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TMI Blog1985 (9) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... the said amount represented diversion of income by overriding title. The ITO examined the terms of the gift deed dated 30-3-1973, on which reliance had been placed and found that this was the case of application of income after it had accrued and not that of diversion of income by overriding title. He, accordingly, rejected the claim for deduction of the said amount. In the appeal filed by the assessee, the Commissioner (Appeals) examined the terms of the said gift deed and relying on the decision of the Ahmedabad Bench of the Tribunal in IT Appeal No. 1141 (Ahd.) of 1979 decided on 10-5-1982 held that there was diversion of income by overriding title and allowed the claim for deduction. The department has now come in appeal before us. 2. Before we discuss the contention of the parties, it is necessary to narrate the facts in brief. The donor Shri F.P. Gaekwad, who executed the gift deed dated 30-3-1973 was in possession of various immovable properties located at different places. He converted some of these immovable properties into stock-in-trade on 9-12-1972. He then became a partner in the partnership firm styled as Gaekwad Real Estate Traders and introduced as his capital co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising to the donee from all the assets of the donee." 4. It would be seen that under clause 3(i)(a) the amount payable by the assessee-company to the said Sir Sayajirao Gaekwad Charities was an amount equal to the entire annual net income accruing or arising from or by virtue of the gifted amount subject to maximum of Rs. 2,10,000. This clause applied to the assessment years 1974-75 to 1978-79. It was submitted before us that there was no income from the gifted amount during the first five years and, as such, no deduction had been claimed. The accounting year 1978-79, relevant for the assessment year 1979-80, with which we are concerned in this appeal, is the first year after expiry of the said five years and, as such, clause 3(i)(b) applies to that year. Under the said clause, the assessee is required to pay Rs. 1,80,000 in each year for a period of fifty accounting years to the said Charities if the income from the said sum of Rs. 30 lakhs was less than Rs. 1,80,000. While if the said income from the said sum of Rs. 30 lakhs exceeded Rs. 1,80,000 a further sum equal to such excess up to Rs. 30,000 was payable to the said Charities. Thus, under this clause, even if there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had no control over the said sum of Rs. 30 lakhs. According to the learned counsel for the assessee this was a case of diversion of income by overriding title and, as such, deduction was admissible under section 28(i). 6. We have considered the materials on record and rival submissions. We have already quoted the relevant clauses of the gift deed. Clause 4 on which reliance is placed stated that the payment to be made by the donee (assessee) to Sir Sayajirao Gaekwad Charities shall form a first charge and claim on the entire income accruing or arising to the donee from all the assets of the donee. From the words of the said clause, it is clear that it is only after the income had accrued or arisen that the question of forming a first charge and claim for payment to be made to the parties would arise. It is out of the income accruing or arising to the assessee that the payment to the charities is required to be made. The payment is to be made after the income accrues or arises. Consequently, it is a case of application of income after the income had accrued or arisen. It is not a case of diversion of income by overriding title before its accrual. Besides, in the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he course of six years could draw only Rs. 2,83,900 out of Rs. 30 lakhs. As already stated one of necessary conditions for an effective gift was that the movable property of which the gift is made is delivered to the donee. In the present case, the subject-matter of gift is an amount and, as such, in normal course, the amount should be paid to the donee or donee should be put in effective control over the amount. This does not appear to have been done in the present case. Consequently, the gift cannot be said to be complete and, as such, the obligation to pay Rs. 1,80,000 out of the total income of the assessee could not be said to have legally arisen. If an action was to be filed by the concerned Charities for recovery of Rs. 1,80,000 the fact that the donor has not placed the assessee in full control of Rs. 30 lakhs would be an effective answer. For these reasons also the amount of Rs. 1,80,000 cannot be claimed as deduction on the facts of the present case. The learned counsel for the assessee made an alternate submission before us and his submission was that liability to pay Rs. 1,80,000 should be held to have arisen against the income derived from the gifted amount and, as suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to do with the gifted property. 8. The learned counsel for the assessee relied on section 127 of the Transfer of Property Act, which deals with onerous gift. What all that section lays down is that where a gift is in the form of a single transfer to the same person of several things of which one is, and the others are not, burdened by an obligation, the donee can take nothing by the gift unless he accepts it fully. This provision and the illustrations given below that provision indicate that it refers to an obligation which is attached to the gifted property. We have given the illustration of a mortgage property. The obligation to pay the mortgage amount is attached to the property and if such property is gifted the obligation to pay the amount must be discharged by the donee. However, where the alleged donated property is not placed in control of the donee and the donee does not derive any income from that property as in the present case, there could not be any obligation to pay the amount. We may now refer to several decisions cited on behalf of the assessee. The first decision was in the case of Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 (PC). In that case, the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f eight years and had declared that those rights shall be taken and enjoyed by the beneficiary in absolute and exclusive right. The beneficiary had been given authority to collect the amount representing one-fourth share of the settlor from the firm. The Supreme Court held that this was not a case of diversion of income by overriding title but it was a case of application of income after it had accrued. It was pointed that the amount was payable to the beneficiary from the profits payable to the partner. The Supreme Court held that a stranger even if he were an assignee did not have and could not have any direct claim to the profits and what all that had happened was that the assessee had allowed a payment to the beneficiaries to constitute a valid discharge in favour of the firm. However, what was paid was, in law, a portion of his profits or in other words his income. In the present case also, the amount to the Charities is payable from the income accruing or arising to the assessee under clause 4. Thus, the payment out of the income which accrues to the assessee and, as such, it is a case of application of income. 11. Another decision which is relevant is New India Colour Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivery of equity shares had been given to the assessee. In the present case, we have held that delivery of the major portion of the amount had not been made even after completion of six years after the date of gift and, as such, the gift was not complete, with the result that the clause regarding payment of Rs. 1,80,000 could not be enforced. The Tribunal in that appeal strongly relied on the decisions of the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 and that of the Gujarat High Court in CIT v. Bipinbhai Vadilal [1978] 113 ITR 664. We have considered those decisions as well as other decisions referred to in the said order of the Tribunal. We find that in the circumstances of the present case, there was no diversion of income by overriding title and that this was a case of application of income after it had accrued. We may at this stage note that the Tribunal in that case was conscious of the fact that the donor whose group had substantial interest in the assessee-company by particular device sought to divert income from taxation by artificial means. However, the Tribunal formed an opinion that in view of the decision of the Supreme Court in CIT v. A. Raman Co. [ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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