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Commissioner of Income-tax Vs. Dr. Rameshwar Lal Pahwa - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax Reference No. 26 of 1971
Judge
Reported in(1980)17CTR(Del)200; [1980]123ITR681(Delhi)
ActsIncome Tax Act, 1961 - Sections 22 to 26 and 60; Finance Act, 1968
AppellantCommissioner of Income-tax
RespondentDr. Rameshwar Lal Pahwa
Appellant Advocate M.L. Verma, Adv
Respondent Advocate P.N. Monga, Adv.
Cases ReferredJain Brothers v. Union of India
Excerpt:
direct taxation - deduction - sections 22 to 26 and 60 of income tax act, 1961 and finance act, 1968 - deduction claimed in respect of amount paid by assessed to his parents as maintenance out of property income - said amount was taken as income of assessed under the head 'income from other sources' and taxed - such inclusion leads to double taxation of income from property - as amount was once taxed under head 'income from property' and again under 'income from other sources' - such double taxation not permissible in law - held, assessed entitled to get deduction. - - 1. this reference under section 256(1) of the income-tax act raises an interesting question regarding the construction of section 24(1) of the i. the tribunal first came to the conclusion that the provisions of section.....ranganathan, j. 1. this reference under section 256(1) of the income-tax act raises an interesting question regarding the construction of section 24(1) of the i.t. act, 1961, read with section 60 of the same act.2. the assessed, dr. rameshwar lal pahwa, derived his income mainly from a house property situate at 20, rajpur road, delhi. the annual letting value of the property from which he derived income was rs. 11,115 and after deducting 1/2 of the municipal taxes paid and 1/6 of the annual value towards repairs the income from property worked out to rs. 8,757. the assessed, however, declared the property income for the assessment years 1964-65, 1965-66 and 1966-67 (the relevant previous years being the financial years 1963-64, 1964-65 and 1965-66) at rs. 5,457. this was because from the.....
Judgment:

Ranganathan, J.

1. This reference under Section 256(1) of the Income-tax Act raises an interesting question regarding the construction of Section 24(1) of the I.T. Act, 1961, read with Section 60 of the same Act.

2. The assessed, Dr. Rameshwar Lal Pahwa, derived his income mainly from a house property situate at 20, Rajpur Road, Delhi. The annual letting value of the property from which he derived income was Rs. 11,115 and after deducting 1/2 of the municipal taxes paid and 1/6 of the annual value towards repairs the income from property worked out to Rs. 8,757. The assessed, however, declared the property income for the assessment years 1964-65, 1965-66 and 1966-67 (the relevant previous years being the financial years 1963-64, 1964-65 and 1965-66) at Rs. 5,457. This was because from the figure of Rs. 8,757 already referred to, the assessed claimed deduction of a sum of Rs. 3,300 under Section 24(1)(iv) which at the relevant time allowed deduction ''where the property is subject to an annual charge, not being a capital charge ' for the amount of such charge. The assessed's contention was that under a deed of maintenance executed by him on April 27, 1963, he had undertaken to pay to his mother during her lifetime and after her to his father during his lifetime a sum of Rs. 275 per month and that the above amount had been charged on the income from the property belonging to him. The ITO allowed the deduction claimed by the assessed and computed the property income for each of the three years at Rs. 5,457 as returned by the assessed. However, the ITO proceeded to observe :

' Since this charge is admissible against the income from house property, it is being allowed and is being separately considered for assessment as income from other sources according to the provisions of Section 60 of the Income-tax Act, 1961. Since it is only the income which has been transferred without transferring the house property in question, this transfer is fully covered by Section 60 of the Income-tax Act, 1961. The transfer of income of Rs. 3,300 would, thereforee, be assessed in the hands of the assessed after allowing it from property income. '

3. In this manner, the ITO added a sum of Rs. 3,300 as income from other sources and computed the total income of the assessed accordingly. The assessed had other income outside India of Rs. 42 in the assessment year 1964-65 and Rs. 2,018 in the assessment year 1966-67. Thus, the total income was determined by the ITO at Rs. 8,799, Rs. 8,757 and Rs. 10,775, respectively, for the three assessment years in question.

