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Udayan Chinubhai and ors. Vs. Commissioner of Income-tax and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference Nos. 1, 2, 3, 4 and 15 of 1974
Judge
Reported in[1978]111ITR584(Guj)
ActsIncome Tax Act, 1961 - Sections 5
AppellantUdayan Chinubhai and ors.
RespondentCommissioner of Income-tax and anr.
Appellant Advocate J.M. Thakore, Adv.-General
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredHartley v. Hudson
Excerpt:
(i) direct taxation - assessment - section 5 of income tax act, 1961 - whether tribunal right in holding part of interest in respect of amounts due to unsecured creditors not be allowed either by way of overriding title or otherwise - facts revealed on partial partition of hindu undivided family (huf) assessee received assets and certain liabilities of huf - income from assets received on partition considered in computing total income of assessee - tribunal erred in holding part of interest in respect of amounts due to unsecured creditors not be allowed either by way of overriding title or otherwise. (ii) deduction - whether interest not admissible deduction under section 12 (2) - tribunal rightly held interest not admissible deduction under section 12 (2). (iii) real income - whether.....divan, c.j.1. in each of these five matters, identical questions arising from the same set of facts have been referred to us for our opinion by the income-tax appellate tribunal and hence we will dispose of all these matters by this common judgment. at the instance of the assessee in each of these five cases, the following three identical questions have been referred to us for our opinion : '(1) whether, on the facts and in the circumstances of the case, and particularly in view of the facts that - (a) on partial partition of the huf the assessee received not only assets but also certain liabilities of the huf, and (b) the income from the assets received on partition had been considered in computing the total income of the assessee, the tribunal was right in holding that a part of the.....
Judgment:

Divan, C.J.

1. In each of these five matters, identical questions arising from the same set of facts have been referred to us for our opinion by the Income-tax Appellate Tribunal and hence we will dispose of all these matters by this common judgment. At the instance of the assessee in each of these five cases, the following three identical questions have been referred to us for our opinion :

'(1) Whether, on the facts and in the circumstances of the case, and particularly in view of the facts that -

(a) on partial partition of the HUF the assessee received not only assets but also certain liabilities of the HUF, and

(b) the income from the assets received on partition had been considered in computing the total income of the assessee,

the Tribunal was right in holding that a part of the interest in respect of amounts due to unsecured creditors should not be allowed either by way of any overriding title or otherwise

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that such interest as was disallowed was not admissible deduction under section 12(2) of the Indian Income-tax Act, 1922

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the said interest should not be taken into account while determining the real income of the appellant ?'

2. We are concerned in these cases with assessment years 1951-52, 1952-53 and 1954-55 to 1961-62. The facts leading to these five references are as follows : Sir Chinubhai Madhavlal, the second baronet, filed a suit in the High Court of Bombay on its original side in 1948 against his three sons, Udayan Chinubhai, Kirtidev Chinubhai and Achyut Chinubhai, his wife, Lady Tanumati Chinubhai, and his mother dowager, Lady Sulochana Chinubhai, for a declaration for severance of the joint status of the joint family of the plaintiff and the defendants to that suit. The family had considerable movable and immovable properties. Out of these, very substantial properties were held in trust as part of what is known as Baronetcy Trust and the trustees were the Baronetcy Trust Corporation. By the Bombay Act 8 of 1924 called Sir Chinubhai Madhavlal Ranchhodlal Baronetcy Act, 1924, this Baronetcy Trust Corporation was created and certain properties were settled in trust. There were also very substantial debts and liabilities against the Hindu undivided family including debts incurred by Sir Chinubhai Madhavlal, the second baronet, the father and karta of the Hindu undivided family. Certain debts had also been incurred by his son, Udayan Chinubhai, and his wife, Lady Tanumati, for maintenance, support and/or education of the various dependants of the family. A consent decree was passed in the suit on March 8, 1950, by the Bombay High Court declaring that there was disruption and severance of the joint status of the joint and undivided Hindu family with effect from October 15, 1947, and it was also declared that on such disruption, the father, that is, Sir Chinubhai Madhavlal, the second baronet, his three sons, Udayan, Kirtidev and Achyut, and his wife, Lady Tanumati, were each entitled to one-fifth share in the immovable and movable properties belonging to the said joint Hindu undivided family. Under the terms of the consent decree, Shri K. M. Munshi, advocate, was appointed the sole arbitrator and it was director by the court that the defendants were not entitled to challenge to debts and liabilities, claims and demands on the ground that they were illegal and immoral and not binding on the joint family. Under the terms of the consent decree, Shri K. M. Munshi was to ascertain and determine finally the debts, liabilities, claims and demands which were binding on the joint family and also determine whether any of these debts, liabilities, etc., were to be taken over by any defendant but as far as practicable the arbitrator was to allot to the plaintiff and the various defendants, such debts, liabilities, claims and demands as related to the properties and business coming to the respective sharer. In his capacity as the arbitrator appointed by the consent decree, Shri K. M. Munsi gave two awards. He first an award which is referred to on the record as the 'interim award'. The interim award was given on August 23, 1950, and the final award was given by him on February 15, 1951. The final award on the face of it is designated as the 'second interim award'. Under the award, the arbitrator gave certain properties to Sir Chinubhai Madhavlal and certain other properties to Lady Tanumati and her three sons. He also determined that certain debts, liabilities, claims and demands should be taken over by Sir Chinubhai Madhavlal while some other specific debts were to be taken over by Lady Tanumati and her three sons. There was no separate allocation either of the assets or the liabilities amongst Lady Tanumati and her three sons. In connection with this very family, it has been held by the Supreme Court in the case of Joint Family of Udayan Chinubhai v. Commissioner of Income-tax : [1967]63ITR416(SC) , that Lady Tanumati and her three sons did not constitute a Hindu undivided family after the consent decree as the original Hindu undivided family had no existence. Lady Tanumati and her three sons did not succeed to the properties as members of the Hindu undivided family but held the properties allotted to them as tenants-in-common.

3. After the partition, in the case of Lady Tanumati herself and each of her three sons it was claimed that interest paid on the liabilities which had been allotted to Lady Tanumati and her three sons on partition should be allowed as a deduction in computing the total income of each of these four assessees. The income consisted of income from immovable property, business income and income from other sources. Some of the debts which had been allotted by the arbitrator to Lady Tanumati and her three sons were secured against immovable properties and the Income-tax Officer allowed interest relating to these secured debts while computing the property income. The Income-tax Officer, however, did not allow the balance of the interest. The total income of the assessee and the balance of interest not allowed in the various years was as under :

________________________________________________________________________Assessment Total income worked Claim of interestyear out by I.T.O. not allowed________________________________________________________________________Rs. Rs.1951-52 44,952 94,8351952-53 49,505 1,00,4591954-55 49,221 98,4181955-56 54,872 1,18,5691956-57 50,501 1,00,0071957-58 60,924 1,12,8041958-59 49,030 1,01,7101959-60 45,511 85,4321960-61 41,221 1,33,5271961-62 2,80,360 76,277________________________________________________________________________

It may be pointed out that as shown by the assessment order passed by the Income-tax Officer for the assessment year 1951-52, he had taken the entire income received by Lady Tanumati and her three sons out of the properties, business and shares, securities, etc., allotted to four of them jointly by the award of Shri K. M. Munshi and one-fourth of the income from each of these three sources, namely, income from property, income from business and income from dividends was taken to be the individual income of each of these four assessee, namely, Lady Tanumati and her threes sons. Thus, it is obvious that in each of these ten assessment years under reference, the total income worked out by the Income-tax Officer for each of these four assessees was identical. In the course of the assessment proceedings interest paid to unsecured creditor was sought to be deducted on three alternative grounds. The first ground was that interest payments should be considered as diverted from the income by an overriding title. The second ground which was in the alternative to the first one was that the interest payment was admissible allowance under section 12(2) of the Indian Income-tax Act, 1922. The third ground which was in the alternative to the above two grounds was that the real income of each of these four assessees would be the gross income from assets received from the Hindu undivided family under the award less the interest payable in respect of liabilities which the assessee got on partition of the Hindu undivided family and it was contended in this connection that each of the four assessees was entitled only to his or her share in the net assets of the joint family at the time of partition, but instead he or she received assets attached with liabilities and hence only the real income from these sources was assessable as the total income of each of these four assessees. Each of these three alternative arguments was rejected by the Income-tax Officer. Against these decisions of the Income-tax Officer in respect of each of these ten assessment years under reference, the assessees concerned filed appeals. The Appellate Assistant Commissioner held that there was no diversion of income and that the interest on liabilities could not qualify for deduction against income from assets assessed under the head 'Other sources'. The Appellate Assistant Commissioner also held that the assessees were required to prove that the liabilities were incurred by the previous owners or by the joint family before the partition to purchase income-yielding assets and all the appeals were dismissed by the Appellate Assistant Commissioner.

