1. The assessee in both these references is the same individual and the only difference is that in Income-tax Reference No. 7 of 1973, we are concerned with the assessment year 1964-65, whereas in Income-tax Reference No. 29 of 1973, the assessment year is 1966-67. Question No.1 in Income-tax Reference No. 29 of 1973 stand on the same footing and it is common ground that both these questions are governed by the same principle and, therefore, we will dispose of both these references by this common judgment.
2. The assessee, lady, derives income from various sources including income from some trusts. One of the trusts is at Ahmedabad and the other is at Bombay. The Ahmedabad trust is known as Smt. Arundhati Balkrishna Trust, Ahmedabad. In respect of assessment year 1964-65, in the books of account of the Ahmedabad trust, a sum of Rs. 10,880 was debited to interest account being interest paid to Harivallbhdas Kalidas Estate Account (hereinafter referred to as 'the estate account'). The Income-tax Officer analysed the withdrawals from the estate account and found that there was substantial debits for expenses like household expenses, advance income-tax, etc., totalling Rs. 2,19,804 and all these withdrawals from the estate account by the Ahmedabad trust were for personal expenses of the assessee. The Income-tax Officer took into consideration earlier withdrawals from the estate account made by the Ahmedabad trust for investments and made adjustment for deposit in the year and finally concluded that the net withdrawals from the estate account for personal purposes was Rs. 3,10,806. He held that proportionate interest of Rs. 6,199 out of the total interest of Rs. 10,880 paid by the Ahmedabad trust to the estate account was referable to withdrawals for personal expenses and for payment of tax, etc., and hence could not be allowed as an admissible deduction in computing the income of the assessee. On this basis the Income-tax Officer worked out the income of the assessee including income from the Ahmedabad Trust where this item of interest of Rs. 10,880 was claimed but he added Rs. 6,199 to the total income of the assessee as inadmissible deduction regarding interest.
3. In Income-tax Reference No. 29 of 1973, the trust and the estate account are the same and for the year of account relevant for assessment year 1966-67, in the books of account of the Ahmedabad trust a sum of Rs. 25,496 was shown to have been paid as interest to the estate account. As against the claim of interest, namely, Rs. 25,496, on an analysis on the same lines which he made for the assessment year under consideration in Income-tax Reference No. 7 of 1973, in this case he made the necessary computation and he held that interest to the extent of Rs. 12,833 was referable to payment of interest for non-investment purpose and hence could not be allowed as deduction in computing the income of the assessee. He disallowed the claim of interest to the extent of Rs. 12,833.
4. Before the Appellate Assistant Commissioner in appeal and also before the Tribunal in further appeal, this question of deduction of the entire amount of interest paid in the respective years was urged but at both these stages, this contention of the assessee in each of the relevant assessment years was rejected.
5. However, in Income-tax Reference No. 7 of 1973, before the Appellate Assistant Commissioner it was urged on behalf of the assessee that the assessee could not claim from the trust the share as determined by the Income-tax Officer but she could only claim her share in the income as per the books of the trust. This contention was rejected by the Appellate Assistant Commissioner. The same contention was also raised by the Appellate Assistant Commissioner. The same contention was also raised before the Tribunal and the Tribunal held that the contention that in the total income of the assessee the revenue authorities were entitled to include only that income which the trustees passed on to her, was untenable in view of the clear provisions of section 45. Thereafter, at the instance of the assessee the following questions have been referred to us for our opinion in Income-tax Reference No. 7 of 1973.
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in not holding that out of the interest payment of Rs. 10,880, Rs. 6,199 was not an admissible deduction against the income from other sources
(2) whether, on the facts and in the circumstances of the case, the income includible in the total income of the assessee is income determinable as per provisions of the Income-tax Act, 1961, in the case of the trust or the income receivable by the assessee from the said trust ?'
6. In Income-tax Reference No. 29 of 1973, only one question has been referred to us for our opinion at the instance of the assessee and that question is :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that out of the interest payment of Rs. 25,496, Rs. 12,833 was not an admissible deduction against the income from other sources ?'.
7. In Income-tax Reference No. 35 of 1972 (Smt. Padmavati Jaykrishna Trust v. Commissioner of Income-tax) decided by a Division Bench of this court to which I was party, on December 3, 1973, a similar question arose in connection with the wife of the present assessee's husband's brother. There also the assessee concerned was claiming interest paid to the estate account and an amount of Rs. 10,279 was not allowed to be deducted and the question in Income-tax Reference No. 35 of 1972 related to this payment of interest and after considering the different authorities on the point, it was held that the expenditure in question was not admisible deduction under section 57(iii) of the Act and the question was decided against the assessee.
