1. This appeal by the department relates to the assessment year 1979-80, for which the relevant accounting year ended on 31-3-1979. The assessee is a private limited company carrying on whole-sale business in yarn. The assessee showed gross total income of Rs. 62,242 from the said business, in the relevant accounting year. Against that income, the assessee claimed deduction of Rs. 1,80,000 on the ground that the said amount represented a charge on the above income for payment to Sayajirao Gaikwad Charities under the gift deed dated 30-3-1973 executed by Shrimant Fatehsinghrao P. Gaikwad, ex-Ruler of princely State of Baroda. The assessee was asked by the ITO as to under what provision of the Income-tax Act, 1961, ('the Act'), the said deduction was being claimed. The assessee by letter dated 1-9-1980, stated that the deduction was being claimed under Section 28(i) of the Act.
According to the assessee, the said amount represented diversion of income by overriding title. The ITO examined the terms of the gift deed dated 30-3-1973, on which reliance had been placed and found that this was the case of application of income after it had accrued and not that of diversion of income by overriding title. He, accordingly, rejected the claim for deduction of the said amount. In the appeal filed by the assessee, the Commissioner (Appeals) examined the terms of the said gift deed and relying on the decision of the Ahmedabad Bench of the Tribunal in IT Appeal No. 1141 (Ahd.) of 1979 decided on 10-5-1982 held that there was diversion of income by overriding title and allowed the claim for deduction. The department has now come in appeal before us.
2. Before we discuss the contention of the parties, it is necessary to narrate the facts in brief. The donor Shri F.P. Gaekwad, who executed the gift deed dated 30-3-1973 was in possession of various immovable properties located at different places. He converted some of these immovable properties into stock-in-trade on 9-12-1972. He then became a partner in the partnership firm styled as Gaekwad Real Estate Traders and introduced as his capital contribution the said immovable properties which he had earlier converted into stock-in-trade. The value of the said property was credited into his capital account as capital contributed by him. On 30-3-1973 there was a credit balance of Rs. 1,25,00,000 in the said capital account. It is out of this credit balance that he transferred his right, title and interest in the sum of Rs. 30 lakhs to the assessee-company under the gift deed dated 30-3-1973. By Clause 1, he transferred, assigned, granted and conveyed by way of gift the said amount to the assessee-company on the terms and conditions contained in the gift deed. In Clause 2, it was mentioned that the gift was irrevocable. In Clause 3(i)(a) and 3(i)(b) the conditions have been mentioned in the following words: (a) For a period of five accounting years from 1-4-1973, an amount equal to the entire annual net income accruing or arising from or by virtue of the said properties shall be paid by the donee to Sir Sayajirao Gaekwad Charities subject, however, to a maximum of Rs. 2,10,000 (Rs. Two lakhs ten thousand only) per annum ; and (b) For a further period of fifty accounting years thereafter a sum of Rs. 1,80,000 (Rs. One lakh eighty thousand only) every year shall be paid to Sir Sayajirao Gaekwad Charities provided that if and when the net annual income accruing or arising from or by virtue of the said properties exceeds Rs. 1,80,000 (Rs. One lakh eighty thousand only) a further sum equal to such excess up to Rs. 30,000 (Rupees Thirty thousand only) shall also be paid by the donee to Sir Sayajirao Gaekwad Charities.
3. In Clause 3(iii)(a) it was mentioned that for the purpose of the said deed, the net income would mean and include all such income which might arise or accrue to the donee in respect of the said properties whether by way of dividend, interest, rent, profit or otherwise. In Clause 3(iii)(c) it was mentioned that any income which accrued or arose to the donee but was not received by the donee during the accounting year should not be deemed to have accrued or arisen but credit therefor should be taken in the accounting year in which the same was actually received. In Clause 4, which is material for our present purposes, it is mentioned as under: 4. The payment to be made by the donee to Sir Sayajirao Gaekwad Charities shall form a first charge and claim on the entire income accruing or arising to the donee from all the assets of the done.
