9911796707
TMI Blog2003 (9) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 1979-80? (ii) Whether, on the facts and circumstances of the case, the assessee is an 'industrial company' under section 2(7) of the Finance Act, 1979?" Heard learned counsel for the parties. The relevant assessment year is 1979-80. The assessee is a private limited company which was incorporated on October 6, 1977. By a sale deed dated November 12, 1977, the assessee took over the running business of M/s. Jit and Pal X-Ray Bhuri Wave and Diagnostic Laboratory, which was being run under the sole proprietorship of Dr. Harnam Singh. The consideration fixed was Rs. 96,192, which is mentioned in the sale deed. The previous year for the assessment year 1979-80 ended on July 31, 1978. In the deed of sale itself it was written that over and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Singh and the assessee-company, copy of which is annexure 2 to the paper book. Para. 4 states: "4. Apart from the cash consideration as above, the company shall be liable to pay Mrs. Jagjit Kaur wife of Dr. Harnam Singh, the vendors and accordingly Mrs. Jagjit Kaur shall be entitled to, by way of permanent contractual annual overriding charge, 20 per cent. of the net profits earned by the company in every year subject, however, to a maximum of Rs. 20,000 per annum, such net profits for the purposes of this clause to be ascertained by deduction of expenditure from gross income and also after providing for the depreciation on its assets and managerial remuneration." It may be noted from the above clause in the sale deed that this overridin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's resources it was not application of the assessee's income but rather the allocation of a sum out of his revenue before it becomes income. A diversion of income by an overriding title need not necessarily be by a decree of court or by statutory or customary law, but may be under the provisions of a will, or agreement, or deed, e.g., a deed of sale or gift or partnership or sub-partnership or partition of joint family property. Thus in CIT v. Travancore Sugars and Chemicals Ltd. [1973] 88 ITR 1 (SC) the facts were that a company was formed to take over the assets of a manufacturing concern from the Government, and a percentage of the annual profit was to be paid to the Government subject to a maximum of Rs. 40,000 in addition to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons (P.) Ltd. [1987] 166 ITR 867 (Cal), etc. As held by the Supreme Court in Provat Kumar MiUer v. CIT [1961] 41 ITR 624, the fundamental principle is that an application of income is an allocation of one's own income after it accrues or has arisen, although such application may be under a contract or obligation, whereas diversion of income is that which diverts away or deflects before it accrues to or reaches the assessee, and it is received by him only for the benefit of the person who is entitled to the income under an overriding charge or title. As explained by the Supreme Court in Motilal Chhadami Lal Jain v. CIT [1991] 190 ITR 1, what has to be seen is the nature of obligation by reason of which the income becomes payable to a person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his sale deed dated November 12, 1977, mentioned in clause 4 one of the conditions and considerations of the sale, namely, that an amount representing a certain percentage of the profits of the company has to be paid to Mrs. Jagjit Kaur subject to a maximum of Rs. 20,000. The obligation to pay this amount is attached to the very source of the income, namely, the going concern purchased by sale deed dated November 12, 1977 and hence it is an integral part of the sale deed. It is not a case where after the sale deed had been executed, the vendor subsequently requested the vendee to pay a certain amount to his wife. Clause 4 of the sale deed specifically mentions that the amount in question is charged on the net profits of the assessee-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the point of view of commercial expediency and a prudent businessman. We have held in that decision that it is for the company to decide what salary shall be paid to its employees, and the Income-tax Officer cannot dictate in this matter. Whether the salary was reasonable or not has to be considered from the point of view of a prudent businessman and not from that of the Income-tax Officer. It is only if the salary fixed is totally unrealistic or absurdly exorbitant that the Income-tax Officer can interfere. Hence, for this reason also the claim of the assessee deserves to be allowed. As regards the second question referred, i.e., whether the assessee was an industrial company under section 2(7) of the Finance Act, 1979, the finding of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