8. The learned Advocate-General who has appeared on behalf of the assessee in both these references has very fairly stated that in view of the decision of this court in Income-tax Reference No. 35 of 1972, on an identical question, he would not argue once again the same legal point and without giving up his contentions in this contentions in this connection, he would not advance arguments before us. In view of that decision in Income-tax Reference No. 35 of 1972, question No. (1) in Income-tax Reference No. 7 of 1973 and the only question referred Income-tax Reference No. 29 of 1973 must be decided in the affirmative and against the assessee in each of the two cases.
9. We will now deal with question No. (2) which has been referred to us in Income-tax Reference No. 7 of 1973. On behalf of the assessee, the first submission which was made by the learned Advocate-General was that what should be considered for income-tax purposes is the real income which has accrued or which has been received by the assessee and not merely the income which may be shown in the book entries. In Commissioner of Income-tax v. Shoorji Vallabhdas & Co., the Supreme Court held that income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income' which does not materialise. Where income has, in fact, been made in the books of account. It was pointed out by Hidayatullan J., as he then was, delivering the judgment of the Supreme court at page 148 :
'A mere book-keeping entry cannot be income, unless income has actually resulted,....'
10. Similar are the observations of the Supreme Court in Commissioner of Income-tax v. Managing Trustees, Nagore Durgha. It was pointed out that the persons who are referred to in section 41(1) of the Indian Income-tax Act, 1922, equivalent to section 160 of the Income-tax Act, 1961, are not the persons having any beneficial interest in the income. None of them has any beneficial interest in the income, for example, the court of wards, the administrator-general, the official trustee, receiver or manager appointed by or under any order of a court, or any trustee or trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including the trustee or trustees under any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913). All these person, according to the Supreme Court, are entitled to receive income on be half of any person and it has been pointed out that none of them has any beneficial income. He collect the income for the benefit of others. The question before the Supreme Court in that case was regarding the income derived by the manging trustee of a particular durgha in the State of Madras and it was held that the nattamaigars were, in terms of section 41, the managers of the propertiers of the durgha and the beneficiaries had beneficial interest. The properties did not vest in them and they received the income therefrom on behalf of all them and after meeting the expenses of the durgha, they held the balance on behalf of the beneficiaries and were required to distribute the same in accordance with their shares. It was held that the income which the nattamaigars held on behalf of the beneficiaries could be assessed only in their hands in the manner prescribed under section 41 of the 1922 Act. It was pointed out that the doctrine of vesting was not germane to the question whether section 41 of the Act was to be made applicable.
11. In Commissioner of Income-tax v. Kalooram Govindram, it was pointed out in a case regarding joint Hindu undivided family, which had formed an association with another Hindu undivided family to carry on a business, that entries relating to interest payable to the two members of the association were posted merely for apportionment of the loss suffered by it and did not represent the real income of the two members. The emphasis in this case was again on the real income derived by the assessee rather than to the income shown by mere book entries in the books of account.
12. The learned Advocate-General is right when he contends that what is to be taxed is the real income derived by the assessee and not what is shown by mere book entires in the books of account of the trust. He contended that according to the books of account of the trust as shown by the accounts of Smt. Arundhati Balkrishna Trust, Ahmedabad, which is part of annexure 'D' in the paper book, the net income received by the trust by way of dividends in the relevant accounting year was Rs. 93,175 and after deducting the different items of expenditure which were debited on the expenditure side, the excess of income over expenditure in the trust account, namely Rs. 72,594, was paid to the beneficiary, the assessee herein. The learned Advocate-General contended that the real income in this case was Rs. 72,594 and, therefore, the revenue was bound to take that amount into consideration for the purpose of ascertaining the assessable income of the assessee. In this connection he also relied upon the provisions of sections 160 to 164 of the Income-tax Act, 1961. It is obvious that under section 160(1)(iv) a trustee is a 'representative-assessee and under sub-section (2) of section 160, every representative-assessee is deemed to be an assessee for the purposes of the Act. Under section 161, sub-section (1), every representative-assessee, as regards the income in respect of which he is a representative-assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall subject to the other provisions contained in that particular Chapter, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. Therefore, in the facts of this case, the income-tax could be levied upon and recovered from the trustees of the Ahmedabad trust in like manner and to the same extent as it would be leviable upon and recorerable from the assessee before us. Under section 164 provisions is made for the charge of tax where share of beneficiaries is unknown or unascertainable. But that is not the case before us. Under section 166 nothing in the provisions of section 160 onwards is to prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to was receivable, or the recovery from such person of the tax payable in respect of such income. Therefore, it is at the option of the department either to proceed against the beneficiary or against the department. It is common ground that in the instant case the department has exercised the option and proceeded against the assessee and not against the trustees of the Ahmedabad trust.
