject to the charge created by the partners to the extent of 6.25 per cent of its profits. According to him, therefore, the real income of the assessee-firm was less by that amount. In this connection, he referred to the decision of the Gujarat High Court in Udayan Chinubhai v. CIT [1978] 111 ITR 584.

19. We find no substance in the above argument of the learned counsel for the assessee. In the case of Udayan Chinubhai (supra), it was found that by virtue of the position under the Hindu law, the Trusts Act, the terms of the consent decree and the arbitrators' award, an overriding title had been created in favour of the creditors to have their liabilities paid from the assets, which came into the hands of the assessee and thus, the interest paid to the creditors did not form part of the real income of the assessee. It was also held that income taxable under the Income-tax Act is the real income of the assessee and in determining the real income, the question was not of any physical receipt of income, but of the concept of the receipt in law. We have already seen above that there was no overriding title in favour of Lok Sewa Mission by which it could be held that a part of the profits of the assessee-firm did not form part of its income. The doctrine of real income, therefore, does not arise in the present case and, in any case, the entire profit earned by the assessee-firm was its real income liable to tax in its hands.

20. Another legal proposition formulated by the learned counsel for the assessee was that one should go by the concept of legal receipt and not by the concept of mere physical receipt. He submitted that the authorities below had gone by the latter concept, which was not correct. To support his submission, he relied on the decision of the Supreme Court in V. Venugopala Varma Rajah v. CAIT [1972] 84 ITR 466.

21. We do not think how the above principle, which is undisputed, can help the assessee in the present case. The Supreme Court at page 475 of the report, observed that when it spoke of the income reaching the hands of the assessee, it did not refer to any physical act and that it was dealing with a legal concept of receipt in law. As stated above, there cannot be any quarrel over this principle. For the reasons, already stated above, we are of the view that the assessee was in legal receipt of its entire profit including 6.25 per cent thereof, which had only been subsequently donated by it to Lok Sewa Mission after it had reached its hands.

22. The counsel for the assessee also argued that a beneficiary had the right to sue for the benefit accruing to it. As an instance, he referred to the decision of the Bombay High Court in CIT v. Crawford Bayley & Co. [1977] 106 ITR 884. This decision is again distinguishable on its own facts. In this case, two of the partners of the assessee-firm had died. A supplementary deed was executed subsequently.

Under the provisions of the partnership deeds, the widows of the deceased partners were made some payments monthly. They were claimed as deductions. The ITO rejected the claim holding that the widows were not parties to the agreement, that they had no rights against the firm, that the payments to them were purely voluntary, that it was open to the partners to modify or stop making payments without the consent of the widows and that as the payments had to be made irrespective of profits or losses resulting to the firm, they had no bearing on the income of the firm and were not a charge on the firm. The Tribunal held that there was an obligation in the nature of a trust on the surviving partners to make payments and accepted the claim of the assessee. The High Court following the decision of the Supreme Court in Sitaldas' case (supra) held that the payments to the widows were not dependent upon the profits or losses of the firm, that it was an absolute obligation and, even though there might be no profits made by the assessee in a particular year, the obligation to pay to the widow under the partnership deeds was absolute. According to the Court, when the obligation to pay such amount to the widow of a deceased partner was absolute, there could be no question of application of income after it had accrued and that the provision was an obligation in the nature of a trust. It was in this context held that even though the cestui que trust may not be a party to the contract, he can enforce his right under the contract by adopting appropriate legal proceedings. The Court held that the payments had to be made by reason of an overriding title.

This case is clearly distinguishable from the facts of the assessee's case as the payments to the widow "were made by virtue of the partnership agreements and the surviving partners were under an obligation to make such payments. There is no such obligation on the assessee-firm to make any such payment to Lok Sewa Mission. It has created a self-obligation, which has no binding force.

23. The counsel for the assessee also submitted that the overriding charges could also be self-created and that they were binding. To support this submission, he referred to the following cases : Surajratan Damani v. CIT [1977] 106 ITR 576 (Bom), CIT v. Kanchanalal L. Talsania and CIT. v. Nandiniben Narottamdas.

