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TMI Blog1974 (8) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... e mills company and the managing agency company on the one hand and the assessee and his brother on the other. These disputes were ultimately settled in accordance with the terms of the deed of agreement entered into between the assessee as representing himself and his brother, B. R. Damani, on the one hand and the managing agency company on the other. The agreement is dated February 26, 1951. A detailed analysis of the rights and obligations under this agreement will be considered a little later. Clause 6 and clause 9 of this agreement deal with the rights of the assessee and his brother, B. R. Damani, to receive their shares in the commission as therein provided. Under clause 6 out of the managing agency commission received by the managing agency company 7 1/2% was receivable by the assessee and the other 7 1/2% was receivable by his brother, B. R. Damani. Up to and including the assessment year 1956-57, the assessee's 7 1/2% share in the managing agency commission was assessed in his hands. On October 20, 1955, the assessee executed a deed of gift transferring his right to receive the share in the managing agency commission to his two married daughters, Kamlabai Bagri and Sushil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a benefit of contract which can be assigned ; that by executing the deed of gift and giving intimation thereof to the managing agency company there was a clear diversion of source of income before income accrued or arose to the assessee and he submitted that when such is the case such income can never be assessed in the hands of the assessee. In support of this contention he incidentally stated that if after the deed of gift was executed by the assessee in favour of his two daughters and an intimation of such deed of gift was given to the managing agency company, the assessee were to file a suit against the managing agency company for his 7 1/2% share in the commission, such a suit would fail on the ground that the assessee has no cause of action thereto. On the other hand, Mr. Joshi on behalf of the revenue contended that the share of 7 1/2% in the managing agency commission accrued as income to the assessee but it was thereafter applied by him in consonance with the provisions of the deed of gift dated October 20, 1955. His submission was that there is a clear distinction between obligation to spend money in a particular manner attaching to income and a similar obligation attachi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but for and on behalf of the person to whom it is payable. " In Commissioner of Income-tax v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17 (SC) the Supreme Court has laid down that an obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee results in the diversion of income. An obligation to apply income which has accrued or arisen or has been received amounts merely to the apportionment of income and the income so applied is not deductible. The true test for the application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted in truth never reached the assessee as his income. We do not intend to multiply authorities but it will be useful to refer to the decision of the Allahabad High Court wherein certain principles are clearly enunciated. That is the case of M. K. Brothers Private Ltd. v. Commissioner of Income-tax [1967] 63 ITR 28, 36, 37, 39 (All). It is there laid down that : " Every income has a source, whether it is a property or a business or a contract. There is a distinction between an obligation to spend money in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d above the following have been held to be income accrued or arisen : (1) annual payment received by an assessee under a guarantee, though it was to be applied in paying interest on capital furnished by the assessee : Nizam's Guaranteed State Railway Co. [1890] 2 TC 584 (QB) ; (2) full salary received by an assessee, though part of it was not actually received and was retained by his employer for being credited to a compulsory deposit fund : Bell's case [1903] 4 TC 522 (CA) ; (3) a sum credited by an employer to the account of the assessee-employee under the provident fund scheme, though no part of it was payable to the assessee so long as he continues in service and he could not raise money on it : Smyth's case [1904] 5 TC 36 (KB); (4) income from dividends on shares purchased by an assessee through a loan taken from a creditor and handed over to it with an obligation to adjust it towards the payment of interest on the loan and part of the principal loaned : Paterson's case [1924] 9 TC 163 (KB) ; (5) income from property, though it was paid as maintenance allowance to dependants under a decree of court (without the maintenance being a charge upon the property yielding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... got to be taken as the meanings attaching to them. " Accruing " is synonymous with " arising " in the sense of springing as a natural growth or result. The three expressions " accrues ", " arises " and " is received " having been used in the section, strictly speaking " accrues " should not be taken as synonymous with " arises " but in the distinct sense of growing up by way of addition or increase or as an accession or advantage, while the word " arises " means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is necessary to refer to the terms of the agreement dated February 26, 1951, that was arrived at between the assessee representing himself and his brother and the managing agency company. This agreement contains reciprocal promises and obligations on both the sides, some of which were to be performed soon after the agreement was entered into while some of them were to continue during the entire duration for which the agreement was to subsist between the parties. By clauses 1 and 2 of this agreement the managing agency comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mills company according to the provisions of clause 8 hereof. Such amount shall be paid by the managing agency company to the said Damani and/or his nominee or nominees without deduction of any income-tax or other taxes whatsoever. The said Damani and/or his nominee or nominees shall pay to the income-tax authorities such income-tax or other taxes as may be assessable on him or his nominee or nominees personally in respect of the 15 per cent. of the commission payable to him or them by the managing agency company as aforesaid... " Clauses 7 and 8 of this agreement provided for the appointment of the managing agency company as managing agents for a period of twenty years from April 1, 1951. By clause 9 Damani agreed to