13. In order to understand the true effect of the provisions regarding representative-assessees, we need only refer to two decisions of this High Court consisting of Bhagwati C. J. and myself dealt with the scheme of the provisions relating to representative-assessees and at page 495 Bhagwati C. J., delivering the judgment of the Bench, has pointed out :
'Before we examine the terms of the trust deeds it would be convenient at this stage to refer to the provisions of the Act bearing on the determination of the controversy between the parties. Section 160 defines 'representative-assessee' and enumerates four categories of representative-assessees who are assessable in respect of income which does not beneficially belong to them but belongs beneficially to another. Clause (iv) of sub-section (1) of that section describes the fourth category of representative-assessee by saying that in respect of income which a trustee appointed under trust declared by a duly executed instrument in writing, whether testamentary or otherwise, receives or is entitled to receive on behalf or for the benefit of any person, such trustee shall be a representative-assessee.'
14. And then the provisions of section 161 are set out. Then the judgment proceeded :
'Every representative-assessee is liable to assessment in his own name in respect of the income in respect of which he is a representative-assessee and the assessment on him in respect of such income is deemed to be made upon him in his representative capacity only and the tax is also to be levied upon him in like manner and to the same extent as it would be leviable upon the person represented by him. This last provision can obviously apply only where income is specifically receivable by the representative-assessee on behalf or for the benefit of a single beneficiary or where there are more beneficiaries than one, the individual shares of the beneficiaries are determinate and known. Tax in such a case would be levied in the representative-assessee on the portion of the income to which any particular beneficiaries entitled in the same manner and to the same extent as it would be leviable upon the beneficiary and in respect of such portion of the income the representative-assessee would be assessed in a representative capacity as representing the beneficiary. But this does not mean that the revenue cannot proceed to make direct assessment on the beneficiary in respect of the portion of the income to which he is beneficially entitled. Such income having accrued to him would form part of his total income and would be clearly assessable in his hands and this right of the revenue to make direct assessment on him in respect of such income stands unimpaired by the provision enabling assessment of such income in the hands of the representative-assessee in a representative capacity. Section 166 makes this clear by providing that nothing in the earlier sections of that Chapter shall prevent direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable. If, therefore, any portion of the income is receivable or is received by the representative-assessee specifically for the benefit of a particular beneficiary so that such income can be said to accrue to the assessee in his representative capacity under section 161 or to make direct assessment on the beneficiary in respect of such income by virtue of the right expressly preserved under section 166.'
15. It is true, as the learned Advocate-General emphasized, that so far as trustee is concerned, he in the eye of the law, does not receive income on behalf of the beneficiary but does so for the benefit of the beneficiary. A trustee is in no sense an agent of the cestui que trust and he is under certain obligations, legal and equitable, so that the beneficiary can enforce his rights against the trustee if a breach of any of those obligations is committed. But in no sense can he be said to be an agent of the cestui que trust or beneficiary nor can he be said to be holding the property or income on behalf of the beneficiary.
16. The learned Advocate-General relied upon several decisions for the purpose of pointing out that where in a particular case there is an overriding obligation on the particular person receiving the income or an overriding right outstanding in favour of another individual, then the income has to be assessed in the hands of the recipient of the income subject to that overriding liability or that overriding right. In Seth Motilal Manekchand v. Commissioner of Income-tax, the case was of a partition between the father and the son and the wife and at the time of the partition it was agreed between the father and the son that certain portion of the income receivable by each of them should be paid to the mother out of his respective share and the Bombay High court there held that this overriding right in favour of the mother was to be given effect and the income in the hands of the father and the son was to be assessed in the light of that overriding right in favour of the mother.
17. Similarly, in Ratilal B. Daftari v. Commissioner of Income-tax, there was a question of a sub-partnership and again the question of the overriding obligation was brought into play and only the income after accounting for this overriding obligation was held to be liable to tax.
18. In Murlidhar Himatsingka v. Commissioner of Income-tax, again the principle of overriding obligation was held to be correct principle and it was held that Ratilal B. Daftari's case was rightly decided. There the Supreme Court was concerned with the case of a sub-partnership.