4. It would be seen that under Clause 3(i)(a) the amount payable by the assessee-company to the said Sir Sayajirao Gaekwad Charities was an amount equal to the entire annual net income accruing or arising from or by virtue of the gifted amount subject to maximum of Rs. 2,10,000.
This clause applied to the assessment years 1974-75 to 1978-79. It was submitted before us that there was no income from the gifted amount during the first five years and, as such, no deduction had been claimed. The accounting year 1978-79, relevant for the assessment year 1979-80, with which we are concerned in this appeal, is the first year after expiry of the said five years and, as such, Clause 3(i)(b) applies to that year. Under the said clause, the assessee is required to pay Rs. 1,80,000 in each year for a period of fifty accounting years to the said Charities if the income from the said sum of Rs. 30 lakhs was less than Rs. 1,80,000. While if the said income from the said sum of Rs. 30 lakhs exceeded Rs. 1,80,000 a further sum equal to such excess up to Rs. 30,000 was payable to the said Charities. Thus, under this clause, even if there is no income from the said sum of Rs. 30,00,000 a minimum amount of Rs. 1,80,000 was payable to the Charities. The contention of the assessee was that since an amount of Rs. 1,80,000 was payable to the said Charities under Clause 3(i)(b) irrespective of the fact whether any income accrued to the assessee or not from the gifted amount of Rs. 30 lakhs and since under Clause 4 the said payment to the Charities was a first charge on the entire income accruing or arising to the assessee from all assets of the assessee (and not necessarily the gifted amount), the amount of Rs. 1,80,000 constituted diversion of income from yarn business before its accrual by overriding title and, as such, that amount was deductible from the profits of yarn business under Section 28(i). The said contention was not accepted by the ITO, who, as already stated, held that the said amount represented application of income after it accrued and, as such, deduction was not admissible. The Commissioner (Appeals), on the other hand, accepted the claim.
5. Shri Jetly, the learned counsel for the department, contended that there was no cash amount with the donor on the date of alleged gift and, as such, the gift was void. Besides, according to him, this was a case of gift with consideration, and as such, it was invalid. Further submission was that the donor was not entitled to create charge on personal properties of the assessee. It was also submitted that the assessee had no control over the sum of Rs. 30 lakhs and, as such, the gift were not valid. In the alternative, it was submitted that this was a case of application of income after its accrual and not diversion of income from overriding title and, as such, deduction was not admissible under Section 28(i) as claimed by the assessee. Reliance was placed on certain decisions. The contention on behalf of the assessee, on the other hand, was that the department was not entitled to challenge the validity of gift deed dated 30-3-1973. According to him, this was a gift with a condition and that it was not a gift for consideration.
Consequently, the gift could not be said to be void. It was further submitted that charge on personal assets for payment of Rs. 1,80,000 had been validly created. The assessee had withdrawn about Rs. 4 lakhs from the said firm out of Rs. 30 lakhs gifted to it in the first seven years and, as such, it could not be said that the assessee had no control over the said sum of Rs. 30 lakhs. According to the learned counsel for the assessee this was a case of diversion of income by overriding title and, as such, deduction was admissible under Section 28(i) 6. We have considered the materials on record and rival submissions. We have already quoted the relevant clauses of the gift deed. Clause 4 on which reliance is placed stated that the payment to be made by the donee (assessee) to Sir Sayajirao Gaekwad Charities shall form a first charge and claim on the entire income accruing or arising to the donee from all the assets of the donee. From the words of the said clause, it is clear that it is only after the income had accrued or arisen that the question of forming a first charge and claim for payment to be made to the parties would arise. It is out of the income accruing or arising to the assessee that the payment to the charities is required to be made. The payment is to be made after the income accrues or arises.
