1978 (3) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 84,000 was deductible in computing the total income of the assessee.
2. Interpretation of the provisions of the West Bengal Act No. II of 1963, as amended by the West Bengal Act No. XXXIX of 1963.
3. Determination of whether the payment to the Nawab Bahadur was an overriding charge on the income of the trust or merely an application of income.

Detailed Analysis:

1. Deductibility of Rs. 84,000:
The primary issue was whether the sum of Rs. 84,000 paid to the Nawab Bahadur was deductible from the total income of the assessee. The Income Tax Officer (ITO) disallowed this claim, viewing the payment as not connected to any overriding charge. The Appellate Assistant Commissioner (AAC) disagreed, treating the payment as an overriding charge on the income of the trust and excluding it from the trust's income. However, the Tribunal reversed the AAC's decision, considering the payment as an application of income rather than an overriding charge. The High Court ultimately had to determine if the payment was an overriding charge or merely an application of income.

2. Interpretation of the West Bengal Act No. II of 1963:
The West Bengal Act II of 1963, known as the Murshidabad Estate (Trust) Act, 1963, created a trust for the benefit of the Nawab Bahadur's sons and daughters. Section 3 of the Act vested all properties of the Murshidabad Estate in the Trustee, who was also entitled to receive a monthly sum of Rs. 19,166 and ten annas and eight pies from the Government Treasury at Berhampore. Section 5, as amended by the West Bengal Act XXXIX of 1963, stipulated the application of funds and income from the trust properties, including a monthly payment of Rs. 7,000 to the Nawab Bahadur.

3. Overriding Charge vs. Application of Income:
The High Court examined whether the payment to the Nawab Bahadur constituted a diversion of income by overriding charge or an application of income. The principles from the cases of Raja Bejoy Singh Dudhuria v. CIT and CIT v. Sitaldas Tirathdas were applied. In these cases, the distinction between an amount diverted before it became the income of the assessee and an amount applied from the income after it reached the assessee was emphasized. The High Court concluded that the payment to the Nawab Bahadur was a diversion of income by overriding charge, as the obligation to pay Rs. 2,30,000 annually originated from the historical relinquishment of the Nawab Bahadur's rights and privileges and was to be paid from the revenue of the Government of British India, not from the properties of the Murshidabad Estate.

Conclusion:
The High Court answered the question in the negative, holding that the sum of Rs. 84,000 was not deductible in computing the total income of the assessee, as it was a diversion of income by overriding charge and not merely an application of income. The obligation to pay the amount was historically rooted in the relinquishment of the Nawab Bahadur's rights, and the payment was to be made from the revenue of the Government of British India. Therefore, the payment did not constitute income of the trustee but was an amount received on behalf of the Nawab Bahadur. The parties were directed to bear their own costs.