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Smt. Savita Mohan Nagpal Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberIncome-tax Reference No. 37 of 1975
Judge
Reported in[1985]154ITR449(Raj); 1984()WLN278
ActsIncome Tax Act, 1961 - Sections 23, 24(1) and 24(4)
AppellantSmt. Savita Mohan Nagpal
RespondentCommissioner of Income-tax
Appellant Advocate S.K. Kakkar, Adv.
Respondent Advocate J.P. Joshi, Adv.
Excerpt:
.....as a matter of fact, on account of the execution of the rent-deeds in joint names the share of nitin mohan in the rental income never reached or formed part of the income of the assessee.;(b) income tax act, 1961 - section 23--50% of rental income of jhandewalon properties not reaching assessee n--held, that part of rental income does not constitute income of assessee and is not liable to tax.;50% of the rental income of the immovable properties at jhandwalan extension had been diverted to nitin mohan before the same came to the hands of the assessee, as such that part of the rental income never constituted part of the income of the assessee. to the extent, a part of the income was diverted before it reached hands of the assessee, the same could not have been assessed to tax in the..........was justified in holding that the payment of half share of income from property at jhandewalan to nitin mohan under an agreement dated november 5, 1964, was not a case of diversion of any sum of money before it had become the income of the assessee ? 2. whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the property income was assessable in the hands of the assessee under section 23 of the i.t. act, 1961 ? 3. whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the payment of half share of income from property at jhandewalan was not an annual charge on the property and, as such, not allowable under section 24(1)(iv) of the i.t. act, 1961 ' 2. one smt. kowshalya wati was allotted a plot.....
Judgment:

Dwarka Prasad, J.

1. This reference has been made by the Income-tax Appellate Tribunal, Jaipure Bench, Jaipur (hereinafter referred to as'the Tribunal'), by its order dated August 29, 1974, and the following three questions of law arising out of the Tribunal dated August 18, 1972, have been referred to this court for its opinion :

' 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of half share of income from property at Jhandewalan to Nitin Mohan under an agreement dated November 5, 1964, was not a case of diversion of any sum of money before it had become the income of the assessee ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the property income was assessable in the hands of the assessee under Section 23 of the I.T. Act, 1961 ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of half share of income from property at Jhandewalan was not an annual charge on the property and, as such, not allowable under Section 24(1)(iv) of the I.T. Act, 1961 '

2. One Smt. Kowshalya Wati was allotted a plot of land bearing No. 25 in the Jhandewalan Extension at Delhi by the Delhi Development Authority in the year 1958. Although the terms of the aforesaid allotment are not available on the record, it appears that the allottee was required to construct a commercial building on the aforesaid plot. Smt Kowshalya Wati entered into an agreement with one Victor Kaul for undertaking the construction of the building on the plot of land in question. However, the agreement with Victor Kaul could not mature and then Smt. Kowshalya Wati entered into another agreement on March 2, 1963, with Smt. Savita Mohan Nagpal, the assessee, for making constructions on the plot of land. The construction work started in March, 1963, and the building was completed in December, 1964. As Smt. Kowshalya Wati could not comply with the terms of the agreement and failed to make payment of the stipulated amount to Smt. Savita Mohan, the latter became the absolute owner of the property in dispute.

3. On November 5, 1964, an agreement was executed between Smt. Savita Mohan and her son, Nitin Mohan, according to which both of them agreed to enter into a partnership with a view to manage the property in question ' efficiently and profitably ' and agreed to jointly make further constructions and earn rents from the property in question by leasing out the same. It was agreed between them that 50% of the net profits would go to Nitin Mohan, while the remaining 50% would go to Savita Mohan. As a result of the aforesaid agreement between the parties, lease deeds were got executed from the tenants jointly in favour of Smt. Savita Mohan Nagpal and Shri Nitin Mohan,