4. The action of the ITO was upheld by the AAC on appeal but the Income-tax Appellate Tribunal took a contrary view on the assessed's further appeals to them. The Tribunal first came to the conclusion that the provisions of Section 60 were clearly attracted in the present case. In theiropinion, this would only mean that the income from the property had to be included in the hands of the assessed. That income could be computed only under Section 24 and, thereforee, the assessed would be entitled to the deduction of the amount of Rs, 3,300 claimed under Sub-clause (iv) of Section 24(1). In this view of the matter, the Tribunal deleted the addition of Rs. 3,300 as income from other sources in each of the three assessment years in question.

5. The Commissioner has sought for and obtained from the Tribunal a reference of the following question for the decision of this court:

' Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the income of Rs. 3,300 per year arising to the assessed's mother for maintenance secured by a charge created by him on his property and allowed as deduction under Section 24(1)(iv) of the Income-tax Act, 1961, could not be included in his total income under Section 60 of the said Act which was held attracted to the facts of the case? '

6. Before proceeding to discuss the question arising before us, it may be necessary and useful to set out the terms of the deed of maintenance dated April 27, 1963. This was a deed executed by the assessed on April 27, 1963, and it was duly registered with the Sub-Registrar of Assurances immediately thereafter. The document was executed by the assessed on the one hand and his mother and father on the other. The preamble set out that the assessed having decided to settle down far away in England was desirous, out of his natural love and affection for his parents, of making a provision for their maintenance and he had decided that for such maintenance a charge should be created on his property. The first clause of the deed declares that the assessed had created an obligation on himself to pay to his mother a sum of Rs. 275 per month during her lifetime from April 1, 1963. By the second clause he committed and declared that if his father survived his mother, he would pay the sum of Rs. 275 to his father every month till his death. Clause (3) stipulated that a sum of Rs. 275 per month was created as a charge during the lifetime of the mother or the father, as the case may be. Under Clause (4) it was declared that the said charge in favor of his parents would be on a property comprised of Flat ' B ' over ' A ' of the building known as Saraswati Block occupied by a particular named tenant and fully described in the schedule and delineated in the plan annexed to the deed. Clause (5) provided that the parents, in respect of their respective rights of maintenance, would be entitled to receive and appropriate the sum of Rs. 275 per month from the present and future tenants of this portion of the property (in addition to the municipal taxes payable thereon by them). The clause also declared that the charge Would continue even after the assessed sold the property and that any such sale would be subject to the charge. Clause (6) provided that the payment made by the tenant of the premises of Rs. 275 to the parent (in addition to the municipal taxes due from him) would be a complete discharge of his liability towards the payment of rent under the terms of the tenancy.

7. From the above narration, it will be clear that the deed of maintenance executed by the assessed did not in any way affect the assessed's ownership of the house property in question. By the said deed the assessed did not transfer either the ownership or any interest in the said property in favor of either his parents or anybody else. As rightly pointed out by Mr. Verma, counsel for the department, the I.T. Act provides for the assessment of the income from a house property in the hands of its owner irrespective of the fact whether it is the owner who actually enjoys the income or somebody else. The ITO was fully justified, thereforee, in determining the annual letting value of the property on the basis of full rent derived from it including the portion which had been made the subject-matter of the charge. The computation of the property income has to be done by deducting from the annual letting value reduced by the amount of municipal taxes, certain amounts of the description set out in Section 24. One of these deductions is the amount of any annual charge which might have been created on the property. The language of the section as it stood at the relevant time was very wide. It permitted an assessed to claim a deduction from the property income of any amount that was an annual charge on the property, whatever might have been the purpose for which the charge was created and also irrespective of the fact whether the charge was created voluntarily by the assessed or whether it was imposed by him as a result of some legal obligation otherwise enforceable on him. This position had been clarified by a series of decisions : Khanderao Gaekwar v. CIT : [1948]16ITR294(Bom) , CIT v. Bhayya [1949] 17 ITR 515 , CIT v. State Bank of India : [1957]31ITR545(Cal) , Krishna Chandra v. CIT : [1961]42ITR137(All) and Kartar Singh v. CIT : [1969]73ITR438(Delhi) .