4. The matters were taken in appeal by the assessees and the Tribunal held that there was no overriding title or diversion of income in respect of liabilities or interest due on the debts which came to Lady Tanumati and her three sons on partition of the Hindu undivided family. The Tribunal further held that the loss for which the deduction is claimed must be one that springs directly from the carrying on of business and is incidental to it. The Tribunal ultimately held that the assessee's claim for allowance of interest could not be allowed. Thereafter, at the instance of each of these assessees, the three questions set out hereinabove have been referred to us in identical terms in each of these matters.

5. It may be mentioned that Achyut Chinubhai and Kirtidev Chinubhai have each come by way of separate references. So far as Lady Tanumati was concerned, she died during the pendency of the proceedings before the Tribunal and her legal representatives seem to have been brought on the record. As regards Udayan Chinubhai, it seems that he received one-fourth share of the income for himself so far as the previous years relevant to the assessment years 1951-52, 1952-53 and assessment years 1954-55 to 1957-58 were concerned and thereafter the one-fourth share of the income was received by the joint family of Udayan Chinubhai (H.U.F.) and thus Income-tax Reference No. 1 of 1974 is for the six assessment years in the case of Udayan Chinubhai himself, and for the remaining four assessment years, Income-tax Reference No. 3 of 1974 has been made, with the assessee being Udayan Chinubhai (H.U.F.). It is under these circumstances that these five reference have been made at the instance of the different assessees.

6. We may mention that in Income-tax Reference No. 15 of 1974, an agreed compilation setting out the difference enactments of the Bombay Legislature relating to Sir Chinubhai Madhavlal Ranchhodlal Baronetcy has been submitted. We may only note for the purposes of this judgment that by Bombay Act No. 8 of 1924, the Baronetcy Trust was created for settling certain properties and securities which were formerly the property of Sir Chinubhai Madhavlal Ranchhodlal, the first baronet, who by 1924 was dead, so as to accompany and support the title and dignity of a baronet lately conferred on him by His Majesty King George V. By Bombay Act No. 16 of 1936, certain amendments were made to Bombay Act No. 8 of 1924. Further amendments were made by Bombay Act No. 27 of 1939 and ultimately by Bombay Act No. 1 of 1957, Sir Chinubhai Madhavlal Ranchhodlal Baronetcy Act, 1924, was repealed and the Baronetcy Trust was dissolved.

7. In order to appreciate to contentions urged before us in the course of the hearing of the references and also in order to approach the legal point from the correct angle, it is necessary to refer to the salient features of the provisions of the consent decree passed on March 8, 1950, and provision of the interim award dated August 3, 1950, and the final award which is also referred to as the second interim award given on February 15, 1951. The consent decree provided that as from October 15, 1947, there was disruption and severance of the joint status of the joint and undivided Hindu family of Sir Chinubhai Madhavlal, the second baronet, and his wife, Lady Tanumati, and his three sons. It was recognised by the consent decree that as from October 15, 1947, Sir Chinubhai Madhavlal, the plaintiff of that suit, his wife and his three sons became separate in food, worship and estate and that on such disruption, the plaintiff, that is, Sir Chinubhai Madhavlal, the second baronet, his wife and his three sons had all become entitled to one-fifth share in the immovable and movable properties belonging to the joint Hindu family, subject to the rights of maintenance and residence of the mother of Sir Chinubhai Madhavlal, the second baronet. By the consent decree it was provided that the properties described in Part I of Schedule 'A' to the consent decree were to belong to and vest exclusively in the plaintiff, that is, Sir Chinubhai Madhavlal, the second baronet, in full satisfaction of his share in the said joint family properties. Lady Tanumati and her three sons were to hand over to the plaintiff such of the properties described in Part I of schedule 'A' as might be in their possession, power or control with relative blank transfer forms in respect of shares. Under the scheme of the consent decree, Sir Chinubhai Madhavlal was to be absolutely entitled to the share and interest of the joint family in the assets, effects and outstandings of six mentioned in clause (e) of the consent decree and he had to pay, satisfy and discharge the debts and liabilities of the said six firms and indemnify and from time to time keep indemnified Lady Tanumati and her three sons in respect of the said properties and liabilities but the liability of Chinubhai Madhavlal and Company, Cotton Department, to the Uganda Commercial Company (Kampala) Ltd. and the Eastern Bank Ltd. through Chinubhai Madhavlal and Company, Cotton Department, and also the liability in the sum of Rs. 3 lakhs in respect of Travancore Rubber Works to the Travancore State were to be deemed to be the debt and liability of the joint family. It was also provided in the consent decree that the properties, movable, and immovable, described in Parts II and III of schedule 'A' to the consent decree were absolutely to belong to and vest in Lady Tanumati and her three sons as tenants-in-common in equal shares in full satisfaction of their respective shares in the said joint family properties subject as regards the properties described in Part II of the schedule 'A' to the provisions of the Baronetcy Act which was then in force provided that the fourth defendant, that is, Lady Tanumati, was to take her share and interest in the said properties as a limited estate equivalent to a limited interest which a Hindu woman gets on partition between her sons. It was further provided in the consent decree that the debts and liabilities binding on the joint family were as shown in schedule 'B' to the consent decree. Further, the claims and demands including income-tax, supper-tax and excess profits tax liabilities made against the said joint family or against the plaintiff, Sir Chinubhai Madhavlal, the second baronet, as father and karta of the said joint family and arising out of his dealings and transactions as such prior to October 15, 1947, were as shown in schedule 'C' and the debts and liabilities incurred by Udayan Chinubhai and Lady Tanumati Chinubhai for the maintenance, support and/or education of the three sons and also for the maintenance and support of the defendants or any of them up to the date of the consent decree were as shown in schedule 'D'. It was also provided by the consent decree that in the event of the plaintiff or any of the three sons or the wife, Lady Tanumati, or any of them challenging the genuineness or otherwise of the debts and liabilities mentioned in schedule 'B' to the consent decree or of the claims and demands mentioned in schedule 'C' or of the debts and liabilities mentioned in schedule 'D' to the consent decree on the ground that such debts and liabilities, claims and demands or any part or parts thereof were the result of direct, misappropriation, fraud or improper conversion of the moneys to the personal use of the plaintiff, that is, Sir Chinubhai Madhavlal or Udayan Chinubhai or Lady Tanumati or any of them, as the case might be, then such disputes or difference were to be raised and intimated in writing and were to be referred to the arbitration of Shri K. M. Munshi, advocate. But it was provided in the consent decree itself that the three sons and Lady Tanumati or any of them were not to be entitled to challenge the said debts, liabilities, claims and demands on all or any of the grounds mentioned in the written statement and supplemental written statement of Udayan Chinubhai and Lady Tanumati or on the ground that the debts were 'Avyavaharika' or illegal and immoral and not binding on the joint family. The consent decree provided that Sir Chinubhai Madhavlal should render to the three sons and Lady Tanumati, accounts of the management and administration of the Joint family properties by the plaintiff from the after October 15, 1947, and any dispute or difference relating thereto was to be referred to the sole arbitration of Shri K. M. Munshi, advocate, and the clause as to arbitration provided that the said arbitrator, Shri K. M. Munshi, shall finally ascertain and determine the debts, liabilities, claims and demands mentioned in schedules 'B', 'C' and 'D' to the consent decree which are binding on the joint family and was also to determine and find out which of the said debts, liabilities, claims and demands given in the said schedules 'B', 'C' and 'D' to the consent decree were to be taken over by the three sons and Lady Tanumati. The consent decree provided that the three sons and Lady Tanumati were to pay and discharge all such debts, liabilities, claims and demands as were taken over by them in pursuance of the award of awards made by the arbitrator and they were to indemnify and from time to time keep indemnified Sir Chinubhai Madhavlal in respect thereof and the three sons and Lady Tanumati undertook to use their best endeavours to procure releases in respect of such debts, liabilities, claims and demands in favour of the plaintiff. It was also agreed that the plaintiff, that is, Sir Chinubhai Madhavlal, was to hand over to Udayan Chinubhai and Lady Tanumati, all documents, title deeds, papers and vouchers relating to or connected with the properties, debts and liabilities coming to the share of the three sons and Lady Tanumati under the consent decree.

