1983 (8) TMI 83 - AT - Income Tax

Summary

Issues Involved:
1. Deductibility of annual liabilities or annual charges under Section 24(1)(iv) of the Income Tax Act, 1961.
2. Diversion of income by overriding title.

Issue-wise Detailed Analysis:

1. Deductibility of Annual Liabilities or Annual Charges:

The assessee, Ram Laxman Janki Trust, claimed deductions for expenses related to the maintenance of Central Dharamshala, Thakurdwara, and Veohar as annual charges under Section 24(1)(iv) of the IT Act, 1961. The Income Tax Officer (ITO) allowed only Rs. 7,950 as annual charges, rejecting the assessee's claim for additional expenses. The assessee argued that these expenses should be deductible as they were annual liabilities under Section 27 of the IT Act. The ld. AAC upheld the ITO's decision, stating that the obligations to spend income on these properties were merely utilizations of funds and not annual charges secured on the property.

Upon appeal, the Tribunal examined the Compromise Decree and relevant case laws. The Tribunal found that the expenses related to Central Dharamshala, Thakurdwara, and Veohar constituted annual charges as defined under Section 27(iv) of the IT Act. The Tribunal noted that the Compromise Decree created a charge on the rental income from specific properties for these expenses. Thus, these expenses were deductible while computing the property income of the assessee.

2. Diversion of Income by Overriding Title:

The assessee alternatively argued that the expenses in question were diverted by an overriding title, relying on the Compromise Decree and case laws such as Addl. CIT vs. Rani Pritam Kunwar, Raja Bejoy Singh Dudhuria vs. CIT, and CIT vs. Sitaldas Tirathdas. The Tribunal considered these cases and noted that the true test for diversion of income by an overriding title is whether the amounts sought to be deducted never reached the assessee as income. The Tribunal found that the Compromise Decree created an overriding title, diverting the income at source to meet the specified expenses.

The Tribunal held that the terms of the Compromise Decree clearly indicated a diversion of income at source, creating an overriding title in favor of the specified expenses. Therefore, the expenses related to Central Dharamshala, Thakurdwara, and Veohar were not part of the assessee's income and were deductible.

Conclusion:

The Tribunal allowed the appeal, concluding that the expenses related to Central Dharamshala, Thakurdwara, and Veohar constituted annual charges under Section 24(1)(iv) and were also diverted by an overriding title. The assessment was to be modified accordingly by the ITO.