8. At first sight it might appear that where a person receives his property income but voluntarily disposes of it in a particular manner that would be only a case of application of income and that, thereforee, a voluntary creation of a charge should not, strictly speaking, be deductible in the computation of the property income. It might be suggested that the provisions contained in the above clause should be construed in the light of the broad principle that where there is only an application of income, there can be no claim for exemption from tax or deduction in the computation of income. In fact this was the contention put forward on behalf of the revenue in CIT v. State Bank of India : [1957]31ITR545(Cal) referred to earlier. Chakravartti C.J. observed in the course of the judgment in the above case (p. 560):

'It struck me at one Time, as the argument proceeded, that, probably, the section could be reconciled with the ordinary notions of liability to income-tax, if it could be construed as contemplating only mortgages or charges existing at the date when the assessed had acquired the property. I must say, however, at once that the language employed by the legislature does not admit of such a limited construction, but is in every respect unqualified.'

9. Then, after referring to the history of the section, the recommendations of the Enquiry Committee of 1936 and the amendments introduced in 1939, the learned judge concluded (p. 562) :

'In construing the clause as it stands, the language in which it is expressed must be our only guide and the language does not, in my view, afford any room for the limitation sought to be imported into the clause by Mr. Meyer. Here, the property is undoubtedly subject to a charge. The only two qualifications which the clause introduces and recognises are that it must be an annual charge and must not be a capital charge. I have already shown that the charge in the present case is an annual charge and I have also pointed out that whether or not it is a capital charge is not within the ambit of the present reference. If then there is a charge and such charge is an annual charge and if no question arises as to whether it is a capital charge, the clause ordains that the assessed shall be entitled to a deduction of the amount of the charge in the computation of the annual value of the properties which is, in terms of Section 9(1), to be taken as his income there from. I am free to confess that although the language used by the Legislature does not seem to me to justify or even leave any room for any alternative construction, the two amounts, namely, the amount of interest on mortgages and the amount of an annual charge, which the clause recognises as admissible allowances, are palpably of a different nature from the other amounts admissible as deductions.... The section, it is true, is not a charging section, but a section concerned with the computation of the assessable income derived from a particular source. It is intelligible that such a section should aim at the ascertainment of the real income of the assessed which comes into his hands from the source concerned and, thereforee, amounts which the assessed has to pay in discharge of liabilities which, so to say, run with the property and which must be discharged in order to its enjoyment, can easily be seen to be reasonable deductions. The same cannot obviously be said as to charges created by the assessed voluntarily for the payment of his personal liabilities to other persons of interests on mortgages created by him. But the section says, and in my view saysin unmistakable terms, that such charges and amounts of interest are also deductible and so must we hold.'

10. Thus, the position is that though perhaps, very strictly speaking and on broad principles, there may be no rationale in allowing the assessed a deduction in the computation of the income from a house property of amounts which he has voluntarily bound himself to disburse out of the income from property, the section provided thereforee and until the section was amended some time ago by the Finance Act of 1968 even charges voluntarily created by an assessed came within the ambit of the reductions permitted under Section 24. Hence, in the present case, the ITO computed the income from property rightly after giving a deduction of the sum of Rs. 3,300 which represented an annual charge on the income from the property.

11. We may mention that though Mr. M.L. Verma made an attempt to challenge the correctness of this decision of the ITO, we did not permit him to do so. The ITO had allowed the' deduction and this was not an issue either before the AAC or before the Tribunal and it is not open to the Commissioner now to say that the ITO erred in allowing this deduction. However, the action of the ITO appears to have been justified by the decisions already referred to.