19. In Commissioner of Income-tax v. C. N. Patuck, there was a question of an overriding obligation created at the time of dissolution of marriage.
20. It is no doubt true that the trustees of the Ahmedabad trust are under an obligation to pay the net income of the trust to the beneficiary who is the assessee herein after accounting for all the outgoings properly debitable to the trust account and the sole question that we are concerned with in this case is not finding out what the book entry in the trust account is, but what is the real income of the trust for the purpose of the Income-tax Act. As shown by the provisions regarding representative-assessee, the trustees can be assessed to the same manner as a beneficiary and it was contended in this connection that while considering the case of the assessee, the beneficiary, it is not open to the revenue authorities to consider whether the amount were rightly or wrongly debited in the trust account. In the light if this contention, so far as the facts of this case are concerned, it was contended by the learned Advocate General, that what the revenue authorities were entitled to look at was merely Rs. 72,594 shown to be the amount at the foot of the income and expenditure account of the Ahmedabad trust and paid to the assessee.
21. There is a fallacy involved in this contention because whether the income of the Ahmedabad trust is assessed in the hands of the trustee or in the hands of the beneficiary, there can be only one amount and not different amount and not different account depending upon whether the revenue authorities proceed against the trustees or against the beneficiary. Against whichever assessee, either the representative-assessee or the beneficiary, the revenue authorities proceed, on thing is obvious, namely that all items debited by the trustees in the trust account can be inquired into and considered from the point of view of finding out whether these items are permissible deduction and whether any of those debit entries is not a non-permissible deduction. It is from this point of view that the entry relating to Rs. 10,880 in the Ahmedabad trust account is required to be examined and was in fact examined by the Income-tax Officer and it was found that the interest which has paid by the Ahmedabad trust to the estate account was not entirely for the purpose of earning the income of the trust. Under section 57(iii) of the Income-tax Act, 1961, when the income is from other sources, any expenditure laid out or expended wholly and exclusively for the purpose of making or earning the income is a permissible deduction. It has been found, as a matter of fact, by the Tribunal and other authorities that out of this amount of Rs. 10,880 which was paid by way of interest to the estate account, a sum of Rs. 6,199 represented interest on borrowings by the Ahmedabad trust from the estate account which borrowings were for the personal use and expenses, etc., of the assessee. Therefore, this amount of Rs. 6,199 out of the amount of Rs. 10,880 cannot in any sense be said to be expenditure incurred by the Ahmedabad trust for the purpose of earning income received by the Ahmedabad trust. Thus, whether at the time of assessing the trustees or assessing the beneficiary, the question has got to be examined and it is only the light of such an examined and it is only in the light of such an examination that the real income of the Ahmedabad trust can be ascertained and it is only that real income which can be included in the assessees income charged to tax. The department has not examined whether there are any other items in the Ahmedabad trust account which can be considered to be permissible deduction so far as the trust is concerned and if there are any such items, they have to decide the question as to what is the real income of the trust for the purpose of the Income-tax Act and whenever ascertained that income will have to be included in the total income of the assessee which is brought to tax.
22. In the light of the above discussion it is clear that so far question No. (2) in Income-tax Reference No. 7 of 1973 is concerned, it is not merely the income which is shown in the books of account of the Ahmedabad trust as paid to the assessee herein which will be required to be included in the total income of the assessee but the real income of the Ahmedabad trust after taking into consideration the various items of permissible deduction so far as that trust is concerned. Under these circumstances it is a clear that question No. (2) must be answered against the assessee and it must be held that the income includible in the total income of the assessee is income determinable as per the provisions of the Income-tax Act, 1961, in the case of the trust and not the income actually received or receivable by the assessee from the said trust or according to the entries in the books of account of the trust.
23. We, therefore, answer the question referred to us as follows :
24. Income-tax Reference No. 7 of 1973 :
25. Question No. (1). - In the affirmative.
26. Question No. (2). - Affirmative as to the first part of the question and in the negative as to the second part and against the assessee.
27. The assessee will pay the cost of this reference to the Commissioner.
28. Income-tax Reference No. 29 of 1973 :
29. The question referred to us is answered in the affirmative and the assessee will pay the costs of the reference to the Commissioner.
30. On behalf of the assessees, the learned Advocate-General applied for leave to appeal to the Supreme Court under section 261 of the Income-tax Act, 1961. Since substantial question of law do arise in both these matter are fit for appeal to the Supreme Court and leave is granted accordingly.