8. Thus, it is clear so far as the properties were concerned, certain concerns were to go to Sir Chinubhai Madhavlal and all those properties which were described in part I to the schedule were to go to him. Properties mentioned in part II were to go to the wife and three sons and some of those properties were included in the Baronetcy Trust. Properties mentioned in part III were also to go to the three sons and Lady Tanumati and the arbitrator was to decide as to which liabilities, claims and other debts should be assigned to each of the two sides, that is, the father, Sir Chinubhai Madhavlal, on the one hand and the three sons and their mother, Lady Tanumati, on the other.

9. By the interim award dated August 3, 1950, the arbitrator awarded that the plaintiff, that is, Sir Chinubhai Madhavlal, should pay and discharge the liability of the joint family to the Uganda Commercial Company Ltd. in the sum of Rs. 12,39, 601-5-0 being item No. 5 in schedule 'B' to the said consent decree. The arbitrator also awarded that Lady Tanumati and her three sons should pay and discharge all other debts, liabilities, claims and demands mentioned in schedules 'B', 'C' and 'D', to the said consent decree including the amount due and payable to Tara Deshpande under the consent decree in Summary Suit No. 44 of 1950. By the second interim award or final award, the arbitrator, Shri K. M. Munshi, awarded that the debts, liabilities, claims and demands mentioned in schedule 'A' to the interim award should be taken over by the plaintiff and the the plaintiff was to pay and discharge the same. He also awarded that debts, liabilities, claims and demands mentioned in schedule 'B' to the final award were to be taken over by the Lady Tanumati and her three sons and that they were to pay and discharge the said debts, liabilities, claims and demands. He also awarded that liability in respect of item 27, 28, 29 and 30 of schedule 'C' to the consent decree were to be borne by defendants Nos. 1 to 4, that is, Lady Tanumati and her three sons, and they were to pay and discharge the same.

10. Thus, under the terms of the consent decree read together with the interim award and the final award, several debts, claims and liabilities outstanding with the joint family were to be paid and discharged by Lady Tanumati and her three sons and the properties under the scheme of the consent decree and the two awards, the interim award and the final award, came to them along with the liability to pay and discharge these debts and liabilities. Thus, the properties which they got under the scheme of the consent decree and the interim award and the final award came to them together with the liability to pay off and discharge the debts, liabilities and claims which were directed to be paid by them by the consent decree and the two awards, interim and final. It is also clear from the scheme of the consent decree and the two awards that no immediate payment of these outstanding debts and liabilities and claims against the joint family was provided for, but, at the time of distributing the properties amongst the five persons entitled to a share on partition of the joint family by metes and bounds, certain properties came to Lady Tanumati and her three sons together with liability to discharge the debts and liabilities of the joint and undivided Hindu family which they were directed or pay off by the arbitrator by the consent decree.

11. It is obvious from the scheme of the consent decree that no provision was made for payment of debts and liabilities at the time of effecting the partition. Ordinarily, when a partition of joint family takes place, sufficient properties are set apart for meeting the liabilities and outstanding dues and claims against the joint family so that out of the total assets of the joint family, after deducting those properties which are set apart to meet the liabilities, the net assets are available for partition, and ordinarily, what each person gets on partition under normal circumstances is his share on that total property less the debts. It is obvious that under the terms of the consent decree it was not open to the three sons or Lady Tanumati to challenge any of the debts incurred by the father and karta of the joint and undivided Hindu family as avyavaharika or immoral or illegal. The question then arises as to what was the effect in view of the provisions of Hindu law and the decided cases of these terms of the consent decree on the rights of Lady Tanumati and her three sons.

12. In Pannalal v. Mt. Naraini : [1952]1SCR544 , 174, the position under Hindu law regarding the doctrine of pious obligation and liabilities of the sons for the debts of their father has been summarized as follows :

'The position, therefore, is that the son is not personally liable for the debt of his father even if the debt was not incurred for an immoral purpose and the obligation is limited to the assets received by him in his share of the joint family property or to his interest in such property and it does not attach to his self-acquisitions. The duty being religious or moral, it ceases to exist if the debts is tainted with immorality or vice.....

It can now be taken to be fairly well settled that the pious liability of the son to pay the debts of his father exists whether the father is alive or dead,..... Thus, it is open to the father, during his lifetime, to effect a transfer of any joint family property including the interest of his sons in the same to pay off an antecedent debt not incurred for family necessity or benefit, provided it is not tainted with immorality. It is equally open to the creditor to obtain a decree against the father and in execution of the same put to sale not merely the father's but also the son's interest in the joint estate. The creditor can make the sons parties to such suit and obtain an adjudication from the court that the debt was a proper debt payable by the sons. But even if the sons are not made parties, they cannot resist the sale unless they succeed in establishing that the debts were contracted for immoral purposes.'

13. At page 176, Mukherjea J., delivering the judgment of the Supreme Court, has summarized the position regarding the liability of the sons under Hindu law upon pre-partition debts of the debts of the father as follows :

'The sons are liable to pay these debts even after partition unless there was an arrangement for payment of these debts, at the time when the partition took place... if is (partition) makes no arrangement or provision for the payment of the just debts payable out of the joint family property, the liability of the sons for payment of the pre-partition debts of the father will still remain.'

14. Thus,it is obvious that Lady Tanumati and the three sons were, under the doctrine of pious obligation as well as under the doctrine of obligation to pay the debts of the joint family, liable under the general principles of Hindu law to pay the pre-partition debts incurred by Sir Chinubhai Madhavlal and the consent decree reflected this legal position by providing that the debts and liabilities of the joint family assigned to them should be paid by Lady Tanumati and her three sons.

15. In Sidheshwar Mukherjee v. Bhubneshwar Prasad Narain Singh : [1954]1SCR177 , Mukherjea J., delivering the judgment of the Supreme Court observed. :

'We do not find any warrant for the view that to saddle the sons with this pious obligation to pay the debts of their father, it is necessary that the father should be the manager or `karta'of the joint family, or that the family must be composed of the father and his sons only and no other male member. No such limitation is deducible either from the original texts or the principles which have been engrafted upon the doctrine by judicial decision. Where a debt is incurred for necessity or benefit of the family, the manager, whether he be the father or not, has the undoubted power to alienate any portion of the coparcenary property for the satisfaction of such debts, irrespective of the fact as to who actually contracted the debts.'

16. Then at page 490, he further observed :

'It is settled law that even after partition the sons could be made liable for the pre-partition debts of the father if there was no proper arrangement for the payment of such debts at the time when the partition was effected, although the father could have no longer any right of alienation in regard to the separated shares of the sons.'

17. In S. M. Jakati v. S. M. Borkar : [1959]1SCR1384 , the legal positi on under Hindu law was thus summarized :

'...unless the son succeeds in proving that the decree was based on debt which was for an immoral or illegal purpose the creditor's right of seizing in execution of his decree the whole coparcenary property including the son's share remains unaffected, because except where the debt is for an illegal or immoral purpose it is open to the execution creditor to sell the whole estate in satisfaction of the judgment obtained against the father alone.'