12. We now come to the provisions of Section 60 of the I.T. Act, 1961, which corresponds to the provisions of the first part of Section 16(1)(a) of the Indian I.T. Act, 1922. This section reads as follows :

'All income arising to any person by virtue of a transfer whether revocable or not and whether effected before or after the commencement of this Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the transferor and shall be included in his total income. '

13. This section is merely declaratory of a principle which is well settled under the income-tax law, namely, that profits on their coming into existence attract tax at that point and that the revenue is not concerned with the subsequent application of the profits. If a person has alienated or assigned the source of his income so that the source no longer belongs to him, he would not be liable to be taxed upon the income arising from that source thereafter unless some special statutory provisions such as Sections 61 to 64 are attracted. There may also be cases in which a person receives income in such circumstances that though he appears to be the owner of income and receives it, it cannot be really construed to be his income at all. These are what may be described as cases where income is divested by overriding title at the very point of accrual. But apart from these cases, where a person is entitled to receive certain income, the mere fact that he is constrained to apply it in a particular manner either under a statute orunder certain contracts would not affect his liability to tax. This is expressed by saying that application or destination of profits or a charge which has been made on them by previous agreement or otherwise is immaterial for the purpose of taxation. The purpose for which such application is effected is also of no relevance. In all such causes of application of income the original recipient would continue to be liable in respect of the entire income which accrues to him.

14. The above principle has been statutorily enacted in Section 60 of the Act. This section provides that where an assessed purports to transfer income arising to him (but not the source of it) in such a way that under the instrument of transfer the income no longer arises to him or is received by him, such an arrangement is be ignored for purposes of taxation. Though under the arrangement or transfer made by the assessed the income may in law arise to another person, it will be treated as continuing to arise to the transferor himself. A transfer of income alone without there being a transfer of the source of that income is a mere application of profits. Thus, in Provat Kumar Miller v. CIT : [1961]41ITR624(SC) , the assessed who was the registered holder of certain shares in a 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 become 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 title to such dividends or sums of money and to instruct the company to pay such dividends and sums of money to her. For the assessment years in question the dividends declared on those shares were included in the income of the assessed notwithstanding the transfer effected by him. It was contended by him that, since the settlement was for the lifetime of, his wife, the third proviso to Section 16(1)(c) of the 1922 Act would apply. The Supreme Court, however, held that the question of application of Section 16(1)(c) did not at all arise. The assessed had not assigned the shares and what the contract provided was merely that the income which continued to accrue to the assessed should be paid to his wife under the terms of the contract instead of to him. The income was, thereforee, assessable in his hands because it was part of his income though applied subsequently towards payment to the wife under the terms of the contract. The income accrued to the settler before the beneficiaries got it and would undoubtedly be assessable in his hands despite the contract. The above decision was also followed by the Supreme Court in K.A. Ramachar v. CIT : [1961]42ITR25(SC) . These decisions clearly show that, quite apart from the language of Section 60, even on general principles when an assessed merely purports to transfer his income without transferring the source of the income such a transaction is to be ignored for the purposes of determining thetransferor's liabilities to taxation. This principle has been statutorily enunciated only in order to render it unnecessary to decide the question in every case whether in a given case under the general law the income is the income of the transferor or of the other person to whom it arises by virtue of the transfer.

15. Two questions arise for consideration in this case. The first is as to whether the provisions of Section 60 are at all applicable here. The Tribunal has held in favor of the present applicant that the provisions of Section 60 are attracted. At first sight, it might seem that this is merely a case where the assessed has entered into a deed of maintenance for his parents and that all that has been created is a charge in respect of the maintenance. It can be said that there is no transfer of any income by the assessed to his parents. In one sense this is true. All that the assessed has bound himself to do by this agreement is to pay maintenance of Rs. 275 per month to his parents, No doubt he has created a charge on the property in respect of this payment. He has also empowered his parents to collect the money from the tenants and the deed has also provided that the tenant by paying the amounts to the parents will be discharging his obligation towards rent. But there is nothing to prevent the assessed from paying Rs. 275 per month himself out of other sources and if he does so then the question of income from the property being paid to the parents does not arise. Those provisions are only intended to protect the interests of the parents and the tenant in the event of their being compelled to realise the maintenance out of the income from the property on the assessed's failure to pay the same. In this view of the matter, it can be said that the document does not transfer any income and that, thereforee, the provisions of Section 60 are not attracted. It, however, appears from the assessment order that the assessed had transferred all his properties in the name of his father. On the facts that the assessed was to have left for England and that on the eve of such departure he transferred all the other properties in the name of his father and made this provision for maintenance of his mother, the case appears to have proceeded on the footing that the rent from the property was thereafter collected by the parents- Section 63(b) provides that for the purpose of Section 60 the expression 'transfer ' would include any settlement, trust, covenant, agreement or arrangement. It could, thereforee, be said that, taking into account the clauses of the maintenance deed as well as the above circumstances, there was an agreement or arrangement that the rent should be paid by the tenant to the parents. We agree, thereforee, with the conclusion of the Tribunal that the provisions of Section 60 were attracted in the present case.

