1985 (9) TMI 119 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the gift deed dated 30-3-1973.
2. Whether the amount of Rs. 1,80,000 constitutes diversion of income by overriding title or application of income after its accrual.
3. Whether the assessee is entitled to claim deduction under section 28(i) of the Income-tax Act, 1961.

Detailed Analysis:

1. Validity of the Gift Deed:
The donor, Shri F.P. Gaekwad, executed a gift deed on 30-3-1973, transferring Rs. 30 lakhs from his capital account to the assessee-company. The department challenged the validity of the gift, arguing that there was no cash amount with the donor at the time of the gift, making it void. Additionally, it was contended that the gift was with consideration and invalid, and that the donor could not create a charge on the personal properties of the assessee. The Tribunal found that the gift was not complete as the amount of Rs. 30 lakhs was not fully delivered to the assessee and remained under the control of the firm. The Tribunal concluded that the gift deed was an unregistered document and thus, ineffective under Section 123 of the Transfer of Property Act, 1882.

2. Diversion of Income by Overriding Title vs. Application of Income:
The assessee argued that the amount of Rs. 1,80,000 payable to Sir Sayajirao Gaekwad Charities constituted diversion of income by overriding title, as it was a first charge on the entire income accruing to the assessee from all assets. The Tribunal, however, held that the payment to the Charities was to be made after the income had accrued or arisen, making it a case of application of income after its accrual, not diversion by overriding title. The Tribunal emphasized that the alleged gift of Rs. 30 lakhs was not complete, and thus, the obligation to pay Rs. 1,80,000 did not legally arise.

3. Deduction under Section 28(i) of the Income-tax Act, 1961:
The assessee claimed deduction under section 28(i) of the Income-tax Act, 1961, on the grounds that the payment to the Charities was a first charge on the income from all assets. The Tribunal rejected this claim, stating that the liability to pay Rs. 1,80,000 arose from the application of income after its accrual, not from diversion by overriding title. The Tribunal also noted that the major portion of the gifted amount was still under the control of the firm, and the assessee had no effective control over it. Consequently, the Tribunal concluded that the liability to pay Rs. 1,80,000 could not be considered a deductible expense under section 28(i).

Conclusion:
The Tribunal set aside the order of the Commissioner (Appeals) allowing the deduction of Rs. 1,80,000 and restored the order of the ITO, concluding that the amount did not constitute diversion of income by overriding title and the gift was not validly executed. The appeal by the department was allowed.