18. In paragraph 13, it was further observed at page 287 :

'The liability of the sons is thus unaffected by partition because the pious duty of the sons to pay the debt of the farther, unless it is for an immoral or illegal purposes, continues till the debt is paid off and the pious obligation incumbent on the sons to see that their father's debts are paid, prevents the sons from asserting that the family estate so far as their interest is concerned is not liable to purge that debt. Therefore, even though the father's power to discharge his debt by selling the share of his sons in the property may no longer exist as a result of partition the right of the judgment-creditor to seize the erstwhile coparcenary property remains unaffected and undiminished because of the pious obligation of the sons. There does not seem to be any divergence of judicial opinion in regard to the Hindu son's liability to pay the debts of his father after partition and by the mere device of entering into partition with their father, the sons cannot get rid of this pious obligation.'

and the above quoted passages from the earlier decisions in Pannalal v. Mt. Naraini : [1952]1SCR544 , and Sidheshwar Mukherjee v. Bhubneshwar Prasad Narain Singh : [1954]1SCR177 , were relied upon and it was reiterated that if there is no proper arrangement for payment of such debts at the time when the partition was effected, although the father could have no longer any right of alienation in regard to the separated shares of the sons, even after partition, the sons could be made liable for the pre-partition debts of the father.

19. In Virdhachalam Pillai v. Chaldean Syrian Bank Ltd. : [1964]5SCR647 , the position was again summarized by Rajagopala Ayyangar J., at page 1429, in paragraph 11, as follows :

'(1) A father can by incurring a debt, even though the same be not for any purpose necessary or beneficial to the family so long as it is not for illegal or immoral purposes, lay the entire joint family property including the interests of his sons open to be taken in execution proceedings upon a decree for the payment of that debt.

(2) The father can, so long as the family continues undivided, alienate the entirety of the family property for the discharge of his antecedent personal debts subject to their not being illegal or immoral.

In other words, the power of the father to alienate for satisfying his debts, is co-extensive with the right of the creditors to obtain satisfaction out of family property including the share of the sons in such property.

(3) Where a father purports to burden the estate by a mortgage for purposes not necessary and beneficial to the family, the mortgage qua mortgage would not be binding on the sons unless the same was for the discharge of an antecedent debt. Where there is no antecedency, a mortgage by the father would stand in the same position as an out and out sale by the father of family property for a purpose not binding on the family under which he receives the sale price which is utilised for his personal needs.

It need hardly be added that after the joint status of the family is disrupted by a partition, the father has no right to deal with the family property by sale or mortgage even to discharge an antecedent debt, nor is the son under any legal or moral obligation to discharge the post-partition debts of the father.'

20. The text book writers on Hindu law have in their learned commentaries also summarized the position in the same manner regarding the pre-partition debts of the father which are not tainted with illegality or immorality, that is, which are not avyavaharika debts. Raghavachariar in the sixth edition of his Hindu Law states at page 336 :

'A long catena of recent decisions has now established that the son's share is liable even after his partition with the father for the latter's non-avyavaharika debts incurred prior to partition, and the argument, though plausible, that the father's creditor should not be held to be in a better position than the father himself and hence should not be allowed to proceed against the son's share when the father himself cannot touch it after partition, has not found acceptance. These rulings do not countenance any distinction between a case of partition where there is no provision made for the discharge of father's debts and a case of an honest division of net assets after making full provision for the discharge of those debts, even though in the former case it would be unjust to deprive the creditor of his remedy against the son's share, and in the latter case it would be inequitable to call upon the son to pay once again what he had virtually paid off by ample provision in the partition. But what is thus established is only the right of the father's creditor to proceed against the son's share after partition, and not from of the remedy by which that right can be enforced. The creditors can enforce the son's pious obligation even after partition by bringing a suit against him in respect of the father's pre-partition debt.'

21. In his book Introduction to Modern Hindu Law, J. Duncan M. Derrett, has stated in paragraph 505 at page 312 :

'Sons and other male issue cannot escape liability by separating between the incurring of the debt and a suit by the creditor. Though their separation is irrevocable, their separated shares are liable to meet the obligation proportionately.'

22. In paragraph 550 at page 338 of his book, Derrett says that after the assets of the joint family are determined at the time of partition, deductions must be made for the following :

'(i) debts binding upon the joint family including estate duty payable on the deaths of coparceners already dead;

(ii) debts binding upon the male issue under the pious obligation, whether or not the creditor is pressing for payment (for unless provision is made for payment of these debts, and the father squanders his share or his share is inadequate, the creditor can have access to the sons' shares).'

23. In paragraph 551, he has observed :

'In the direction to take accounts of the assets and liabilities of the joint family, it is understood that all these deductions (which he has mentioned at paragraph 551) have to be made, thus considerably reducing the net assets available for distribution at the partition.'

24. In the light of the above discussion regarding the provisions of Hindu law and in the light of the scheme of the consent decree and the awards, it is clear that in the instant case the three sons and Lady Tanumati were liable to pay the pre-partition debts incurred by Sir Chinubhai Madhavlal the second baronet, or debts which were held to be binding on the joint family, and that since no provision was made by setting apart sufficient assets to meet all these liabilities at the time of awarding the assets of the joint family, the arbitrator, Shri K. M. Munshi, made a division of all liabilities and debts which the joint family should have discharged but had not discharged till the date of partition. It is in the light of this legal position and the impact of that legal position on the facts of this case that we have to consider the three questions that have been referred to us.

25. The question regarding section 12(2) of the Indian Income-tax Act, 1922, which is covered by the third question can be easily disposed of and is taken up first for consideration. Section 12 provided for deductions while computing income from other sources. Sub-section (1) of section 12 provided that the tax was to be payable by an assessee under the head 'Income from other sources' in respect of income, profits and gains of every kind (which might be included in his total income) if not included under any of the proceeding heads). It is well settled that dividends were to be charge under the head 'Other sources' since they were not covered by any other head of income under Act of 1922. Under section 56(2)(i) of the Income-tax Act, 1961, income from dividends had been specifically made chargeable as income which is to be computed under the head 'Income from other sources'. Under section 12(1) as originally enacted and thereafter by section 12(1A) which came into effect in 1959, income from other sources was to include dividends, and thus dividend income was 'Income from other sources'. Under section 12(2) income falling under the head 'Income from other sources' was to be computed after making allowance for nay expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains.

26. As regards section 12(2), all relevant authorities bearing upon the point have been considered by this High Court in Income-tax Reference No. 35 of 1972 decided on December 3, 1973 (Padmavati Jaykrishna v. Commissioner of Income-tax : [1975]101ITR153(Guj) ]. The question involved in that reference was, whether the assessee in that case was entitled to claim deduction as regards the payment of interest to the extent of Rs. 10,279 against 'income from other sources' under clause (iii) of section 57 of the Income-tax Act, 1961. It was found in that case on facts that the assessee had borrowed a loan and interest paid on the outstanding amount of the loan was Rs. 26,986. The assessee contended that the entire interest amount of Rs. 26,986 should be allowed as a permissible deduction under section 57(iii) of the Act of 1961 corresponding to section 12(2) of the Act of 1922.

27. In T. S. Krishna v. Commissioner of Income-tax : [1973]87ITR429(SC) , the question before the Supreme Court was whether the amount of wealth-tax paid in respect of shares held by the assessee could be deducted in computing income from dividends and interest under section 57(iii) of the Income-tax Act, 1961. One of the two grounds on which the Supreme Court decided that case against the assessee was that the wealth-tax paid by the assessee did not bear any relationship direct or incidental to the earning of the income from dividends and could not be said to be laid out or expended exclusively for the purpose of making or earning such income within the meaning of section 57(iii).