4. In respect of assessment year 1965-66, Savita Mohan Nagpal and Nitin Mohan submitted a return of income and sought assessment as a partnership firm. They also made an application under Section 184 of the I.T. Act, 1961, for registration of the firm. The ITO rejected the application for registration and assessed the entire income in the hands of Smt. Savita Mohan. He also valued the total investment made in the construction of the building at Rs. 1,82,000, instead of Rs. 1,56,256 declared by the asses-see and the difference of Rs. 25,744 was treated as the assessee's income from undisclosed sources. On appeal, the AAC by his order dated February 16, 1971, affirmed the finding arrived at by the ITO regarding rejection of the application for registration of the partnership firm; but he was of the view that on account of the agreement entered into between Savita Mohan and Nitin Mohan, the income from property should be divided equally between the two and that such income should be assessed in their hands in equal proportion as coparceners. He also accepted the valuation of the cost of construction as declared by the assessee.

5. Two appeals were filed by the Department before the Tribunal against the order passed by the AAC of Income-tax. Smt. Savita Mohan Nagpal filed cross-objections. The Tribunal by its order dated February 18, 1972, came to the conclusion that no legal partnership came into existence between Savita Mohan Nagpal and her son, Nitin Mohan, and, as such, the so-called firm could not be allowed registration. The Tribunal further held that without the execution of a registered document of transfer, half share in the ownership of the immovable property could not be transferred by Smt. Savita Mohan to her son and in the absence thereof, she continued to remain as the sole owner of the entire property. According to the finding of the Tribunal, the income from the property in question could only be assessed in the hands of Smt. Savita Mohan under Section 23 of the I.T. Act, 1961, and if she chose to give half of the said income to her son out of love and affection or otherwise, it would amount to application of the said income on her part. Thus, the finding of the Tribunal was that the present was not a case of diversion of any amount by Smt. Savita Mohan before the same became the income of the assessee but it was a simple case of application of a part of the income by the assessee. The Tribunal also held that no overriding charge was created by virtue of the agreement in favour of Nitin Mohan. Smt, Savita Mohan Nagpal filed an application under Section 256(1) of the I.T. Act before the Tribunal for making a reference and as already stated three questions reproduced above have been referred to this court by the Tribunal, as arising out of its order dated August 18, 1972.

6. The first question which requires consideration in the present case is as to whether there was a diversion of the income representing 50% of the rent by the assessee, Smt. Savita Mohan, before it reached her hands or it was a case of application of her income by Smt. Savita Mohan Nagpal after the income had been received by her. As noticed already, the authorities including the Tribunal have taken the view that no legal partnership had come into existence as there was no venture in the nature of business disclosed by the deed dated November 5, 1964. It merely appears that Smt. Savita Mohan Nagpal and her son agreed to share the rental income arising out of the property in question through common management. The Tribunal also found as a fact that as a result of the aforesaid agreement entered into between Smt. Savita Mohan Nagpal and her son, Nitin Mohan, on November 5, 1964, the lease agreements in respect of the building constructed by Smt. Savita Mohan were executed by the lessees jointly in favour of both Smt. Savita Mohan and Nitin Mohan. A substantial part of the building was let out to the Posts and Telegraphs Department on a monthly rent of Rs. 4,000 on December 2, 1964. Another portion of the building was let out to a business concern on a monthly rent of Rs. 1,000 in June, 1965. According to the terms of the agreement dated November 5, 1964, Nitin Mohan and Savita Mohan Nagpal were entitled to share the net profits half and half, out of the rents of the building after payment of taxes and defraying of expenses. No attempt was made by Smt. Savita Mohan to part with the ownership of half of the property in question to her son and as such the Tribunal rightly held that Smt. Savita Mohan continued to remain as the sole owner of the entire property. However, the question that arises for consideration is as to what was the true income from such property in the hands of Smt. Savita Mohan. Nitin Mohan was neither the co-owner nor a coparcener having any right in the property in dispute.

