S.K. Kapur, J.
(1) This is one consolidated reference made to us by the Income-tax Appell Rate Tribunal in the case of L. Hans Raj Gupta and of M/s. H. G. Gupta and Sons arising out of the order of the Tribunal dated 19th November, 1962, in Income-Tax Appeal Nos. 6841 and 7177 of 1961-62. The relevant year of assessment is 1956-57, the accounting year in btoh the cases being ending 31st March, 1956. The questions referred to us in the case of Hans Raj Gupta are-
1.'Whether in view of the clause 12 of the partnership deed dated 30th March, 1954, it could be said that there was an overriding title in favor of Messrs H. G. Gupta and Sons and, thereforee, the sum of Rs. 55,664.00) should have been excluded from Shri Hansraj Gupta's ttoal income ?'
2.'Whether, in any case, the aforesaid sum of Rs. 55,664.00 could be claimed as permissible deduction under section 10 of the Indian Income-tax Act, 1922 ?' and in that of Messrs H. G. Gupta and Sons are-
3.'Whether the amount of Rs. 55,664.00 has been properly included in the assessment of the firm ?'
4.'Whether in view of the observations of the Appellate Assistant Commissioner, the order of the Tribunal amounts to an enhancement of the income of the firm ?'
(2) The facts giving rise to the reference may now be stated. The t assesseds are-firstly, Hans Raj Gupta, and secondly, the registered firm Messrs H. G. Gupta and Sons (hereafter referred to as the assessed firm). The assessed firm was a registered firm Constituted under an instrument of partnership dated 30th March, 1954. The said firm had three partners, namely, Hans Raj Gupta, Des Raj Gupta and Shiv Raj Gupta, their shares in the profits being 2/3rd, l/6th and l/6th respectively. On August 4, 1965, Hans Raj Gupta entered into antoher partnership under the name and style of Messrs D. S. Bawa and Company with four toher persons. The said firm was brought into being for executing certain contracts at Indian Industries Fair held in New Delhi in the year 1955. Hans Raj Gupta's share in the said firm was 5/6 in the rupee. In the relevant assessment year the profit of Hans Raj Gupta in the firm Messrs D. S. Bawa and Company was determined by the Income-tax Officer at Rs. 55,664.00. Clause 12. of the instrument of partnership constituting the assessed firm provides-
'THATnone of the parties shall without the written consent of all the toher parties start any new business either individually or in partnership, and in case of infringement of this condition, the profits earned in such business shall belong to the firm and the losses, if any, shall be borne by such party'
(3) In view of the said clause 12 the entire share of income received by Hans Raj Gupta frofia Messrs D. S. Bawa and Company was credited to the profit and loss account of the assessed firm. Hans Raj Gupta was also assessed in his individual capacity and in the return for the relevant assessment year he made a ntoe to the effect that the share income (Rs. 55,664.00 from the firm Messrs. D. S. Bawa and Company belonged to the assessed firm. If this contention had been accepted by the Revenue the result would have been that out of the amount of Rs. 55,664.00 only a sum of Rs. 37,110.00 being 2/3rd share of Hans Raj Gupta in the assessed firm, would have been included in the hands of Hans Raj Gupta. The Income-tax Officer, however, decided that the entire amount of Rs. 55,664.00 was taxable in the hands of Hans Raj Gupta. He, thereforee, added Rs. 18,554.00 as the income of Hans Raj Gupta. So far as the assessed firm is concerned, its assessment was completed before the assessment of Hans Raj Gupta and the entire sum of Rs. 55,664.00 was treated as the income of the assessed firm. The assessed firm went up in appeal before the Appellate Assistant Commissioner and it was inter alias contended that the entire amount of Rs. 55,664.00 having already been assessed in the hands of Hans Raj Gupta as individual the same should be excluded from the assessment of the assessed firm. Hans Raj Gupta also preferred an appeal before the Appellate Assistant Commissioner and contended before him that the entire amount of Rs. 55,664.00 should nto have been included in his assessment. The Appellate Assistant Commissioner held that there was no oyer-riding title in favor of the assessed firm over the sum of Rs. 55,664.00 and the said amount was rightly taxed by the Income-tax Officer as the income of Hans Raj Gupta. In the appeal of the assessed firm, however, the Appellate Assistant Commissioner made a reservation that-
'IF,however, this income is ultimately held by the Appellate Authorities to belong to L. Hans Raj Gupta then the Income-tax Officer should give the consequential relief to the assessed firm by excluding the income from the ttoal income of the firm.'
(4) Against the orders of the Appellate Assistant Commissioner btoh Hans Raj Gupta and the assessed firm filed appeals before the Tribunal. It was contended before the Tribunal on behalf of Hans Raj Gupta that in view of the over-riding title created by clause 12 of the instrument of partnership, the income of 55, 664.00 was assessable in the hands of the assessed firm and nto of Hans Raj Gupta.