28. In Income-tax Reference No. 35 of 1972 decided by this court on December 3, 1973 [Padmavati Jaykrishna v. Commissioner of Income-tax : [1975]101ITR153(Guj) after referring to T. S. Krishna's case : [1973]87ITR429(SC) , and earlier decisions on the point, it was held that unless it is found that a particular item of expenditure has some sort of nexus with the income in question, the deduction contemplated by section 57(iii) could not be made. It was further held by the Division Bench that the two decisions of this court, namely, Commissioner of Income-tax v. Kasturbhai Lalbhai : [1968]70ITR267(Guj) and commissioner of Income-tax v. Indumati Ratanlal : [1968]70ITR353(Guj) were not overruled by the subsequent decision of the Supreme Court in Indian Aluminium Co. Ltd. v. Commissioner of Income-tax : [1972]84ITR735(SC) . This court held in the light of the decided cases that the purpose for which the expenditure is incurred must be in order to earn income and here 'purpose' must not be confused with 'motive' because what section 12(2) emphasizes is the purpose for which the expenditure is incurred and the 'purpose' does not mean motive for the transaction. The passage from the decision of the Supreme Court in T. S. Krishna's case : [1973]87ITR429(SC) was also cited in this connection. In view of this legal position regarding section 12(2), it is obvious that the interest paid by the assessees in respect of these different liabilities could not be said to be expenditure incurred solely for the purpose of making or earning such dividend income or income from the rest of the properties which came to the share of Lady Tanumati and her three sons.

29. It was sought to be argued on behalf of the assessees by the learned Advocate-General that if a part of the assets received by Lady Tanumati and her sons had been liquidated by them, they could have paid off the liabilities and to that extent the payment of the interest dispensed with (sic) the necessity of liquidating some of the assets received by them on partition and, therefore, this payment of interest could be said to be a deductable item under section 12(2). Even since the decision of the Bombay High Court in Bai Bhuriben Lallubhai v. Commissioner of Income-tax : [1956]29ITR543(Bom) , such a contention has been consistently turned down. The decision in Bai Bhuriben Lallubhai's case : [1956]29ITR543(Bom) has been followed by this High Court consistently and ultimately in Income-tax Reference No. 35 of 1972 [Padmavati Jaykrishna v. Commissioner of Income-tax : [1975]101ITR153(Guj) ], it has been held in terms by this court particularly in the light of the decision of the Supreme Court in Commissioner of Income-tax v. Malayalam Plantations Ltd. : [1964]53ITR140(SC) , that the purpose contemplated by clause (iii) of the 1961 Act, equivalent to section 12(2) of the Act of 1922, is specific in character inasmuch as it points to a precise and specific object of making or earning income. It follows, therefore, that so long as the particular item of expenditure is not laid out with the sole object of earning or making income, the deduction contemplated by clause (iii) of section 57 of the Act of 1961 cannot be allowed. In view of this legal position as it emerges from an examination of all authorities on the point, it is obvious that the claim for interest cannot be sustained under section 12(2) of the Act of 1922.

30. We will now deal with the contentions urged before us by the learned Advocate-General on behalf of the assessees and by Mr. Kaji on behalf of the revenue regarding what is referred to in decided cases and at the Bar as aspect of 'real income'. The starting point of the line of decisions in this connection is the decision of the Privy Council in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax [1933] ITR 135. In that case, the assessee succeeded to the family ancestral estate on the death of his father. Subsequently his step-mother brought a suit for maintenance against him in which a consent decree was made directing the assessee to make a monthly payment of a fixed sum to his step-mother and declaring that the maintenance was a charge on the ancestral estate in the hands of the assessee. In computing his income, the assessee claimed that the amounts paid by him to the step-mother under the decree should be excluded. It was held by the Privy Council that the assessee's liability under the decree did not fall within any of the exemptions or allowances conceded in sections 7 to 12 of the Indian Income-tax Act, 1922, but the sum paid by the assessee to his step-mother were not 'income' of the assessee at all. The decree of the court by charging the appellant's whole resources with a specific payment to his step-mother had to that extent diverted him income from him and had directed it to his step-mother; to that extent what he received for her was not his income. It was not a case of the application by the appellant of part of his income a particular way; it was rather the allocation of a sum out of his revenue before it became income in his hands. Lord Macmillan, delivering the opinion of their Lordships of the Privy Council, observed at page 138 :

'The learned Chief Justice next examines the various exemptions and allowances conceded in sections 7-12 of the Act in respect of the several heads of income, profits and gains chargeable to tax under section 6 reaches the conclusion that the appellant's liability to his step-mother does not fall within any of these exemptions or allowances. With this conclusion their Lordships are also in agreement.

But their Lordships do not agree with the learned Chief Justice in his rejection of the view that the sums paid by the appellant to his step-mother were not `income' of the appellant at all. This, in their Lordships opinion, is the true view of the matter.

When the Act by section 3 subjects to charge 'all income' of an individual, it is what reaches the individual as income which it is intended to charge. In the present case the decree of the court by charging the appellant's whole resources with a specific payment to his step-mother has to the extent diverted his income from him and has directed it to his step-mother; to that extent what he receives for her is not his income.'

31. The same point came up for consideration again before their Lordships of the Privy Council in P. C. Mullick v. Commissioner of Income-tax [1938] 6 ITR 206. In that case, a testator had by his will appointed the appellants his executors and had directed them to pay Rs. 10,000 out of the income of his property on the occasion of his addya sradh for expenses in connection therewith to the person who was entitled to perform the sradh. He had also directed them to pay out of the income of his property the costs of taking out probate of his will. During the year of account the executors had paid Rs. 5,537 for expenses in connection with the addya sradh and a sum of Rs. 1,25,000 for probate duty. It was held by the Privy Council that the payments made for the sradh expenses and the costs of probate could not be excluded in computing the chargeable income. These were payment made out of the income of the estate coming to the hands of the appellants as executors and in pursuance of obligation imposed by the testator. It was not a case in which a portion of the income was by an overriding title diverted from the person who would otherwise have received it as in Raja Bejoy Singh Dudhuria's case [1933] 1 ITR 135 , but a case in which the executors having received the whole income apply a portion of it in a particular way. The relevant portion in the opinion of the Privy Council is to be found at page 210 of the report and there it was pointed out that the payment of the sradh expenses and the costs of probate were payments made out of the income of the estate coming to the hands of the appellants as executors, and in pursuance of an obligation imposed by their testator. The case was distinguished from Raja Bejoy Singh Dudhuria's case [1933] 1 ITR 135 on the ground that Mullick's case [1938] 6 ITR 206 was a case in which the executors having received the whole income of the estate applied a portion in a particular way pursuant to the direction of the testator, in whose shoes they stood.

32. The learned Advocate-General for the assessees relied upon certain observations of Chagla C.J. in Seth Motilal Manekchand v. Commissioner of Income-tax : [1957]31ITR735(Bom) . In that case, a managing agency belonged to a Hindu joint family composed of A, his son, B, and A's wife. In a partition between the members of the family the managing agency was also divided and the partition deed provided that A and B would be entitled to the managing agency remuneration in equal shares and that each of them should pay to A's wife 2 as. 8 pies out of the their respective 8 as. share in the managing agency. A and B constituted themselves into a registered firm and carried on the managing agency. In the assessment of the firm and of each of the individual partners it was claimed that the 2 as. 8 pies share paid to A's wife by each of them should be deducted before ascertaining their taxable income. It was held that even though the amount to be paid to A's wife could not be considered in the assessment of the firm, that would not prevent A and B from claiming that their real income as partners was not an 8 as. share in the managing agency commission but only 8 as. less the amount which A's wife was entitled to receive from them. It was further held that under the deed of partition what the parties really intended was that only a portion of the managing agency commission should be the income of A and B and that the remaining portion should be the income of A's wife; this was accordingly a case in which the portion of the managing agency commission payable to A's wife was diverted before it became the income of A and B and not a case of application of a part of the income of A and B, and the amount payable to A's wife should, therefore, be deducted before ascertaining the taxable income of A and B. At page 743 of the report, after citing the earlier cases and also the decision of a Division Bench of the Bombay High Court in Commissioner of Income-tax v. D. R. Naik [1939] 7 ITR 362, Chagla. C.J., delivering the judgment of the Bombay High court, observed :

'In a more recent case, Prince Khanderao Gaekwar v. Commissioner of Income-tax : [1948]16ITR294(Bom) , we applied this principle to a voluntary settlement made by two sons in favour of their mother, and the test we laid down was whether the property was subject to a valid and legal charge which could be enforced in a court of law under which the assessee was bound to pay a certain amount recurring annually. In our opinion, the test would be the same even though may not be specific charge so long as there was an obligation upon the assessee to pay which could be enforced in a court of law.'