24. We have gone through the above decisions. In the case of Surajratan Damani (supra), he had made a gift of 7 per cent of the managing agency commission from a company. It was held that on a plain reading of the operative part of the gift deed, its effect was to transfer the source of income to the daughters before the income had accrued or had arisen to the assessee in a particular year. It was held that as the source of income was really transferred to the daughters before the income had accrued in any of the accounting year, such income could not be regarded as the income of the assessee for any of the relevant assessment years. Similar findings were given in the other two cases.

In the case of Kanchanlal L. Talsania (supra), the assessee, after retirement from the firm had settled on his two sons, his right to receive the profit falling during the period he was a partner. It was held that the assessee's right to a share in the fees to be recovered from the clients by the firm was only an actionable claim assignable by him as any other property. The right to profit arose only when the accounts were settled, i.e., on 31-12-1970. At that time, the assessee had already assigned his said right or source of income to his sons irrevocably and his sons alone were thereafter entitled to receive the said amount and not the assessee. Similarly, in the case of Nandiniben Narottamdas (supra), the assessee had made a gift of her respective shares in the two firms in favour of the beneficiaries of the trust, which meant a gift of the share in profits and losses of the firms. It was held that the assessee had divested herself of the income producing apparatus or asset and that by the overriding title created in favour of the beneficiaries of the trust, the share income of the assessee stood diverted even before it reached her. As pointed out above both these cases are distinguishable. There is no such gift or assignment by the assessee-firm in favour of any person. What the assessee did was only to divert a part of its profit after it had reached it for which there was no overriding title or obligation. In the case before us, the source of profit was business and no part of business was either assigned or gifted away to anybody.

25. Another proposition put forth by the learned counsel for the assessee was that a charge could be created either on a business or only on its profits. We, however, do not see anything in this proposition to take a contrary view than what we have already proposed above.

26. We will now refer to another decision of the Supreme Court in K.A.Ramachar v. CIT [1961] 42 ITR 25. In this case, the assessee, who was a partner in a firm, had executed three irrevocable deeds of settlement in favour of his three relatives, assigning to each of them one-fourth of his share of the profits in the firm (but not losses) payable to him during a period of eight years from the date of the settlement to be enjoyed by them absolutely and exclusively. The relatives were also entitled directly to receive and collect from the firm their share under the settlements. In the account books of the firm, the profits due to the assessee were credited to his account and one-fourth thereof was transferred to the accounts of each of the three beneficiaries. The assessee claimed that those amounts could not be included in his total income for purposes of assessment to income-tax. It was held on the facts that the tenor of the deeds of settlement showed that the profits were first to accrue to the assessee and were then applied for payment to the beneficiaries. It was also held that under the law of partnership, it was the partner and the partner alone, who was entitled to the profits. A stranger, even if he were an assignee did not have and could not have any direct claim to the profits. This principle, in our opinion also applies to the present case. Lok Sewa Mission being a stranger did not have and could not have any claim to any part of the profits of the assessee-firm as under the law of partnership it were the partners alone, who were entitled to the profits.

27. On behalf of the assessee, it was contended that the above case had been distinguished by the Supreme Court itself in Murlidhar Himatsingka v. CIT [1966] 62 ITR 323. What is held in this case is that in the case of a sub-partnership, the sub-partnership creates a superior title and diverts the income from the main firm 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 of the sub-partnership. However, the distinguishing feature of this case was that both the profits and losses of a partner in the registered firm were to belong to the sub-partnership as an asset. In the present case, on the other hand, Lok Sewa Mission is entitled to receive only a part of the profit and is not to bear a part of the loss of the assessee-firm. This case, therefore, falls within the ratio laid down by the Supreme Court in the case of K.A. Ramachar (supra).

28. The learned departmental representative, on the other hand, submitted that in the profits and loss account of the assessee, a deduction of Rs. 11,540 was claimed like any other expenditure and, therefore, it had to be treated as part of the assessee's income accruing to it from its business. The question whether the expenditure claimed was allowable or not was entirely a different matter.

