Commissioner of Income Tax vs Atmaprakash Aishiram Batra

Mohta, J.—This is an application by the Commissioner, Nagpur u/s 256(2) of the income tax Act 1961 (''the Act'') for calling upon the Tribunal to state the case and to refer the following three questions to this Court for opinion u/s 256(1).

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the agreements between the assessee and his wife create overriding title?

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that provisions of section 40A(2) are not applicable to the facts of the case?

Whether, on the facts and in the circumstances of the case, the Tribunal is correct, in holding that payments are reasonable and not disproportionate?"

There was a partial partition in respect of the capital of the HUF ''Atmaprakash Aishiram Batra'' which was recorded in the form of memorandum dated 2-4-1963. The family members consisted of Shri Atmaprakash (karta), his wife Smt. Bhagwatibai, minor son Sushilkumar and five unmarried minor daughters. As per the said memorandum the capital (after setting apart Rs. 10,000 each for the education and marriage of the five daughters, was equally divided between Atmaprakash, his wife and minor son. The profits arising from various businesses in which the capital stands invested was to be divided in future in equal shares between the karta, his wife and minor son. On 9-4-1963 further agreement took place between them in which it was additionally agreed that Shri Atmaprakash would continue the old business as proprietary concern and his wife and minor son would get minimum 9 per cent interest on the capital in the business assets. The mother acted as guardian of the minor in the agreement. The assessee had claimed recognition of partial partition u/s 171 of the Act. Recognition was granted by the ITO vide order dated 6-6-1968. For the assessment years 1964-65 to 1975-76 Shri Atmaprakash was assessed on the basis of the said partition. The assessment for the year 1976-77 was also made accordingly, but the Commissioner in revisional jurisdiction u/s 263 of the Act set it aside on the ground that this was a case of application of income and not diversion by overriding title. The ITO made a reference u/s 144A of the Act to the IAC for guidance to enable him to complete the assessment. The IAC directed the ITO to allow the claim treating 2/3rds income as having been diverted by overriding title to the wife and minor son.

This order was again set aside by the Commissioner u/s 263. Against that order the assessee filed appeal before the Tribunal which came to be allowed, relying, inter alia, on the following cases :

(1) Charandas Haridas and Another Vs. The Commissioner of Income Tax, Bombay North, Kutch, Saurashtra and Ahmedabad and Another, ,

(2) The Commissioner of Income Tax, Bombay City II Vs. Shri Sitaldas Tirathdas, ,

(3) Commissioner of Income Tax Vs. M.D. Kanoria, and

(4) Commissioner of Income Tax Vs. Indramohan Sharma (No. 1),

Application for reference by the Commissioner u/s 256(2) was rejected by the Tribunal.

Basic facts in this matter leave no doubt that this was a case not of application of income but of diversion by overriding title. There was HUF. The HUF had business assets including capital. There was partial partition in respect of that asset. Such a partition is permissible under the Hindu law. The partition was even recognised u/s 171 at the time of making first assessment for the assessment year 1964-65 and assessments were made on that basis for a period of overall 11 years.

Now the true test for the application of rule of diversion of income by an overriding charge is whether the amount sought to be deducted never reached the assessee as his income. There are no doubt obligations, but they exist in every case. Deciding factor is the nature of the obligation. There is difference between an amount which a person is obliged to apply out of his income and amount which by the nature of the obligation cannot become a part of the income of the assessee. Where by the obligation, income is diverted before it reaches the assessee, it is diversion by overriding charge, but where the income is required to be diverted to discharge an obligation after it reaches the assessee, it is application. The former is deductible, the latter is not.

In Charandas Haridas'' case (supra) dealing with asset of HUF, it is observed:

"...For an asset of this kind, there was no other mode of partition open to the parties if they wished to retain the property and yet hold it not jointly but in severalty, and the law does not contemplate that a person should do the impossible.

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It is, therefore, manifest that the family took the fullest measure possible for dividing the joint interest into separate interest. There is no suggestion here that this division was a mere pretence; nor has the Appellate Tribunal given such a finding. The document was fully effective between the members of the family." (p. 208)

In M.D. Kanoria''s case (supra) this Court in identical circumstances held that it was a case of diversion of income by overriding title and not of application of income. The only difference between that case and the case at hand is that the former pertains to a share of HUF in the partnership firm and the latter pertains to the whole share in the proprietary concern.

Our pointed attention was drawn by Shri Chandurkar, the learned counsel for the revenue, to the recitals in the agreement dated 9-4-1963 regarding guaranteed minimum return of 9 per cent on the capital assets in favour of the wife and the minor son. Rightly Shri Dewani, the learned counsel for the assessee, submitted that this fact of the matter would have no decisive impact on the source to which the income can be traceable and it is this source which is the principal determinant. It seems to us that Shri Dewani is right. There is nothing unusual about the minor being admitted only to the benefits of the partnership. Indeed law mandates that minor cannot be made to suffer losses. This guarantee is extended even to the wife in this case. Crucial point is that after partition the assessee was not entitled to 2/3rds income from the business assets.

Our attention was also invited to the fact that in the agreement mother has acted as guardian despite father being alive. It is submitted that as per law this is impermissible. Reliance was placed in support of this proposition on the case of Commissioner of Wealth Tax, Bombay City-II Vs. Mrs. P.G. Rao, . We are unable to see how that facet can have any impact on the conclusion. Even if agreement is ignored, the memorandum produces the same result about diversion of profit at the source.

Under the circumstances, rightly has the Tribunal held that the partition created overriding title by diversion and rejected the application for reference.

It is obvious that question No. 2 can arise only in case reference is called on question No. 1.

Question No. 3 is not legal and is factual. For all these reasons this application is dismissed and rule discharged. No order as to costs.