16. The second and more important question is the extent to which Section 60 will help the department. Here again, after careful consideration, we have come to the conclusion that the Tribunal was right in holding that this section will not help the department to tax the sum of Rs. 3,300 as income from other sources. As already mentioned, all that Section 60 declares is that where an assessed tries to transfer his income (without transferring the assets from which the income is derived) and as a result of the transfer the income arises to somebody else, that transaction should be ignored and the income arising to the transferee should be chargeable to tax as the income of the transferor. So, in the present case, the assessed has entered into an arrangement whereby he has transferred the income derived by him from the property to his parents and after the arrangement the income arises to the parents. That being so all that Section 60 lays down is that the income, though arising to the parents, will be assessed not in their hands but will be assessed in the hands of the assessed himself. As we have set out earlier, the income from the property has been assessed by the ITO in the hands of the assessed under Sections 22 to 26 because he continues to be the owner of the property. That being so, there is no further scope for the operation of Section 60. That section does not declare, it is contended by Mr. Verma, either expressly or implicitly that the income should in such cases be separately added as the income of the transferor nor does it allow such income to be treated as income from other sources. All that Section 60 declares is that, despite the arrangement (which has been hit at by Section 60), the income from the property will continue to be assessed in the hands of the assessed. That assessment of the property income has to be done only in accordance with the provisions of Sections 22 to 26 and that has already been done. As pointed out by the Supreme Court in the case of Nalinikant Ambalal Mody v. Narayan Row : [1966]61ITR428(SC) , there is no scope for adding same income over again as income from other sources merely because in the original computation of the income from same source the ITO has been obliged to give a deduction in respect of an item which he considers to be merely an application of income. What the ITO has done virtually amounts to a double taxation of the income from the property in question: once under the head ' Income from property ' and again under the head ' Income from other sources'. Such double taxation cannot be permitted although it is true that while computing the statutory income under the head ' Income from property ' the assessed has been able to get a deduction for a sum of Rs. 3,300. To do so is merely an attempt by the revenue to get back by way of income from other sources an item which the assessed was entitled to deduct in the computation of his income from property.

17. It is well settled that where income falls in a particular head its computation has also to be made under the same head. To give an example,if a property is actually fetching a rent of Rs. 15,000 per annum but the income from property has to be computed on the basis of a standard rent of, say Rs. 9,000 per annum, the surplus .of Rs. 6,000 cannot be brought to tax as income from other sources. By the computation under the head ' property income ' on the basis of the standard rent, the assessment of that source of income is exhausted and it cannot be taxed again though in fact some real income has escaped assessment. The accident of a surplus being left is on account of the statute falling short of assessing the real income but such a shortage cannot be made up for by adding the income as income from other sources. The present case is no different. The income from the property has been computed and merely because this computation has been made after allowing a deduction claimed, by the assessed, and hence the income from property has considerably been reduced, the ITO cannot resort to taxing the same source again and including the amount of deduction as income from other sources. It cannot be denied, as pointed out by the Tribunal, that the sum of Rs. 3,300 which the ITO is seeking to assess is the income derived by the assessed from house property. It cannot be taxed as income from other sources even on the footing that Section 60 directs its inclusion in the total income of the assessed.