7. A similar question arose before the Bombay High Court in Seth Motilal Manekchand v. CIT, : [1957]31ITR735(Bom) . In that case, Chagla, Chief Justice, as he then was, explained the difference between a claim that a particular amount was not the real income of the assessee and a claim for deduction of an amount from the income of the assessee, under the provisions of the I.T. Act. It was observed by the Bombay High Court in the aforesaid case as under (p. 739):

' In the first place, this is not a case where a claim is made in respect of any deduction under the provisions of the Income-tax Act. If such a claim had been put forward, then we would have to consider the various sections of the Act in order to determine whether the deduction is justified. But it is clear position in law, as we shall presently point out, thateven though an assessee may not be allowed to claim a particular amount as a deduction falling within the provisions of the Act, he would be entitled to urge that his real income should be considered and if a certain amount is to be deducted in order to ascertain his real income, such a deduction would have to be made notwithstanding that the Income-tax Act made no provision for such a deduction. In all cases of tax, what has got to be considered is what is the income of the assessee and when that question arises what has got to be considered is the real income and not any artificial income, and for the purpose of ascertaining that real income every part of that income which may seem to be his income, if in fact it is not his income, if that part has been diverted and never constituted his real income, has got to be excluded. '

8. The aforesaid decision was relied upon by the Bombay High Court in Ratilal Daftari v. CIT, : [1959]36ITR18(Bom) wherein it was held that the real income was what remains after deducting the amount which may be said to have been diverted and which never constituted the real income of the assessee and such amounts will have to be excluded from consideration before the real income of the assessee is reached.

9. The decision in Ratilal's case, : [1959]36ITR18(Bom) was approved by their Lordships of the Supreme Court in Murlidhar Himatsingha v. CIT, : [1966]62ITR323(SC) and it was reiterated that for purposes of assessment, the real income of the assessee has to be reached, which remains after deducting the amount that may be said to have been diverted and that what constitutes his real income only could be assessed.

10. The real test in this respect was laid down by Hidayatullah J., as he then was, speaking for the Supreme Court, in CIT v. Sitaldas Tirathdas, : [1961]41ITR367(SC) in the following words (p. 374);

' 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 neverreaches 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.'

11. In Provat Kumar Mitter v. CIT, : [1961]41ITR624(SC) the facts were like this. The assessee was a registered holder of 500 ordinary shares in a limited company. He assigned to his wife, the right, title and interest to all dividends and sums of money which might be declared or which may be issued and payable in respect of those shares for the term of her natural life and agreed to deliver and endorse over to her any dividend warrant or any other document of title to such dividend or sum of money and to instruct the company to pay the dividends or sums of money to her. As the dividend income relating to the aforesaid income was included in the income of the assessee, he made a submission that the dividend income could not be deemed to be his income. The Calcutta High Court held in the aforesaid circumstances that the income continued to accrue to assessee and was assessable in his hands, even though it was clearly payable to his wife in the terms of the deed. Their Lordships of the Supreme Court, affirming the judgment of the Calcutta High Court, held that it was not a case of diversion of any income before it had become the income of the assessee but was a clear case of application of his income by the assessee, after it had accrued to him. In this context, their Lordships of the Supreme Court observed as under (p. 629):

' A transfer of property may take place not only in the present, but also in future ; but the property must be in existence. It is clear to us that the instrument of January 19, 1953, was not a transfer of any existing property of the assessee. It was in its true nature a contract to transfer or make over in future, every dividend and sum of money which may be declared or become due and payable on account or in respect of the shares held by the assessee, to his wife during her lifetime ; the other covenants are ancillary in nature and subserve this main object of the contract. The assessee did not assign the shares and, therefore, retained the right to participate in the profits of the company ; he did not part with that right. What tbe contract provided for was merely this : the beneficiary was given the right to receive from the assessee every dividend and other sum of money which may be declared or become due and payable in respect of the shares. If this is the true construction of the document, then it is clear to us that the answer given by the High Court to the question referred to it is correct. The High Court rightly pointed out that the company paying the dividend can pay it only to the registered shareholder or under his orders (see Howrah Trading Co. Ltd. v. CIT, : [1959]36ITR215(SC) ); therefore, Section 16(1)(c) of the Income-tax Act was not attracted nor the third proviso thereto and the income continued to accrue to theassessee, but was thereafter paid over to his wife under the terms of the contract. The income was, therefore, assessable in the hands of the assessee, because it was part of his income though applied subsequently towards payment to the wife under the terms of the contract.'