33. The learned Advocate-General has relied upon this observation in the decision in Seth Motilal Manekchand's case : [1957]31ITR735(Bom) at page 743 of the report.

34. It must be pointed out that in a subsequent decision, namely, Sitaldas Tirathdas v. Commissioner of Income-tax : [1958]33ITR390(Bom) , the High Court of Bombay had observed :

'...... it is not essential that there should be a charge, it is quite sufficient if there is a legally enforceable claim.'

35. In Murlidhar Himatsingka v. Commissioner of Income-tax : [1966]62ITR323(SC) , Sikri J., as he then was, delivering the judgment of the Supreme Court, observed at page 328 regarding this observation of the Bombay High court in Sitaldas Tirathdas's case : [1958]33ITR390(Bom) :

'These observations must be treated as unsound. The test laid down by this court is quite clear, though like some other test it is not easy of application in all cases.'

36. The test to be applied in cases like the present one where the claim is made on the ground of 'real income' was laid down by the Supreme Court in Commissioner of Income-tax v. Sitaldas Tirathdas : [1961]41ITR367(SC) of the report, the legal position was summarized as follows :

'There are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not 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 assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable.'

37. In Murlidhar Himatsingka's case : [1966]62ITR323(SC) , at page 328 the above passage from the decision of the Supreme Court in Commissioner of Income-tax v. Sitaldas Tirathdas : [1961]41ITR367(SC) was cited and Sikri J., delivering the judgment of the Supreme Court, observed - see 62 ITR 328 :

'This test clearly shows that it is not every obligation to apply income in a particular way that results in the diversion of income before it reaches the assessee.'

and then he pointed out that the observations of the Bombay High Court in Sitaldas Tirathdas v. Commissioner of Income-tax : [1958]33ITR390(Bom) must be treated as unsound. Since the observations of Chagla C.J. in Seth Motilal Manekchand's case : [1957]31ITR735(Bom) , at page 743 of the report of that case were on the same lines as the observations in Sitaldas Tirathdas v. Commissioner of Income-tax : [1958]33ITR390(Bom) , it must be held that the only test which in the opinion of the Supreme Court is now required to be applied is as laid down by the Supreme Court itself in Sitaldas Tirathdas : [1961]41ITR367(SC) , in the passage which we have cited above.

38. In spite of these observations in Himatsingka's case : [1966]62ITR323(SC) , we find that in Commissioner of Income-tax v. C. N. Patuck : [1969]71ITR713(Bom) , Division Bench of the Bombay High Court felt itself bound by the decision of the Bombay High Court in Seth Motilal Manekchand's case : [1957]31ITR735(Bom) . On the facts of the case before it in C. N. Patuck's case : [1969]71ITR713(Bom) , the Division Bench held that upon the two documents which were material in that case, the assessee had created a charge in favour of his two daughters and there arose an overriding right or title in favour of two daughters who got the remuneration and profits, to the extent of that right or title, ceased to be remuneration and/or profits of the assessee. In that view, the income could not be taxed in his hands. But the Division Bench further held (page 732) :

'Even assuming, however, that we are wrong in the construction of the two documents before us and that no charge has arisen, we think that the case will be clearly covered by the decision of this court in Seth Motilal Manekchand's case : [1957]31ITR735(Bom) which is binding upon us.'

39. In view of what has been stated in Himatsingka's case [1962] 62 ITR 323 , the earlier decision of the Bombay High Court in Seth Motilal Manekchand's case : [1957]31ITR735(Bom) , must be read in the light of what has been stated by the Supreme Court regarding the correct test to be applied in cases like this. (Vide the Supreme Court decision in Sitaldas Tirathdas : [1961]41ITR367(SC) and the Supreme Court decision in Himatsingka's case : [1966]62ITR323(SC) ).

40. In Commissioner of Income-tax v. Mrs. Indumati Ratanlal : [1968]70ITR353(Guj) , a Division Bench of this High Court was dealing with the following facts. The assessee's husband died leaving a will bequeathing half of his estate to his wife and the other half to his minor son. The estate consisted mainly of shares and securities. For the assessment year 1962-63, the assessee claimed that an amount of Rs. 15,397 being one-half of the interest on money borrowed for payment of estate duty was deductible under section 57(iii) of the Income-tax Act, 1961, from the dividends derived from the shares and securities. It was held that there is no difference between interest paid on money borrowed to pay income-tax and interest on money borrowed to pay estate duty. While the former is not paid for the purpose of making or earning the income, the latter is not made for the purpose of making or earning the assets. Whether interest paid is allowable under section 57(iii) of the Act or not, depends on the facts of each case. If property is received by a person subject to a charge for payment of a liability an moneys are borrowed for clearing that liability, the interest paid on such borrowed moneys will be an allowable expenditure. In this connection Bhagwati C.J., delivering the judgment of the Division Bench, observed at page 363 :

'The question then arises : Does it make any difference if there was a charge on the shares for payment of estate duty and moneys were borrowed by the assessee for the purpose of clearing the charge We cannot assent to the broad proposition canvassed on behalf of the assessee that whenever liability is charged on a property, and moneys are borrowed for clearing the charge, interest paid on the borrowed moneys would necessarily be an allowable expenditure in computing the assessable income from the property. Whether it constitutes an allowable expenditure or not would depend on the facts of each case. But one thing is clear that if property is received by an assessee subject to a charge for payment of a liability and moneys are borrowed for clearing the charge by discharging the liability, interest paid on the borrowed moneys would be an allowable expenditure. The purpose of the borrowing would be to save the property by freeing it from the encumbrance and thus to facilitate the earning of the income and there would accordingly be the requisite connection or nexus between the borrowing of the moneys and the earning of the income. To illustrate the point, take a case where property is received by an assessee subject to a charge for payment of money with growing interest. Would the interest paid by the assessee to the charge-holder not be an allowable expenditure in computing the assessable income from the property It would be an outgoing in respect of the property just like a municipal tax or cess and would be expenditure incurred for the purpose of making or earning the income from the property within the meaning of section 57(iii). But if this be so, what deference should it make on principle if, instead, moneys are borrowed by the assessee for discharging the liability to the chargeholder and clearing the charge on the property and interest is paid on the borrowed moneys ?'

41. The learned Advocate-General, on behalf of the assessee, has also relied on the decision of the Division Bench of the Bombay High Court in Commissioner of Income-tax v. H. H. Maharani Shri Vijaykuverba Saheb of Morvi : [1975]100ITR67(Bom) . In that case, by a trust deed dated October 6, 1955, M created a trust in favour of his son, Prince M. The trust property comprised of shares and securities and the income of the trust was by way of dividends from shares and interest on securities. M died on August 17, 1957, within two years of the execution of the trust deed, and the property comprised in the trust was includible in the property passing on the death of M which was liable to estate duty. The estate duty payable by the trustees, who were the assessees, was Rs. 8,25,300. The trustees paid the estate duty immediately on March 26, 1958, by borrowing the amount from the Bank of India Ltd. The trustees paid interest to the bank in the three assessment year 1959-60, 1960-61 and 1961-62 till the whole amount was repaid in 1962. The trustees claimed the amounts paid as interest as deduction against their income under the head 'dividends' and 'Interest on securities'. On these facts a Division Bench of Bombay High Court held that if an assessee had no option except to incur an expenditure in order to make the earning of the income possible, then undoubtedly the exercise of that option is compulsory and any expenditure incurred by reason of the exercise of that option would come within the ambit of section 12(2) of the Act of 1922. The Division Bench held that it was clear that the assessee had no other option except to incur expenditure in order to make the earning of an income possible and that the exercise of the option, in the circumstances of that case, was compulsory. The Division Bench pointed out that the estate duty liability was first charge on the movable property held by the trustees as such by virtue of the provisions of section 74(2) of the Estate Duty Act, 1953, and, ultimately, it was held that the expenditure would be a permissible deduction under section 12(2) of the Act of 1922.

