1973 (4) TMI 15 - HC - Income Tax

Small percentage kept as dharmada and kept in separate account for being used only for charities - This is a petition under article 226 of the Constitution. The petitioner, Messrs. Thakur Das Shyam Sunder, prays for a writ of certiorari for quashing the order of the Additional Commissioner of Income-tax - even if some discretion was given to spend the amount deposited with the assessee on charity of his own choice, it does not mean that either no trust was created or that the trust created was invalid - order of the Income-tax Officer treating these amounts as the assessee s taxable income was invalid and should be quashed.

Issues Involved:
1. Whether the amount collected as dharmada by the petitioner constitutes its income.
2. The applicability of the principle of income diversion before accrual.
3. The relevance of market customs in determining the nature of receipts.
4. The distinction between trust obligations and discretionary spending in the context of income tax.
5. The comparison with other judicial precedents on similar issues.

Detailed Analysis:

1. Whether the amount collected as dharmada by the petitioner constitutes its income:
The petitioner, a commission agent, collected dharmada charges during business transactions and credited them to a separate dharmada account for charitable purposes. The Income-tax Officer and the Additional Commissioner treated this amount as the petitioner's income, arguing that it was received during business transactions and the petitioner had discretion over its use. However, the court found that the amount collected as dharmada was intended for charity and not as income for the petitioner. The custom in Shahjahanpur mandated that dharmada be spent on charity, and both parties to the transaction understood this. Therefore, the court concluded that the amount did not constitute the petitioner's income.

2. The applicability of the principle of income diversion before accrual:
The court referred to the Supreme Court's principle in Commissioner of Income-tax v. Sital Das Tirath Das, which states that income diverted at source by an overriding title does not reach the assessee as income. The court found that the dharmada collected was intended for charity from the outset and did not reach the petitioner as income. Thus, it was not taxable as the petitioner's income.

3. The relevance of market customs in determining the nature of receipts:
The court acknowledged the long-standing custom in Shahjahanpur where commission agents collected dharmada for charity. This custom was not disputed by the respondents. The court emphasized that the nature of the receipt, as governed by market customs, indicated that the dharmada was collected for charitable purposes and not as income for the petitioner.

4. The distinction between trust obligations and discretionary spending in the context of income tax:
The Additional Commissioner argued that since the petitioner had discretion over the dharmada funds, it was not held in trust and thus constituted income. However, the court clarified that under trust law, trustees have legal ownership and discretion over trust funds, but this does not negate the trust's charitable purpose. The petitioner's discretion to choose the charitable cause did not transform the dharmada into income. The court cited Commissioner of Income-tax v. Sardar Bahadur Sardar Indra Singh Trust to support the validity of charitable trusts with unspecified objects.

5. The comparison with other judicial precedents on similar issues:
The court distinguished the present case from Commissioner of Income-tax v. Thakar Das Bhargava, where the amount received by an advocate was considered professional income as no trust existed at the time of receipt. Similarly, in India Pepper and Spice Trade Association v. Commissioner of Income-tax, the laga collected was remuneration for services, unlike dharmada collected for charity in the present case. The court also differentiated from Kanpur Agencies Private Ltd. v. Commissioner of Income-tax, where the amount collected had no binding obligation for charity. In contrast, the petitioner in the present case was bound by custom to use dharmada for charity. The court found support in Agra Bullion Exchange Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Tollygunge Club Ltd., which held that amounts earmarked for charity do not constitute income.

Conclusion:
The court allowed the petition, setting aside the Additional Commissioner's order and quashing the part of the Income-tax Officer's assessment that included the dharmada amount as the petitioner's income. The court directed the Income-tax Officer to modify the assessment order accordingly. The judgment emphasized the importance of understanding the true nature and quality of receipts, market customs, and the legal obligations associated with trust funds in determining tax liability.

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