18. It is contended for the revenue that the effect of the Tribunal's decision is to ignore the provisions of Section 60. This argument, however, is not tenable. As pointed out earlier, the Tribunal has agreed that Section 60 applies and has also given effect to it. Only this is of no help to the department because that section directs nothing more than that the property income should be assessed in the hands of the assessed. This criticism is, thereforee, not justified. On the other hand, the effect of the assessment order is to deny the benefit to the assessed of a deduction to which the statute entitles him and the unwarranted addition of an item of income from house property as income from other sources.

19. We are, thereforee, of opinion that the attempt of the ITO to tax Rs. 3,300 over again was not justified. We, thereforee, agree with the view taken by the Tribunal and answer the question referred to us in the affirmative. There will be no order as to costs.

Khanna, J.

20. The circumstances of the creation of charge show that it was entirely to meet the personal obligation to maintain his parents that the assessed had entered into that arrangement. Such liability could not of its own be a permissible deduction from income for the purpose of assessment to income-tax. From any angle looked at, it remained application simplicities of income after it had accrued to the assessed. It appeared that the charge over the property was created as a matter of convenienceand a practical solution to the difficulty of the assessed who was residing outside India and of sending money from there every month.

21. Section 24(1)(iv), as stood before the amendment of 1969, permitted deduction of annual charge from property income. On the face of it, there was no indication that such a charge should have been the creation of factors beyond the control of the assessed. The judicial pronouncements, thereforee, have included within its ambit even those charges which were voluntarily created. This was of course prone to let loose infinite diversion of income after accrual. Any assessed could thereby create a charge in favor of his family and thus divert all his property income for its maintenance. It would appear that it was to set at rest this mischief that the Legislature introduced amendment in the year 1969 as to exclude from the purview of Section 24(1)(iv), voluntary charges or those capital in nature. One view can be that this amendment was clarificatory in nature as perhaps the Legislature felt that those provisions were not being interpreted in the light of the intendment behind them.

22. It would appear that had Section 60 of the Act been kept in view and an harmonious and coherent interpretation placed on this provision and those contained in Section 24(1)(iv), it should have been clear that with the existence of Section 60 in the Act, voluntary charges were in any case excluded from deduction permissible under Section 24(1)(iv). This Section 60 made it amply clear that where the asset was not transferred but the income thereof alone was transferred, the income was assessable in the hands of the owner of the asset. This section thus nullified the device which an assessed was prone to effect by creating a voluntary charge and transferring the income while retaining the property with himself. It is a well settled rule of interpretation of statutes that one provision should not be interpreted in such a manner as to render another equally explicit provision otiose or nugatory. Section 60 in its implication is quite clear and provides no scope for ambiguity. It should have, thereforee, been allowed to have its full sway and its operation should not be unnecessarily abridged.

23. I should have, thereforee, been much inclined to place a harmonious construction on the two provisions contained in Section 24(1)(iv) as they existed before the amendment of 1969 and those contained in Section 60. This was irrespective of whether in the course of assessment a calculation exercise was involved of first making some deduction and then adding that up. I find that no double taxation was at all involved in the present case as the amount of Rs. 3,300 was not in any manner earlier taxed when it was sought to be added up under Section 60. Here it may be stated that double taxation is not anything absolutely foreign to tax laws. Where it is distinctly enacted, it is legal and has to be given effect to. See in this respectthe decision of the Supreme Court in the case of Jain Brothers v. Union of India : [1970]77ITR107(SC) .

24. Having made these observations, I am still not inclined to differ from the Anal conclusion arrived at by my learned brother, as I find that a number of High Courts have, while giving effect to the provisions contained in Section 24(1)(iv) of the Act, allowed the deductions arising from the creation of voluntary charges. Since this view had been uniformly adopted in these days, it would not be proper to arrive at this late stage at a different view specially when the law now stands amended.

25. I am, thereforee, inclined to concur with the overall conclusion of my learned brother.


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