12. This principle laid down by their Lordships of the Supreme Court in Sitaldas case, : [1961]41ITR367(SC) was applied by the Bombay High Court in CIT v. Patuck, : [1969]71ITR713(Bom) and it was observed in that case as under (pp. 721, 725):

' Where a charge is created or, upon the facts and circumstances, a charge can be found, it would not be a case of mere application of a portion of his income by the assessee to discharge an obligation but a case in which an overriding charge is created by the assessee and he becomes only a collector of another's income. In other words, whenever a charge is created or exists, an overriding title is created in the charge-holder and, to the extent of the charge, the income of the assessee ceases to be his income, because the charge-holder has the paramount right by virtue of his overriding title to recover that income before it reaches the hands of the assessee....

Now, it is clear that the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. In deciding the question, the nature of the obligation created in each case is the decisive test. Where, however, coupled with an obigation, the terms of the document give rise to an overriding charge, then there can be no doubt that there would be created in favour of the charge-holder such an overriding or superior title as would make the amount due under the charge cease to be the income of the assessee altogether. '

13. The decision in Patuck's case, : [1969]71ITR713(Bom) was again followed by the Bombay High Court in CIT v. Nariman B. Bharucha & Sons, : [1981]130ITR863(Bom) . In that case, according to a particular clause in the partnership deed, after the death of one of the partners, the partnership business was to be continued by the other two partners, who were the sons, in equal shares, but subject to paying their mother 25% of the net profits of the partnership. It was held that the document of partnership created an overriding title in the mother of the two surviving partners to the extent of 25% of the profits of the partnership firm, and that the said amount was liable to be diverted before the profits reached the partnership of the assessee-firm.

14. The same view was also taken in CIT v. Crawford Bayley & Co., : [1977]106ITR884(Bom) where the test laid down by their Lordships of the Supreme Court in Sitaldas' case, : [1961]41ITR367(SC) was applied. Kantawala C.J.of the Bombay High Court, observed as under in the aforesaid case (p. 888):

' The true test for the application of the rule of diversion of income by an overriding charge, 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. '

15. It was observed in the aforesaid case that ordinarily it was true that a person who was not a party to the contract cannot enforce it, but the provision to make payment of the amount to the widow of the deceased partner was an absolute obligation in the nature of a trust. Such payment was to be made even if there were no profits whatsoever made by the firm and as such there could be no question of application of income to the assessee-firm after the same had accrued. Such payments have to be made by reason of an overriding title and must be regarded as diversion of the income by the creation of an overriding obligation. Thus 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 factor. 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 form part of the income of the assessee. Where, on account of the obligation, income is diverted before it reaches the assessee, it does not at all constitute his income. But where the income is required to be applied to discharge the obligation, after the amount reaches the assessee, the same consequences do not follow in law. That is a case of application of such income. Of course, if the income or a part thereof falls within one of the clauses of Section 24, then it has to be deducted, but it is one thing to say that a particular amount did not constitute part of the income of the assessee and quite a different thing to say that such an amount was deductible from the income of the assessee on account of an overriding charge. In the first kind of cases, the amount as a matter of fact never reaches the hands of the assessee. In thesecond class of cases, the payment is made to fulfil an obligation to pay another person a portion of one's own income. In the first class of cases, the income never reaches the assesses, who even if he were to collect the same, does not do so as a part of his income but only for and on behalf of the person to whom it is paid, while in the second type of cases, the income is applied in discharge of an obligation created by an overriding charge. Much of the confusion arises on account of a misunderstanding about the nature of the receipt of the two amounts. It may be pointed out that cases where an overriding charge is created by a paramount or superior title or even by the assessee are distinguishable from cases where there is mere application of a portion of his income by the assessee in discharge of some obligation. Even if an overriding title creates a charge, then to the extent of the charge, the income of the assessee ceases to be his income and he becomes a collector of another's income because the charge-holder has a paramount right by virtue of his overriding title to recover that amount. But when a charge is created on the assessee's income and in discharge of such obligation, a portion of the income of the assessee is applied, then the amount so applied would constitute part of the income of the assessee.