29. During the course of hearing, reference was also made to the two decisions of the Supreme Court in the cases of Tollygunge Club (supra) and CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60. As rightly pointed out by the learned departmental representative these cases are clearly distinguishable on the basis of their own facts. In the case of Tollygunge (supra), resolutions were passed for levying a surcharge over and above the admission fees, the proceeds of which were to go to local charities as also to Red Cross fund. Every entrant was issued two tickets, one an admission ticket for admission to the enclosure of the club and the other, a separate ticket in respect of the surcharge for local charities. It was held that the surcharge was not a part of the price for admission but was a payment made for the specific purpose of being applied to local charities. It was further held that for creation of a trust, the only requisites, which must be satisfied were that there should be "purposes independent of the donee to which the subject-matter of the gift is required to be applied and an obligation on the donee to satisfy those purposes". This decision was followed by the Court in Bijli Cotton Mills (supra). In this case, a charge customarily called 'Dharmada' was paid by the customers for purposes of spending on charity. It was held that when the customers or brokers paid the amounts ear marked for 'Dharmada', those payments were validly earmarked for charity ; in other words, right from the inception these amounts are received and held by the assessee under an obligation to spend them for charitable purposes only, with the result that those amounts were not its trading receipts. In the present case, the assessee earned its income in the normal course, without any obligation to spend it on charity. There was, therefore, no trust in favour of Lok Sewa Mission, which by any overriding charge could not form part of the income of the assessee. We may observe that the earlier Bench had required the constitution of a Special Bench mainly with a view to consider the principle laid down by the Supreme Court in the case of Tollygunge (supra).

30. We also agree with the submission of the learned departmental representative that the assessee-firm did not earn any profit subject to any charge. The charge, if at all, there could be one, was after the profits had been earned by it and had formed part of its total income.

We, of course, do not agree with him that no legal sanctity could be attached to the deed of partnership dated 27-3-1973 as the partners were free to amend it at their sweet will. That might be so, till the partnership deed existed, it had to be acted upon by the partners.

However, this, by itself, does not help the assessee as, in our opinion, it does not create any overriding charge or title in favour of Lok Sewa Mission. Similarly, we also do not agree with his view that there was no evidence that Lok Sewa Mission had accepted the offer or it was a party to any arrangement. That fact is not fatal to the case of the assessee. However, that by itself, also does not help the latter.

31. In this connection, we will also like to refer to a recent decision of the Allahabad High Court in Addl. CIT v. Rani Pritam Kunwar [1980] 125 ITR 102. It was held in this case that in order that a payment should be treated as a diversion at source, it is necessary that it should have been made under some legal obligation. Such legal obligation must attach to the source of income. In other words, for such a payment there should be an overriding charge, a charge which is created under any law for the time being in force or by virtue of Court's decree or by a voluntary settlement or the obligation must be such that though not made a specific charge on the property, it could be enforced in a court of law. None of these tests are satisfied in the present case. There was no diversion at source, as was found by the Allahabad High Court in the above case. In the present case, on the other hand, the partners voluntarily created an obligation for making a payment to Lok Sewa Mission. There was, therefore, no overriding charge by virtue of which a part of the assessee's income could be treated as belonging to Lok Sewa Mission and should be allowed as a deduction in computing its own income.

32. For the reasons given above, we hold that the assessee is liable to tax on its entire income and 6.25 per cent of its profit cannot be allowed as a deduction on the ground that it does not form part of its income by virtue of an overriding charge or title. The assessee, therefore, fails in this contention.

33. We, however, agree with the alternate contention of the learned counsel for the assessee that, in any case, it should be allowed the benefit of Section 80G of the Act. In our opinion, this alternate contention of the assessee has to be admitted even at our stage in the facts and circumstance of the case. Since, however, the ITO had no occasion to examine the facts of the case in the light of this contention, we restore this question for his consideration. We direct him to go through the facts of the case, allow the assessee an opportunity of being heard and then decide whether the assessee is entitled to any relief under Section 80G for its payment to Lok Sewa Mission.


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