support and to do his best to procure his friends to support the managing agency company in obtaining from the mills company a new managing agency agreement for a period of twenty-years as mentioned therein and for maintaining the same for the full period thereof. Further, the assessee was to retain in his own name or in the name of his nominee or nominees at least 7,000 shares in the capital of the mills company and to use the voting power in respect of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agency company and which shall hereafter be payable by the mills company to the agency company to the intent that the half share, right, title and interest of the donor in the said amount equal to fifteen per cent. of the said managing agency commission payable every year by the mills company to the agency company and which shall hereafter be payable by the mills company to the agency company shall henceforward remain vested in and be held by the donees in equal shares absolutely to the entire exclusion of the donor or of any benefit to him by contract or otherwise........ " (The underlining is ours) Soon after this deed of gift was executed by the assessee in favour of his married daughters, by a letter dated October 25, 1955, the assessee informed the managing agency company about the execution of the deed of gift and actually forwarded the original thereof together with a copy for the record of the managing agency company. By this letter the managing agency company was requested thereafter to make out two separate cheques in respect of the two half equal shares payable to his two daughters out of the managing agency commission payable to him. It is the effect of this deed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rothers complying with their obligations under this agreement. Once these obligations are complied with, the managing agency company is under an obligation to pay the share in the managing agency commission as stipulated therein. Such a claim was clearly an actionable claim and was capable of being assigned in the manner prescribed by section 130 of the Transfer of Property Act. It is not disputed in the present case that each one of the conditions laid down under section 130 had been fulfilled. If that is so, then upon Damini brothers performing their obligations under the agreement dated February 26, 1951, having regard to the provisions of the gift deed the share in the managing agency commission will only accrue to the married daughters and not to the assessee as donor at any time. The effect of such a deed of gift is to transfer the source of income itself before the income either accrues or arises. In fact, after the deed of gift was executed and intimation thereof was given by the assessee to the managing agency company, the assessee will have no cause of action to institute any suit to recover any share in such commission. In case such a suit is filed it is liable to be dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case was whether the amounts paid for shradh of the testator and for costs of taking out probate of his will were deductible from the assessable income. In this case the testator had died and by his will he appointed the appellants his executors. He directed them to pay Rs. 10,000 out of the income of his property on the occasion of his addya shradh for expenses in connection therewith to the person who was entitled to perform the shradh. He had also directed them to pay out of the income of his property the costs of taking out probate of his will. Daring the year of account the executors had paid Rs. 5,537 for expenses in connection with the addya shradh and a sum of Rs. 1,25,000 for probate duty. Affirming the decision of the Calcutta High Court, their Lordships held that the payments made for the shradh expenses and the costs of probate could not be excluded in computing the chargeable income. These were payments made out of the income of the estate coming to the hands of the appellants as executors and in pursuance of an obligation imposed by the testator. It was not a case in which a portion of the income was by an overriding title diverted from the person who would otherwis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidends or sums of money and instructed the company to pay such dividends and sums of money to her. It was held that the deed of assignment was, in its true nature, only a contract by the assessee to transfer, or make over, to his wife in future all dividends that may be declared in respect of the shares. As a company can pay dividend only to the registered holder of the shares, the income continued to accrue to the assessee and was assessable in the hands of the assessee as his income, even though it was ultimately payable to his wife under the terms of the deed. It was clearly a case of application of income after it had accrued and not a case of diversion of any sum of money before it had become the income of the assessee. It may be noted that the shares in respect of which the dividends were transferred to the wife were never transferred to the wife and they continued to be in the name of the assessee. Reference was then made by Mr. Joshi to a decision of the Supreme Court in K. A. Ramachar v. Commissioner of Income-tax [1961] 42 ITR 25 (SC). The question that arose for consideration was whether the share of profit that arose to the settlor and which was settled by a deed of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was rejected by the Supreme Court as such a contention was not in accordance with the law of partnership nor with the tenor of the documents and the facts found. Thus, each one of the cases relied upon on behalf of the revenue is distinguishable on facts and they do not afford any assistance for deciding the matter in question. Actually, upon the test laid down in those cases, at no point of time income ever accrued to the assessee after execution of the deed of gift. We may lastly refer to the case relied upon by Mr. Kolah on behalf of the assessee. This was the case of Murlidhar Himatsingka v. Commissioner of Income-tax [1966] 62 ITR 323 (SC). The question that arose for consideration in this case was whether the share of a partner in respect of which a sub-partnership was created can be included in the assessment of the partner himself. M, who was a partner in a registered firm (firm A) entered into a sub-partnership (firm B) with his two sons and a grandson from December 21, 1949. Clause 5 of the deed of sub-partnership (firm B) provided that the profits and losses of M in the registered firm (firm A) shall belong to the sub-partnership (firm B) and shall be borne and divided ..... X X X X Extracts X X X X X X X X Extracts X X X X
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