42. Now, it must be noticed that the case before he Division Bench of the Bombay High Court in H. H. Maharani Shri Vijaykuverba Saheb's case : [1975]100ITR67(Bom) was not a question of 'real income' as is the case before us. There it was not a case of any estate having been received by the assessee subject to an overriding title in favour of someone else who received a portion of the income nor was it a case of any diversion of the income before the income was received by the assessee, and hence, this decision in H. H. Maharani Shri Vijaykuverba Saheb's case : [1975]100ITR67(Bom) does not help us in deciding the case before us.

43. Mr. Kaji for the revenue has relied upon the decisions of the Supreme Court in Sitaldas Tirathdas's case : [1961]41ITR367(SC) and Himatsingka's case : [1966]62ITR323(SC) . He had also pointed out to us the decision in Venugopala Varma Rajah v. Commissioner of Agricultural Income-tax : [1972]84ITR466(SC) . The facts of the case before the Supreme Court were that the assessee was the karnavan of his tarwad. Under a karar of 1909, certain properties of the tarwad were put in possession of the junior members of the tarwad for their maintenance. On the question whether the income from the agricultural lands which were put in possession of the junior members were liable for inclusion in the income of the family, the High Court answered the reference against the assessee, holding that such income was liable for inclusion in the income of the family under section 9(1) of the Kerala Agricultural Income-tax Act, 1950. The Supreme Court held that section 9(1) of the Kerala Act was similar to section 16(1)(c) of the Indian Income-tax Act, 1922. If the income in dispute is considered as having been applied to discharge an obligation of the assessee, the same is liable to be included in the assessable income of the assessee but, if, on the other hand, the same had been diverted by an overriding charge, then it is not liable to be included in the assessable income of the assessee as it ceased to be his income. It was further held that where the income is the income of the family, it would reach the hands of the family as soon as it reached the hands of any member of the family who was entitled to receive it on behalf of the family. The members of the family received that income on behalf of the family and applied the same in discharge of an obligation of the family. When it is said that the income reached the hands of the karnavan, it does not refer to the physical act but to a legal concept, a receipt in law. It was held that the properties allotted for the enjoyment of the various members of the family under the karar continued to be the properties of the family, and the income from all the properties was liable to be assessed in the hands of the assessee, karnavan. The decisions in Bejoy Singh Dudhuria's case [1933] 1 ITR 135 , Mullick's case [1938] 6 ITR 206 and Sitaldas Tirathdas's case : [1961]41ITR367(SC) , were considered by the Supreme Court. Hegde J. has observed at page 475 of the report :

'The test to be applied for finding out whether there is diversion of income or not is set out by this court in Commissioner of Income-tax v. Ratilal Nathalal : [1954]25ITR426(SC) .'

44. When one goes to Commissioner of Income-tax v. Ratilal Nathalal : [1954]25ITR426(Bom) , one finds that in the case before the Supreme Court the assessee, a Hindu undivided family, consisted of a father R, his son N, the wife and daughter of R and the wife of N. R and N executed a trust deed with a regard to certain house property of the family under which the income from the property was to be enjoyed by R during his lifetime, by N after the death of R and after the death of N by his widow and his son who were in existence at the time of the death of the survivor of R and N. There was a power of revocation given to R but he died and thereafter the income from the property was enjoyed by N. In assessing the family to income-tax, the question arose whether the income from the trust property could be included in the income of the assessee under section 16(1)(c). It was held that the income from the trust property could not be included in the income of the assessee, a Hindu undivided family.

45. Now, it must be noticed that in the cases before the Supreme Court in Venugopala Varma Rajah's case : [1972]84ITR466(SC) and Ratilal Nathalal's case : [1954]25ITR426(SC) , the question in each case arose under section 16(1) (c) of the Act of 1922 or the provisions of the Kerala Agricultural Income-tax Act, similar to the provisions of section 16(1)(c). Under section 16(1)(c), in computing the total income of an assessee all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income-tax (Amendment) Act, 1939, from assets remaining the property of the settlor or disponer shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor. Therefore, really speaking, neither in Venugopala Varma Rajah's case : [1972]84ITR466(SC) nor in Ratilal Nathalal's case : [1954]25ITR426(SC) , the question of 'real income' in the sense in which we are dealing with that question arose before the Supreme Court. In our opinion, therefore, it would be better to rely upon the decisions of Sitaldas Tirathdas's case : [1961]41ITR367(SC) and Himatsingka's case : [1966]62ITR323(SC) for the purpose of finding out the test to be applied for ascertaining the 'real income' and finding out whether a portion of the income has been diverted by a overriding title before it reached the hands of the assessee.

46. Mr. Kaji for the revenue has relied upon the decision of the Allahabad High Court in Commissioner of Income-tax v. Badal Ram Laxmi Narain, Income-tax Reference No. 478 of 1973, decided on March 20, 1975. A summary of the decision of the Allahabad High Court is to be found in July, 1975, issue if Taxation, Vol. 40, Section 1, page 1. In that case a Hindu undivided family had been carrying on business, with the help of borrowed capital since it had no capital of its own. As a result of a partial partition, the business of the family was partitioned between the members of the family and the members formed themselves into a partnership and continued the business. On the date of the partition there was a debit balance of Rs. 1,75,310 in the capital account of the family and this was transferred in equal proportion to the personal accounts of the three partners. The firm which took over the debt borrowed further capital, and suffered further losses in subsequent years, thereby increasing the debit balances. The question that arose in the assessment was whether the interest paid by the firm on the debit balance taken by the firm was an allowable deduction in the computation of its income. It was found by the Tribunal that the debit balance of Rs. 1,75,310 in the books of accounts of the family represented the borrowing for non-business purposes and the Allahabad High Court held that the interest on that amount could not have been allowed as a deduction to the family and that, therefore, the interest could not be allowed as deduction to the firm also as he nature of the debt did not change when it was taken over by the firm. The assessee's alternative plea that the sum of Rs. 1,75,310 could be considered to be the price paid by the firm for the goodwill of the business, was also rejected by the court, which pointed out that the partners of the firm were bound to take over the liability of the firm because the liability was that of the family which they were the members and on partition every member became liable for the liabilities of the family according to his share. The firm took over the liability not in consideration of any goodwill but because the liability devolved upon the partners under their personal law. It was held that the interest paid on the debit balance was not deductible.

47. In our opinion, it is in the light of what has been observed in Sitaldas Tirathdas's case : [1961]41ITR367(SC) and in Himatsingka's case : [1966]62ITR323(SC) by the Supreme Court that the problem as to what may be called 'real income' has to be approached. It is no doubt true that on the facts of this case, no formal charge was created in favour of any person in the sense of charge as understood under the Transfer of Property Act, but, at the same time, under the awards of Shri K. M. Munshi and the consent decree the assessees in the different references before us got their shares of Hindu undivided family property subject to the liability to pay off the debts which were assigned to them.

48. In Words and Phrases Legally Defined, second edition, volume 1, at page 239, it has been stated :

'An ordinary meaning of the word 'charge' is a liability to pay money. It is not limited to such a liability when it is imposed on property but is also applicable to such a liability imposed on a person. It was in this sense that the word was held to have been used in the lease which fell to be construed in Hartley v. Hudson [1879] 4 CPD 367. The world is frequently used in the Local Government Act in the sense of a liability to pay money laid upon real property. However, there is a cognate but distinct meaning of the word in the sense of cost or the price demanded for services or goods. These meaning are given separately in the Shorter Oxford English Dictionary. We have come to the conclusion that, when the word `charge' is in the Local Government Act used in conjunction with the word `fee' it is used in the latter sense, namely, as the price demanded for services or goods.'

