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TMI Blog1967 (8) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... are applicable only in cases of diversion of income ; and (3) Whether, in the facts and circumstances of this case, the provisions of sub-section (1) of section 9 read with the provisos thereof are applicable in assessing the income of the Hindu undivided family. A Hindu undivided Marumakkathayam tarwad represented by its karnavan was assessed to agricultural income-tax for the year 1959-60, by the Agricultural Income-tax, Officer, Chittoor, by his order dated April 13, 1961. The assessee had contended before the officer that there was a karar in the tarwad executed by all the members of the tarwad in the year 1909 (May 29, 1909), by which the properties of the tarwad have been allotted to what may be called the " Rani group " and the junior members of the tarwad for their maintenance, that the income from the properties allotted is being taken by the " Rani group " and the junior members and that the tarwad should not be assessed to tax in respect of the income so received by them. The Agricultural Income-tax Officer overruled the contention and assessed the tarwad on the entire income. The assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from the income of the properties and the aforesaid properties were agreed to be retained as " stree tavazhi " properties. The net income from the " A " schedule properties was estimated at 30,785 paras of paddy and Rs. 1,250. 300 cartloads of paddy out of the income has to be given for the years 1,085, 1086 and 1087 (M.E.) to party No. 1, who was the karnavan of the tarwad at the time. The surplus income from " A " schedule properties has to be accumulated and properties acquired for the " stree tavazhi ". The managing member of the tavazhi is to keep accounts of the income and expenditure and render account to the female members and to the karnavan for the time being. " A " schedule properties and acquisitions out of the income therefrom would remain as " stree tavazhi " properties of Kalari Kovilagam, and they shall be preserved in accordance with the Marumakkathayam system without division. Party No. 2 has been given 7,000 paras of paddy annually for his maintenance and for this purpose paddy lands yielding 3,500 paras of paddy, shown in " B " schedule, were given possession to him and party No. 1 is directed to give party No. 2, from 1085 onwards, 3,500 paras of paddy. " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance, the members of the tarwad were given the right to take the income from the various properties allotted to them and appropriate it for their maintenance. It is clear from the terms of the karar that there was no transfer of the properties from the tarwad to the allottees. The only right of the junior members is to take the income and appropriate it for their maintenance. The tax in respect of the properties allotted to the junior members has to be paid by the karnavan. The members received the income from the properties allotted, in their capacity as members of the tarwad and in discharge of the obligation of the tarwad to maintain them. Even assuming that the karar is a settlement or disposition of the income, we think that this is a case of application of the income of the tarwad and that the income passes through it, even though the assessee has entered into a legal obligation to apply it in that way. In Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax the assessee succeeded to the family ancestral estate on his father's death. Subsequently, his step-mother, who had a legal right to maintenance out of the estate, brought a suit for maintenance against him and a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f court passed by consent in a suit. No charge on any property of the assessee was created. It was held by the Supreme Court that it was a case in which the wife and children of the assessee, who continued to be members of his family, received a portion of the assessee's income after he had received it as his own, and was, therefore, one of application of a portion of the income to discharge an obligation and not one in which by an overriding charge the assessee became only a collector of another's income. Hidayatullah J. said : " In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in England. It is " designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to avoid or reduce tax liability by means of settlements. Stated quite generally, the method consisted in the disposal by the taxpayer of part of his property in such a way that the income should no longer be receivable by him, while at the same time he retained certain powers over, or interests in, the property or its income. The legislature's counter was to declare that the income of which the taxpayer had thus sought to disembarrass himself should, notwithstanding, be treated as still his income and taxed in his hands accordingly ". (See the observations of Lord Macmillan in Chamberlain v. Commissioners of Inland Revenue). Section 9(1) together with the third proviso reads : " In computing the total agricultural income of an assessee all agricultural income arising to any person by virtue of a settlement or disposition, whether revocable or not, and whether effected before or after the commencement of this Act, from asset remaining the property of the settlor or disponer shall be deemed to be the agricultural income of the settlor or disponer and all agricultural ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t property" was to be enjoyed by Ramjibhai during his lifetime and after his death by his son, Ratilal. The effect of the execution of the trust deed was that the properties ceased to belong to the joint family as also the income therefrom. When Ratilal, who was one of the beneficiaries under the trust, became the manager of the undivided family, the question arose whether this circumstance would enable the revenue to assess the income derived from the trust properties as the income of the joint family. The court held that Hindu undivided family was a unit for the purposes of income-tax, and should be treated as an independent entity, with the result the income which the manager derived as a beneficiary under the trust, could not be treated as the income of the family. In answer to the arguments that, by virtue of the 2nd proviso to section 16(1)(c) of the Indian Income-tax Act, corresponding to the 2nd proviso to section 9(1) of the Act, Ratilal, though only one of the two persons who executed the settlement deed, is the " settlor ", and that the provision in the trust deed that the income was to be enjoyed by Ratilal after the death of Ramjibhai is, in substance, " a provision co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the disponer. But this does not necessarily mean that in any particular case the settlement of the income may not be an application of income. In other words, the effect of a disposition satisfying the requirements of the third proviso is merely to take it out of the scope of section 9(1), namely, out of the statutory fiction created by the use of the expression " deemed " in the sub-section. " It was contended for the assessee that even if there must be a diversion under an overriding title, for applying section 9(1), that title need not precede the title of the assessee and that it would be enough if the title of the transferee precedes the accrual of the income and that here the title to receive the income by the members preceded the receipt of the income by them, that that would override the title of the assessee and therefore it was under an overriding title that the junior members received the income. We cannot agree. The karar, so far as junior members are concerned, was only a maintenance arrangement, and the title to take the income from the properties allotted to the junior members was a title created by the voluntary act of the assessee, namely, the tarwad, which in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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