Consequently, it is a case of application of income after the income had accrued or arisen. It is not a case of diversion of income by overriding title before its accrual. Besides, in the present case, the alleged gift of Rs. 30 lakhs does not appear to be complete. Section 123 of the Transfer of Property Act, 1882 lays down that for the purpose of making a gift of movable property the transfer may be effected either by a registered instrument signed by or on behalf of the donor or by delivery. In the present case, obviously, there is no registered instrument. Instrument by which the alleged gift has been made is an unregistered document. Consequently, it was necessary that the property should be delivered by the donor to the donee. As already stated, the property is an amount of Rs. 30 lakhs out of Rs. 1,20,000 standing to the credit of the donor in the account books of the firm of which the donor is the partner. Admittedly, the said amount of Rs. 30 lakhs was not paid by the said firm to the assessee. The date of alleged gift is 30-3-1973. Yet only Rs. 25,000 had been received by the assessee up to 30-3-1977. Thereafter, small amounts were received in subsequent years and at the end of the accounting year with which we are concerned (31-3-1979), an amount of Rs. 27,16,100 was yet receivable from the said firm. This was the position six years after the alleged date of gift. The assessee was perfectly at liberty to treat the amount receivable from the firm as loan advanced to the firm.
In that event, the amount would be considered to be owned by the assessee and the firm would be treated as debtor. Consequently, the assessee would be entitled to receive interest from the firm on the amount lying with the firm payable to the assessee. It is not disputed before us that there is no agreement for payment of interest between the assessee and the said firm. In the circumstances, an inference would be that the said amount was not in fact kept with the firm in the form of advance. The said amount is still lying under the control of the said firm and the assessee for all practical purposes has no control over the said amount. Before us no plausible explanation was furnished as to why the assessee would have allowed such huge amount to remain with the firm without charging interest, if really the assessee had effective control over the said amount in the capacity of donee.
This circumstance strongly indicates that the assessee was not put in full control of the amount alleged to have been gifted. The amount still remained where it was and the assessee in the course of six years could draw only Rs. 2,83,900 out of Rs. 30 lakhs. As already stated one of necessary conditions for an effective gift was that the movable property of which the gift is made is delivered to the donee. In the present case, the subject-matter of gift is an amount and, as such, in normal course, the amount should be paid to the donee or donee should be put in effective control over the amount. This does not appear to have been done in the present case. Consequently, the gift cannot be said to be complete and, as such, the obligation to pay Rs. 1,80,000 out of the total income of the assessee could not be said to have legally arisen. If an action was to be filed by the concerned Charities for recovery of Rs. 1,80,000 the fact that the donor has not placed the assessee in full control of Rs. 30 lakhs would be an effective answer.
For these reasons also the amount of Rs. 1,80,000 cannot be claimed as deduction on the the facts of the present case. The learned counsel for the assessee made an alternate submission before us and his submission was that liability to pay Rs. 1,80,000 should be held to have arisen against the income derived from the gifted amount and, as such, that amount was liable to be deducted from the income derived from the gifted amount, if not from the income from yarn business. According to him, the gifted amount had been considered by the assessee as loan advanced to the firm from whom the amount is receivable, and as such, the deduction should be allowed. We are unable to accept this contention. It is true that in the balance sheet, the assessee-company had shown an amount of Rs. 27,16,100 in the column of loans and advances. This by itself would not give rise to claim for deduction of Rs. 1,80,000. As already stated, according to the assessee, there was no agreement about payment of interest between the assessee and the firm. Consequently, there was no income from the alleged gifted amount to the assessee. In the circumstances, the liability to pay Rs. 1,80,000 cannot arise, Besides, mere showing of the said amount in the column of loans and advances, would not mean that the said amount represented loans and advances to the firm Gaekwad Real Estate Traders particularly when an amount of Rs. 28,62,915 is shown as estimated liabilities for said Charities. This indicates that gifted amount was not business asset. From the circumstances it appears that the said firm is in control of the said amount and the major portion of said amount is yet to be released by the said firm in favour of the assessee under the gift deed. Thus, the gift is not complete and, as such, the liability for payment of Rs. 1,80,000 under the gift deed cannot by said to have arisen.