16. In the case before us, there is no doubt that Smt. Savita Mohan Nagpal, remained the absolute owner of the immovable property and she had no intention of parting with a share of the title or ownership of the property. But by virtue of the document dated November 5, 1964, an overriding charge was created in favour of her son, Nitin Mohan, on account of which Nitin Mohan became entitled to 50% of the net profits or receipts from the immovable property on account of rent, after payment of taxes and other expenses. The Tribunal found as a fact that in pursuance of the document dated November 5, 1964, the lessees executed lease agreements both in favour of Smt. Savita Mohan Nagpal and Nitin Mohan. The Tribunal's view was that as Smt. Savita Mohan was the owner of the entire immovable property, the income thereof was assessable in her hands under Section 23 of the I.T. Act, 1961, and then if she chose to give half of such income to her son, out of love and affection or otherwise, it would amount to an application of a portion of such income on her part after it had accrued to her. According to the Tribunal, there was no case of diversion of any sum of money before it had become income of the assessee. We are unable to agree with the aforesaid view expressed by the Tribunal. The Tribunal, having held as a fact that after the agreement dated November 5, 1964, the lessees had executed lease agreements in respect of portions of the building jointly in the names of Smt. Savita Mohan and Nitin Mohan, it cannot be lost sight of the fact that the agreement dated November 5, 1964, contained a stipulation that 50% of the net income of the building shall belong toNitin Mohan. Thus, an overriding interest was created which may not be in the nature of a charge on the property, yet the same constitutes on obligation created by a paramount title. It may be pointed out that on account of the excution of the lease agreement pursuant to the agreement dated November 5, 1964, Nitin Mohan was entitled to get 50% of the net profits or rent of the building, even before the same reached the hands of the assessee, Smt. Savita Mohan. However, it constituted an enforceable obligation and Nitin Mohan could realise the rent from the tenants directly on the basis of the lease agreements. Thus, following the tests laid down by Chagla CJ. in Motilal Manekchand, : [1957]31ITR735(Bom) and by their Lordships of the Supreme Court in Sitaldas' case, : [1961]41ITR367(SC) we hold that the agreement dated November 5, 1964, together with the execution of the lease deeds jointly in favour of Smt. Savita Mohan and Nitin Mohan created an obligation on account of which 50% of the net rental income was diverted by an overriding or superior title to Nitin Mohan and the same would not constitute the income of the assessee.

17. We, therefore, find that the Tribunal was not justified in holding that the payment of 50% share out of the rents of the property at 25, Jhande-walan Extension, Delhi, to Nitin Mohan, under the agreement dated November 5, 1964, was not a case of diversion of such amount before the same reached the assessee. In our view, this is a clear case of diversion of part of the rental income by an overriding or superior title before the same could be received as the income of the assessee. As a matter of fact, on account of the execution of the rent deeds in joint names, the share of Nitin Mohan in the rental income never reached or formed part of the income of the assessee. We answer the first question accordingly.

18. As regards the second question, as we have already held that 50% of the rental income of the immovable properties at Jhandewalan Extension had been diverted to Nitin Mohan before the same came into the hands of the assessee, as such that part of the rental income never constituted part of the income of the assessee. We have also pointed out above that it must be found as to what was the real income of the assessee. To the extent a part of the income was diverted before it reached the hands of the assessee, the same could not have been assessed to tax in the hands of the assessee under Section 23 of the I.T. Act.

19. In view of our answer to the first two questions, the third question referred to us need not be answered. As half of the rental income was already diverted to Nitin Mohan before it became the income of the assessee, the question of claiming any deduction in respect thereof under Section 24(1)(iv) did not arise. The agreement dated November 5, 1964, did not create any ' annual charge ' on the property of the assessee within themeaning of Clause (iv) of Section 27 nor could any deduction be claimed on that basis under Section 24(1)(iv) of the Act. The reference is answered accordingly.


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