(5) On behalf of the assessed firm it was inter alias argued that in case it be held that the amount represented the income of Hans Raj Gupta consequential relief may be granted by excluding Rs. 55,664.00 included in the assessment of the assessed firm since the same amount had been assessed twice. In the case of Hans Raj Gupta the Tribunal decided that it was case of application of income by Hans Raj Gupta and there was no over-riding title making it the income of the assessed firm. Regarding the appeal of the assessed firm, the Tribunal held that by Hans Raj Gupta having applied his income and made it over to the assessed firm amount became the income of the assessed firm also.
(6) The point for determination may be put thus; was the sum of Rs. 55,554.00 the income of Hans Raj Gupta and payment thereof to the assessed firm an application of that income or was it an allocation of the sum of Gupta's revenue before it became the income in his hands. The analysis of clause 12 of the instrument of partnership show that if a partner starts any new business without the written consent of all toher partners, the profits earned in such business shall belong to the firm. What we have been called upon to decide is : Does this create an over-riding title in favor of the assessed firm The first case on the subject is Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, Bengal. In that case Raja Bejoy Singh Dhudhuria succeeded to certain ancestral estate on the death of his father. His stepmtoher filed a suit for maintenance and the assessed submitted to a consent decree under which he was obliged to pay every month a fixed sum to the step-mtoher by way of maintenance. The said maintenance was to be a charge on the estate in the hand of the assessed. It was held by the Judicial Committee that the amount of maintenance was the allocation of a sum out of the assessed's revenue before it became income in his hands. The decision proceeds on the finding that the Court by charging the assessed's resources with a specific payment had diverted the assessed's income from him and directed it to his step-mtoher and to that extent what the assessed received on account of his step-mtoher was nto his income. It was observed-
'IT is nto 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 this revenue before it becomes income in his hands.'
Their Lordships of the Judicial Committee, interpreted the Indian Income-tax Act, to mean that it intended to tax only the real income of a tax payer and nto to tax what is a charge upon the the assessed's income. In Seth Mtoi Lal Manekchand v. Commissioner of Income-tax, Bombay North, (2) Hindu Joint family was partitioned and with it was partitioned the managing agency belonging to the said family. The partition deed provided that two of the members of the family shall be entitled to the managing agency remuneration in equal shares but each one of them shall pay to the wife of one of the members 2 annas 8 pies out of his half share in the managing agency. The said two members constituted themselves into a registered firm and continued to act as the managing agents. The argument of the partners in the managing agency firm was that in determining their real income as partners the amount paid by them to a member's wife was excepted on the ground that a portion of the managing agency commission payable to the two partners was diverted to a member's wife before it became the income of the partners. The ratio of the decision is that in ascertaining the income of an assessed his real income should be determined and every part of that income, which may ostensibly seem to be the income of the assessed but is, in fact, nto his income by reason of its diversion, should be excluded. It was observed:-
'IT is sufficient for the purpose of this reference if we come to the conclusion that Bhargirathi Bai had a legal enforcible 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.'
(7) The matter has been considered on more than one occasion by their Lordships of the Supreme Court. In Commissioner of Income-tax, Bombay City Ii v. Sitaldas Tirathdas, ( ), the assessed claimed to deduct from his income sums paid by him as maintenance to his wife and children under a consent decree which did nto create any charge on the property of the assessed. Their Lordships of the Supreme Court came to the conclusion that it was a case of application of a portion of the income and the assessed was, thereforee, nto entitled to the deduction claimed. Hidayatullah, J. (as his Lordship then was) laid down the test to be applied in determining such a question in the following words:
'THESEare the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, nto. But we do nto 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 assessed 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 cannto be said to be a part of the income of the assessed. Where by the obligation income is diverted before it reaches the assessed, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessed, the same consequence, in law, does nto follow. It is the first kind of payment which can truly be excused and nto the second. The second payment is merely an obligation to pay antoher 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 assessed, who even if he were to collect it, does so, nto as part of his income, but for and on behalf of the person to whom it is payable. In our opinion, 'the present case is one in which the wife and children of the assessed who continued to be members of the family received a portion of the income of the assessed, after the assessed had received the income as his own. The case is one of application of a portion of the income to discharge an obligation and nto a case in which by an overriding charge the assessed became only a collector of antoher's income. 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 nto the case.'