7. Besides, as far as the case of onerous gift is concerned, liability in the donee could be created in respect of an amount which the donor is under obligation to pay. For example, if the gift is of a mortgage property, there could be a valid condition that the donee would pay the amount due under the mortgage deed to the mortgagee. That would be an obligation connected with the gifted property. However, the stipulation that the liability of donee to pay certain amount would be a first charge on all the income of the donee, which is not derived from the gifted property, would not amount to diversion of income by overriding title, as far as the income from sources other than gifted property was concerned. For this reason also deduction of Rs. 1,80,000 could not be claimed under Section 28(i) from the profits derived from yarn business, which has nothing to do with the gifted property.
8. The learned counsel for the assessee relied on Section 127 of the Transfer of Property Act, which deals with onerous gift. What all that section lays down is that where a gift is in the form of a single transfer to the same person of several things of which one is, and the others are not, burdened by an obligation, the donee can take nothing by the gift unless he accepts it fully. This provision and the illustrations given below that provision indicate that it refers to an obligation which is attached to the gifted property. We have given the illustration of a mortgage property. The obligation to pay the mortgage amount is attached to the property and if such property is gifted the obligation to pay the amount must be discharged by the donee. However, where the alleged donated property is not placed in control of the donee and the donee does not derive any income from that property as in the present case, there could not be any obligation to pay the amount.
We may now refer to several decisions cited on behalf of the assessee.
The first decision was in the case of Raja Bejoy Singh Dudhuria v. CIT  1 ITR 135 (PC). In that case, the amounts were payable by Hindu son to his step-mother under the decree for maintenance charging ancestral estate. In that case the stepmother's maintenance was a legal liability of the assessee arising by reason of the fact that the assessee was in possession of his ancestral estate. The amount was payable out of that estate and further that the Court had declared that the maintenance was a charge on the property in the hands of the assessee. Thus, the facts are entirely different and the ratio of that decision is not applicable to our case. In the case of Madan Mohan Mullick & Bros., In re.  6 ITR 315 (Cal.), on which also reliance was placed, the amount involved was maintenance allowance paid to the settlor's widow under the terms of settlement deed and that amount was held to be deductible on the basis of the decision of the Privy Council referred to above. The principle laid down in this case does not apply to the present case.
9. In CIT v. Travaneore Sugars & Chemicals Ltd.  88 ITR 1 (SC), it was found as a fact that the obligation in question had been incurred as a contribution to the profit earning apparatus or incurred at the inception and, as such, it was deductible as an overriding charge on the profit making apparatus. In the present case, the liability has not been incurred in respect of yarn business and, as such, the said liability could not be said to be an overriding charge on the profits arising out of yarn business. The other decisions on which the assessee had placed reliance are CIT v. Tollygunge Club Ltd.  107 ITR 776 (SC), CIT v. Smt. Kamlabai Juthalal  108 ITR 755 (Bom.) and Surajratan Damani v. CIT  106 ITR 576 (Bom.). We have perused those decisions and we find that those decisions are not at all applicable to the facts of the present case. Consequently, it is not necessary to discuss them in detail in the present order.
10. In this connection, we find that the decision of the Supreme Court in K.A. Ramachar v. CIT  42 ITR 25, relied on by the department, is relevant. In that case, the decision of the Privy Council in Raja Bejoy Singh Dudhuria's case (supra) relied on by the assessee and discussed above was duly considered. In that case, the settlor had assigned unto the beneficiary all the rights of the settlor in respect of one-fourth of his share of profits in the firm 'payable to him' during the period of eight years and had declared that those rights shall be taken and enjoyed by the beneficiary in absolute and exclusive right. The beneficiary had been given authority to collect the amount representing one-fourth share of the settlor from the firm. The Supreme Court held that this was not a case of diversion of income by overriding title but it was a case of application of income after it had accrued. It was pointed that the amount was payable to the beneficiary from the profits payable to the partner. The Supreme Court held that a stranger even if he were an assignee did not have and could not have any direct claim to the profits and what all that had happened was that the assessee had allowed a payment to the beneficiaries to constitute a valid discharge in favour of the firm. However, what was paid was, in law, a portion of his profits or in other words his income. In the present case also, the amount to the Charities is payable from the income accruing or arising to the assessee under Clause 4. Thus, the payment out of the income which accrues to the assessee and, as such, it is a case of application of income.
