1977 (3) TMI 1 - SC - Income Tax

Diversion by Overriding Title - special surcharge collected by a sports club from local charities in addition to the normal admission fees for races - It cannot become part of the assessee's income - Revenue's appeal dismissed

Issues Involved:
1. Whether the surcharge levied on admission tickets for purposes of charity could be included in the assessee's taxable income for the assessment year 1960-61.

Detailed Analysis:

1. Nature of Surcharge Receipts:
The primary issue was whether the surcharge levied on admission tickets, intended for local charities, should be treated as part of the assessee's taxable income. The assessee, Tollygunge Club Ltd., conducted Gymkhana races and charged an admission fee, which was undisputedly considered a trading receipt. However, a surcharge of eight annas was added to the admission fee, earmarked for local charities. This surcharge was not credited to the profit and loss account but carried to a separate "charity account."

The Income-tax Officer, while assessing for the year 1960-61, included the surcharge receipts in the total income, treating it as revenue receipts, and allowed a rebate under section 158 for amounts disbursed to local charities. The Appellate Assistant Commissioner upheld this view, stating that the surcharge was part of the admission price. However, the Tribunal reversed this decision, stating that the surcharge was for charity and never belonged to the assessee, thus not includible in taxable income.

2. Legal Obligation and Nature of Receipts:
The High Court agreed with the Tribunal, holding that the surcharge was charged for a specific purpose-local charities-creating a legally enforceable obligation on the assessee to apply these amounts to local charities. Therefore, these amounts did not reach the assessee as income but were diverted to local charities before reaching the assessee.

The Supreme Court emphasized that income tax is a tax on income, and it is what reaches the assessee as income that is chargeable to tax. The Court examined whether the surcharge receipts reached the assessee as its income. The revenue's argument that the surcharge was part of the admission price and merely a voluntary desire to apply it to charity was rejected. The Court noted that the surcharge was not part of the admission price but a separate payment for local charities.

3. Trust and Legal Obligation:
The Court pointed out that a resolution passed by the assessee for levying the surcharge for local charities created a trust-like obligation. The surcharge was impressed with an obligation in the nature of a trust, to be applied for the benefit of local charities. This obligation diverted the surcharge before it reached the assessee as income.

The Court applied the test from Commissioner of Income-tax v. Sitaldas Tirathdas, determining whether the amount sought to be deducted reached the assessee as income. The surcharge, being impressed with a trust obligation, was diverted before reaching the assessee and never became part of its income.

4. Comparison with Thakar Das Bhargava's Case:
The Court distinguished this case from Thakar Das Bhargava's case, where the amount received by the assessee was professional income, and the creation of the trust was a voluntary act with no legal obligation. In the present case, the surcharge was earmarked for charity ab initio, and the assessee received it with a legal obligation to apply it to local charities.

Conclusion:
The Supreme Court upheld the High Court's decision, affirming that the surcharge receipts were not part of the assessee's taxable income as they were diverted to local charities before reaching the assessee. The appeal was dismissed with costs.

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