In Murlidhar Himatsingka and Antoher v. Commissioner of Income- tax, Calcutta. Murlidhar Himatsingka was carrying on business in shellac, jute, hessian, etc. under the name and style of 'Fatehchand Murlidhar.' He was also a, partner in a registered firm 'Messrs Basantlal Ghanshyamdas,' having 2 annas 8 pies share. An instrument of partnership was entered into by Murlidhar Himatsingka and his two sons and a grandson and clause 5 of the deed provided that the profits and losses of Murlidhar Himatsingka as a partner in the firm Messrs. Basantlal Ghanshyamdas shall belong to the new partnership and shall be divided and borne by the parties in accordance with the shares specified in the deed but the capital with its assets and liabilities will belong exclusively to Murlidhar Himatsingka. The same very question arose before their Lordships of the Supreme Court and it was held that there was an over-ridding obligation and the income of Murlidhar Himatsingka from the old firm did nto remain his income but became the income of the new firm. It was observed-
'INour view, in the case of a sub-partnership the subpartnership creates a superior title and diverts the income before it becomes the income of the partners. In toher words, the partner in the main firm receives the income nto only on his behalf but on behalf of the partners in the subpartnership.'
Their Lordships also dealt with the effect of section 23(5)(a) of the Income-tax Act, 1922, but since no arguments were addressed to us on this aspect, I need nto deal with the same. This decision, in my opinion, is the nearest to the case before us.
(8) In the toher decision cited before us, namely. Commissioner of Income-tax, Mysore, v. Woodlands Co.( ) the same principles have been applied.
(9) The principles deducible from the above decisions are that if a person has assigned his source of income in such a manner that it ceases to be his he cannto be taxed on that income but if, on the toher hand, he merely applies the income in such a manner that it passes through him and goes over to antoher person he may be taxable on the income ntowithstanding the legal obligation to apply it for the transferee. Profits attract tax as soon as they come into being and the subsequent application thereof would be indifferent. But if there is an over-riding title created to divert the income from the assessed it cannto be considered as the income of the assessed at all. Such diversion by over-riding title may be created either by a will or by law or by any toher document. The crux of the problem always being-is it an application of income or a diversion at the source before becoming the income of the assessed. It was suggested on behalf of the Revenue that if creation of an over-riding title be that simple then anyone liable to heavier burdens of tax may divert it to avoid liability. The answer to that is that everyone has the freedom to manage his own affairs so as to legitimately avoid the rigours of taxation law and the Courts should nto be too astute to strike down such transactions merely on the ground that they have the effect of depriving the Revenue of a lucrative source. Of course, the matter has to be decided on the construction of the deed, document or law creating the title. On principle I see no difference between this case and the decision of their Lordships of the Supreme Court in Murlidhar Himatsingka's case.( ) By clause 12 of the instrument of partnership, Hans Raj Gupta had clearly agreed that in case he starts any business without the written consent of toher parties to the partnership deed, the profits earned in such business shall belong to the said firm. In toher words, as soon as he entered into a business in violation of clause 12, the income earned thereafter was nto his but belonged to the assessed firm. In my opinion, thereforee, an over-riding title was created and the income could nto have been taxed in the hands of Hans Raj Gupta. The answer to the first question must, thereforee, be in the affirmative and in favor of the assessed.
(10) Mr. Kirpal, the learned counsel for the Revenue, strongly pressed on us to call for a further statement from the Tribunal as to whether or nto Hans Raj Gupta started the new venture without the written consent of his toher partners. He referred us to a letter dated 20th December, 1960, recited in the assessment of the Income-tax Officer, the relevant part of which reads-
'NOwritten consent was ever obtained, and in view of this provision the profits were handed over to the firm. As a matter of fact, the share was held by me as a representative of the firm and all the partners had contributed to the earning of the profits. Mr. Des Raj Gupta and the 'undersigned supervised the fabrication of Steel and Mr. Shiv Raj Gupta supervised accounts and finances.'
From this Mr. Kirpal wanted us to deduce that there was an implied consent by Des Raj Gupta and Shiv Raj Gupta, the only toher two partners in the assessed firm. Apart from the question whether that amounts to consent or nto, it is nto open tome to go into questions of fact. This aspect of the case does nto appear to have been presented before the Tribunal. The Tribunal after referring to the appellant's contention that Hans Raj Gupta had nto obtained a written consent of toher partners of the assessed firm proceeded to discuss the question of over-riding title. It is. a possible view to take that the Tribunal proceeded on the assumption that there was no written consent. In any case, written consent was never set up by the Revenue before the Tribunal. If we were to call for a further statement of case on this point, that would change the very nature of the question referred so much so that if it be found that there was a written consent, the first question may nto arise at all. Besides the letter mentioned above, admittedly there is ntohing else on the record to show that there was a written consent. In the circumstances, and particularly the circumstance that this contention was never put forth before the Tribunal, I am nto inclined to agree with Mr. Kirpal and send for a fresh statement of case.
(11) In view of my answer to the first question, the second question does nto arise. So far as the third question is concerned, it must be held that the income was properly included in the assessment of the firm. The fourth question also does nto, in the circumstances, arise.
(12) I answer the questions as discussed above with no order as to costs.