49. This meaning of the word 'charge' in Word and Phrases Legally Defined has been relied upon by the learned Advocate-General in support of his contention that there was an overriding charge in favour of the creditors whose debts were assigned by the terms of the consent decree and the awards of Shri K. M. Munshi to the present assessees. It must be pointed out that these meanings to be found in the passage relied upon from Words and Phrases Legally Defined were in the context of certain pieces of legislation in Australia, but, ultimately, what we have to decide is in the light of the principles culled by the Supreme Court in the Sitaldas Tirathdas's case : [1961]41ITR367(SC) and Himatsingka's case : [1966]62ITR323(SC) together with what was said by this court in Smt. Indumati Ratanlal's case : [1968]70ITR353(Guj) . In subsequent decisions of this court, Smt. Indumati Ratanlal's case : [1968]70ITR353(Guj) has been consistently followed and we see no reason to depart from what has been stated in hat case by Bhagwati C.J. delivering the judgment of the Division Bench.

50. So far as the personal law of the parties is concerned, there is undoubtedly the position which emerges from the different cases which we have set out hereinabove, and the position is that under the doctrine of pious obligation, the sons and Lady Tanumati were all liable to pay the debts of the father. Their shares in the properties belonging to the Hindu undivided family were liable to be sold and for the pre-partition debts of the father, the property received by the sons on partition could be proceeded against even after partition. Moreover, by the very terms of the consent decree, a liability to pay the debts assigned to the assessee before us was cast upon them and, therefore, it must be held that the assessees received their respective shares on partition under the consent decree and under the terms of the awards subject to the liability to discharge the debts and other outgoings referred to as having been assigned to them by the awards of Shri K. M. Munshi. It must be pointed out once again on the peculiar facts of this case that until the Baronetcy Trust was dissolved, valuable properties of the Hindu undivided family which had been assigned to the assessee before us were part of the Baronetcy Trust. So long as those properties continued to form part of the Baronetcy Trust, they could not be touched in any respect and that is probably the reason why instead of making provision for the payment of the debts and liabilities and other outgoings of the Hindu undivided family at the time of effecting the partition, the learned arbitrator, Shri K. M. Munshi, had to assign the debts as well as the properties and to leave it to the assessees gradually to pay off the creditors and others who were entitled to proceed against the Hindu undivided family both for liabilities of the family as well as for the debts of the father which were not tainted with illegality or immorality. As we have pointed out, it was only by the Bombay Act No. 1 of 1957, which came into effect on January 7, 1957, that the Baronetcy Trust was dissolved and thereafter the properties came into the hands of the assessees. Even after the properties assigned to them came to their hands, it took some time to gradually pay off the liabilities and in the interim period the assessees went on paying interest to the different creditors and other persons who were entitled to claim moneys from them by virtue of the assignment of debts and liabilities of the family made by the arbitrator, Shri K. M. Munshi. The Hindu undivided family was severed with effect from October 15, 1947, and the assessees undertook to take over the debts and to discharge them. This is clear from the terms of the consent decree passed on March 8, 1958. Under the terms of the consent decree it was provided that Lady Tanumati and her three sons should pay and discharge all such debts, liabilities, claims and demands as were taken over by them in pursuance of the awards made by the said arbitrator and to indemnify and from time to time keep indemnified Sir Chinubhai Madhavlal, the second baronet, and in respect thereof they undertook to use their best endeavours to procure releases in respect of such debts, liabilities, claims and demands in favour of Sir Chinubhai Madhavlal, the second baronet, who was the plaintiff of that suit.

51. Apart from the liability under the general Hindu law of the sons to discharge the pre-partition debts of the father, when the debt is not tainted with illegality or immorality, here we get specific provision in the consent decree under which the partition was effected between the different members of the Hindu undivided family by which the three sons and the mother undertook the liability to discharge all these debts and it is because of that the properties came to be assigned to them by the arbitrator.

52. There is another aspect also from which the matter can be considered. Chapter IX of the Indian Trusts, Act, 1882, which covers sections 80 to 96, deals with certain obligations in the nature of trusts. Section 94 provides for constructive trusts in cases not otherwise expressly provided for and states that in any case not coming within the scope of any of the preceding sections, where there is no trust, but the person having possession of property has not the whole beneficial interest therein, he must hold the property for the benefit of the persons having such interest, or the residue thereof, (as the case may be), to the extent necessary to satisfy their just demands, Illustration (a) to section 94 is in these terms :

'A, an executor, distributes the assets of his testator B to the legatees without having paid the whole of B's debts. The legatees hold for the benefit of B's creditors, to the extent necessary to satisfy their just demands, the assets so distributed.'

53. If instead of the executors, we substitute the words 'the arbitrator' and instead of the legatees we substitute the words 'the members of the Hindu undivided family' into the illustration (a) to section 94 of the Indian Trusts Act, it becomes clear that the assessees before us held the properties received by them for the benefit of the creditors to the extent necessary to meet the just demands of the creditors. As pointed out earlier, ordinarily provision has to be made for the creditors to discharge the liabilities of the Hindu undivided family and for the pre-partition debts of the father at the time when a partition takes place, but, if for some reason or other provision for discharging the liabilities has not been made or could not be made, the persons who get the properties on partition keep the properties in their hands subject to the liability to satisfy the just demands of the creditors. In this sense, the sons and the mother, the assessees before us, hold the property for the benefit of the creditors and they were holding the assets which they received on partition for the benefit of the creditors to the extent necessary to satisfy the just demands of the creditors. Even from this point of view, therefore, it is clear that there was an overriding right in favour of the creditors to have their liabilities paid from the assets which came to the hands of the assessees before us by virtue of the consent decree and the awards of the arbitrator. This position clearly emerges both under the provisions of the Hindu law as well as under the provisions of the Indian Trust Act. Therefore, it was by virtue of an overriding title in favour of the creditors that the total income which the assessees received did not represent their 'real income'. By virtue of the overriding title in favour of the creditors, the income of the family had to be diverted to pay off the interest amounts on the outstanding liabilities and the case would fall within the principle in Bejoy Singh Dudhuria's case [1933] 1 ITR 135 rather than under the principle in P. C. Mullick's case [1938] 6 ITR 206 . To use the language of the Supreme Court in Sitaldas Tirathdas's case : [1961]41ITR367(SC) , it must be held that the amounts sought to be deducted in truth never reached the assessees as their income. By the very nature of the obligation which the assessees before us undertook under the scheme of the consent decree and the awards, the income in the shape of interest payable on the outstanding liabilities of the Hindu undivided family assigned to them can never be said to be a part of their income. Because of the obligation on the assessees, the income was diverted before it reached them and hence the amount of interest is deductible in the case of each of the assessees before us. This cannot be said to be a disposition of income by the assessees. The property was received by the assessees before us subject to the liability for payment of the demands of the creditors whose debts were assigned to them and though moneys were not actually borrowed for clearing the charge by discharging the liability, interest had to be paid to the creditors until the liabilities could be discharged and that interest must be held to be an allowable expenditure. As the Privy Council pointed out in Bejoy Singh Dudhuria's case [1933] 1 ITR 135 , the concept is of 'real income' and not any specific deduction covered by any of the provision of the Indian Income-tax Act, 1922, or any provisions of the Income-tax Act, 1961. The only question is as to what is the 'real income' which reaches the hands of the assessee. Is it a case of diversion of part of the total receipts by an overriding title before the income reached the assessees' hands or is it a diversion of a part of the income after it reached the hands of the assessees As Hegde J. has pointed out in Venugopala Varma Rajah's case : [1972]84ITR466(SC) , the question is not of any physical receipt but what we have to consider is the legal concept of receipt in law and looked at in this sense, it must be held that the real income of the assessees consisted of only total receipts less the interest payable on the outstanding liabilities assigned to them under the terms of the consent decree and the award.

54. In the light of these conclusions, we answer the questions referred to us in each of these reference as follows :

Question No. (1). In the negative, that is, in favour of the assessees and against the revenue.

It must be observed that our entire decision is in respect of interest paid in respect of amounts due to unsecured creditors.

Question No. (2). In the affirmative, that is, in favour of the revenue and against the assessees (sic).

Question No. (3). In the negative, that is, in favour of the assessees and against the revenue.

55. The Commissioner will pay the costs of the assessees in each of these five references.


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