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Issues Involved
1. Overriding title and diversion of income. 2. Deduction of interest under section 12(2) of the Indian Income-tax Act, 1922. 3. Determination of real income. Issue-wise Detailed Analysis 1. Overriding Title and Diversion of Income The court examined whether the interest paid on liabilities taken over by the assessees on partition should be considered as diverted by an overriding title. The assessees received properties and liabilities from a Hindu Undivided Family (HUF) partition. The court referred to the doctrine of pious obligation under Hindu law, which obligates sons to pay their father's debts unless tainted with immorality. The court cited precedents, including Pannalal v. Mt. Naraini and Sidheshwar Mukherjee v. Bhubneshwar Prasad Narain Singh, establishing that sons are liable for pre-partition debts unless there is a provision for their payment at partition. The court concluded that the assessees received properties subject to the liability to discharge debts, creating an overriding title in favor of creditors. This diversion of income before reaching the assessees' hands aligns with the principle in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, where income was diverted by an overriding title before it became the assessee's income. 2. Deduction of Interest Under Section 12(2) of the Indian Income-tax Act, 1922 The court analyzed whether the interest paid on the liabilities was an admissible deduction under section 12(2) of the Indian Income-tax Act, 1922. Section 12(2) allows deductions for any expenditure incurred solely for earning income. The court referred to precedents, including Padmavati Jaykrishna v. Commissioner of Income-tax and T. S. Krishna v. Commissioner of Income-tax, emphasizing that the expenditure must have a direct nexus with earning income. The court found that the interest paid on the liabilities did not meet the criteria of being incurred solely for earning income. It was not a direct expenditure for earning the income from the properties or dividends received by the assessees. Therefore, the interest could not be deducted under section 12(2). 3. Determination of Real Income The court considered whether the interest should be taken into account while determining the real income of the assessees. The concept of real income involves considering income that actually reaches the assessee. The court referred to the principle in Commissioner of Income-tax v. Sitaldas Tirathdas, which distinguishes between income diverted before it reaches the assessee and income applied to discharge an obligation after reaching the assessee. The court concluded that the interest payments were a diversion of income before it reached the assessees, aligning with the principle in Bejoy Singh Dudhuria's case. The assessees received properties with attached liabilities, and the interest payments were a result of this obligation. Thus, the real income of the assessees was the total income less the interest paid on the liabilities. Conclusion 1. Overriding Title and Diversion of Income: The court held that the interest paid on the liabilities was diverted by an overriding title before it became the assessees' income. 2. Deduction of Interest Under Section 12(2): The court held that the interest paid was not an admissible deduction under section 12(2) of the Indian Income-tax Act, 1922. 3. Determination of Real Income: The court held that the interest payments should be considered while determining the real income of the assessees, as the income was diverted before it reached them. Judgment 1. Question 1: Answered in the negative, in favor of the assessees. 2. Question 2: Answered in the affirmative, in favor of the revenue. 3. Question 3: Answered in the negative, in favor of the assessees. The Commissioner was ordered to pay the costs of the assessees in each of the five references.
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