11. Another decision which is relevant is New India Colour Co. v. CIT  80 ITR 206 (Delhi). In that case, the partner wrote a letter to the firm requesting it to debit certain sum in his account and credit the same in the accounts of his sons and daughters, stating that he had made gifts of those amounts to these persons. The letter was signed by the doners. The assessee-firm carried out the directions and made the entries. Thereafter, the firm credited to the accounts of the donees certain amounts by way of interest and claimed deduction. The High Court held that the gifts made by the partner were not valid because the partner was not free to claim or exercise any exclusive right over the property which he had brought in as trading assets of the partnership for making gifts of specified amounts. Further, the gifts could not be considered to have been completed by any symbolic delivery and the transaction was no better than that of mere book entries. There was, therefore, no liability on the part of the assessee-firm for payment of any interest to the donees and interest credited in the accounts of donees was not allowable as deduction. In the present case also the amount of Rs. 30 lakhs stands in the capital account of the donor in the firm and that amount represents value of immovable property introduced by the donor as stock-in-trade. The gift is of that amount of Rs. 30 lakhs. Only a symbolic delivery has been made. An amount of about Rs. 27 lakhs out of Rs. 30 lakhs, was still lying with the firm after nearly six years of the date of gift and the firm was not paying any interest to the assessee. Thus, the gift in question could not be said to have been completed. The ratio of this decision applies to the facts of this case.
12. Reliance was placed on behalf of the assessee on the decision of the Ahmedabad Bench of the Tribunal in IT Appeal No. 1141 (Ahd.) of 1979 decided on 10-5-1982. It is submitted that the facts in that appeal are similar and, as such, the ratio of the said decision which was in favour to the assessee should be followed by us. We have perused that order. In that case the validity of the gift had been challenged but the Tribunal did not express any opinion on that aspect. According to the Tribunal, there was diversion of income by overriding title by virtue of the clause which created first charge on the income of the assessee. In that case, the gift was of equity shares and obviously, delivery of equity shares had been given to the assessee. In the present case, we have held that delivery of the major portion of the amount had not been made even after completion of six years after the date of gift and, as such, the gift was not complete, with the result that the clause regarding payment of Rs. 1,80,000 could not be enforced. The Tribunal in that appeal strongly relied on the decisions of the Supreme Court in CIT v. Sitaldas Tirathdas  41 ITR 367 and that of the Gujarat High Court in CIT v. Bipinbhai Vadilal  113 ITR 664. We have considered those decisions as well as other decisions referred to in the said order of the Tribunal. We find that in the circumstances of the present case, there was no diversion of income by overriding title and that this was a case of application of income after it had accrued. We may at this stage note that the Tribunal in that case was conscious of the fact that the donor whose group had substantial interest in the assessee-company by particular device sought to divert income from taxation by artificial means. However, the Tribunal formed an opinion that in view of the decision of the Supreme Court in CIT v. A. Raman & Co.  67 ITR 11, the assessee was entitled to lawfully circumvent the provisions of taxation statutes and was entitled to resort to any device to divert the income before it accrued to him. The said observations of the Supreme Court have now been disapproved in subsequent decision of the Supreme Court in McDowell & Co. Ltd. v. CTO  22 Taxman 11. In the present case, we do not refer to that aspect of the matter. Suffice it to say that on the materials that were produced before us, we have come to the conclusion that there was no diversion of income by overriding title to the extent of Rs. 1,80,000 in the present case. We may also mention that in the subsequent year, i.e., 1980-81, the Commissioner (Appeals) has come to the same conclusion to which we have arrived. We set aside the order of the Commissioner (Appeals) allowing deduction of Rs. 1,80,000 in computation of profits and gains of the business of the assessee and restore the order of the ITO on this point.