1984 (12) TMI 108 - AT - Income Tax

Summary

Issues Involved:

1. Inclusion of Rs. 1,20,670 in the assessee's total income.
2. Nature of the liability: Deposit or Loan.
3. Limitation and enforceability of the debt.
4. Existence of an obligation in the nature of a trust.
5. Overriding diversion of income.

Issue-wise Detailed Analysis:

1. Inclusion of Rs. 1,20,670 in the assessee's total income:

The assessee, Bhai Mohan Singh, contested the inclusion of Rs. 1,20,670 in his total income, arguing that the interest earned from fixed deposits made out of money held in trust for Bhai Sunder Das's estate should not be taxable. The ITO included this amount in the assessee's income, stating that no legal obligation existed binding the assessee to pay this money to the estate of Bhai Sunder Das. The Commissioner (Appeals) upheld the ITO's decision, leading to the present appeal.

2. Nature of the liability: Deposit or Loan:

The Commissioner (Appeals) framed the issue of whether the liability was a deposit or a loan. The assessee argued that the amount was a deposit, which would mean the limitation period starts only upon demand for repayment. The Commissioner (Appeals) concluded that there was no evidence of an actual deposit or an agreement for repayment on demand, thus treating it as a loan. The Tribunal, however, found enough evidence to show that the money was a deposit and not a loan, citing the origin and subsequent conduct of the parties.

3. Limitation and enforceability of the debt:

The ITO and Commissioner (Appeals) held that the debt became barred by limitation as there were no repayments after 1960, making the liability unenforceable. The Tribunal disagreed, noting that payments were made to the Income-tax Department on behalf of Bhai Sunder Das, which should be deemed as repayments. These payments extended the limitation period, making the debt still enforceable. The Tribunal also pointed out that the acknowledgment of the debt by the assessee and the legal representatives of Bhai Sunder Das kept the debt alive.

4. Existence of an obligation in the nature of a trust:

The Commissioner (Appeals) held that no constructive trust was created under Section 94 of the Indian Trusts Act, as there was no connection between the money received and the fixed deposits. The Tribunal found this conclusion erroneous, stating that the origin of the deposit and the conduct of the parties indicated a legal obligation to hold the money in trust for the legal representatives of Bhai Sunder Das.

5. Overriding diversion of income:

The Commissioner (Appeals) concluded that there was no overriding diversion of income at source. The Tribunal, however, found that the interest earned on the fixed deposits was held in trust for the legal representatives of Bhai Sunder Das and did not belong to the assessee. This created an overriding title, diverting the income at source.

Conclusion:

The Tribunal concluded that the assessee's claim to exclude the interest from his income should be accepted, as the debt to Bhai Sunder Das & Sons existed and was enforceable. The Tribunal allowed the appeal, reversing the decisions of the ITO and Commissioner (Appeals).