1983 (1) TMI 94 - AT - Income Tax

Charitable Trust, Diversion By Overriding Title, Diversion Of Income, Income By Overriding Title, Total Income

Summary

Issues Involved:
1. Overriding title and diversion at source in favor of Lok Sewa Mission.
2. Application of income versus diversion of income.
3. Legal obligation and enforceability of the charge created.
4. Eligibility for deduction under Section 80G of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Overriding Title and Diversion at Source in Favor of Lok Sewa Mission:
The primary issue was whether there was an overriding title and diversion at source in favor of Lok Sewa Mission to the extent of 6.25% of the firm's profit. The assessee argued that clauses 11 and 12 of the partnership deed created a charge on the profits, making the partners trustees for Lok Sewa Mission. The Tribunal examined the Supreme Court's ruling in CIT v. Sitaldas Tirathdas, which established that for income to be diverted at source, it must never reach the assessee as their income. The Tribunal concluded that the 6.25% profit did reach the assessee as its income and was subsequently applied as a donation, thus constituting an application of income rather than a diversion at source.

2. Application of Income Versus Diversion of Income:
The Tribunal distinguished between the application of income and diversion of income by an overriding title. The true test, as laid down by the Supreme Court in Sitaldas, was whether the income was diverted before it reached the assessee. The Tribunal found that the income first accrued to the firm and was then applied to Lok Sewa Mission, indicating an application of income. The Tribunal also referenced the case of K. A. Ramachar v. CIT, where it was held that under the law of partnership, only partners are entitled to profits, and a stranger cannot have a direct claim to the profits.

3. Legal Obligation and Enforceability of the Charge Created:
The Tribunal examined whether the charge created by the partnership deed was legally enforceable. It was noted that Lok Sewa Mission was not a party to the partnership agreement and thus had no actionable claim to enforce the charge. The Tribunal cited the case of CIT v. Crawford Bayley & Co., where it was held that an obligation in the nature of a trust could be enforced even if the beneficiary was not a party to the contract. However, the Tribunal found that in the present case, the obligation was self-created and lacked legal enforceability.

4. Eligibility for Deduction under Section 80G of the Income-tax Act, 1961:
The Tribunal acknowledged the alternate contention of the assessee for relief under Section 80G for the donation made to Lok Sewa Mission. It directed the Income Tax Officer (ITO) to examine the facts and determine the eligibility for deduction under Section 80G. The ITO was instructed to allow the assessee an opportunity to present their case and then decide on the relief.

Conclusion:
The Tribunal held that the assessee was liable to tax on its entire income, including the 6.25% of profit donated to Lok Sewa Mission, as there was no overriding charge or title. The appeal was partly allowed, with the matter of deduction under Section 80G remanded to the ITO for further consideration.