K. A. Ramachar and Another v. Commlssioner of Income Tax, Madras

1961. Januan· 10. The Judgment of the Court. was delivered byv HIDAYATULLAH, J.-These are two appeals by the Hiday&aJullah J. legal representatives of one A. R. Rangachari, who died during the pendency, in the High Court at Madras, of proceedings in a reference under s. 66( I) of the Income~tax Act made by the Income-tax Appellate Tribunal, Madras Bench. The following question was referred to the High Court for its decision : 382 ::;UPREME COURT REPORTS [1961] 1 961 "Whether the inclusion in the assessee~s total K.A. Ramachar income of the profits settled by him on his wife v. and two daughters is justified in law ? " Commissioner of The High Court answered the quest ion i 11 the :-tffir~ Income-ta);, Madras mative. The appeals have been tiled with a. CPrtificate Hidayatt41lah ) . granted by the High Court. Rangachari was one of five partners of 11 firm, Messrs. Chari and Ram, and held 11 :-;ix-anna :-;hare in the profits and loss of the partnership. On Septem­ ber 22, 1947, he executed three cJeedH of settlemeut., which are marked ExtH. A, A~l and A-2, in favour of his wife, a married adult. daughter and a minor daughter. To each of them, he assigned a fourth share of the profits of the firm payable to him (but not the losses), for a period. of M years, vesting the right in them to receive the said share of profits absolutely and exclusively and declaring the settlements to be irrevoc­ able during the above period. It is not necessary to refer to the three documents, because the terms are the same. A few clauses of the deed, Ex. A, may be quoted. After recitals which included the following: "Whereas the Settlor has settled upon his minor daughter, Srimathi l\Ieera Bai, one-fourth of his share of profits payable to him from the firm for a period of eight years; And whereas out of natural love and affection, the Settlor is desirous of conferring upon the Bene­ ficiary a similar portion of his share of profits from the firm", the deed goes on to say : " Now this Indenture witnesseth as follows : I. The Settlor hereby assigns unto the Beneficiary all the rights of the Settlor in respect of one~fourth of his share of profits in the firm (but not the losses) payable to him during a period of eight years com­ mencing from the date hereof to be taken and enjoyed by the Beneficiary in absolute and exclusive right. 2. The Settlor shall not b a yc any manner of right or interest in the said one-fourth share herehy settled and the right to receive from the firm one-fourth of 3 S.C.R. SUPREME COURT REPORTS 383 the Settlor,s share during the said period of eight 1 961 years shall exclusively vest in the Beneficiary. K. A. Ramachar 3. The Beneficiary shall be entitled directly to v. receive and collect from the firm the share of profits Commissioner of hereby transfened for the Raid period of eight years. Income-tax, Madras If • 111o 1 I. I + I 11 + I •• 41 111o 1o ... • 4. ' 111o ' ' 111o + f • + .f' • • ' I + t • 111o I If • If If I I I t I I + I ' ' • 111o I • I • • • + ' + I t <t ~ I + t lllo I 8. This settlement shall be irrevocable." For the assessment year 1947-48 corresponding to a previous year ending on April 13, 1947, the profits due to Rangachari amounted to Rs. 86,491-13-0. This amount was credited to the account of Rangachari, and Rs. 21,622-15-3, bring one-fourth thPref)f, were trans­ fezTed to the accounts of each of the three disponees. In the same lvay, the profits oft he prey ions yf:'ar end­ ing April 13, 1948, were dispo~ed of. The a~sessee claimed that these amounts could not be ine1uded in his total incon1e for purposes of assessment, being excluded by rt·ason ofthe third proviso to s. l6(l)(c) of the Ineozne-tax Act. He also contended that the amount payable to his wife and two daughters never became his income, being diverted by an overriding title, and that the case was governed by the rule laid down by the Privy Council in Bijoy Singh Dudhuria v. Com'missioner of lncome-ta~, Bengal (1). The assessee's contentions were not accepted by the Inco1ne- t a.x Officer, .and his appeals to the Appellate Assistant Commissioner and the Tribunal also failed. In so far as the assessment year 1947-48 was con­ cerned, the Income-tax Officer held that the incorne had already accrued to the assessee, because the deeds were executed five months after the cJose of the account year. He also held that the transfer to the minor daughter fell within s. 16(3), as there was no adequate consideration for the transfer. With regard to the \vife and marrit>d daughter, he held that s. 16(l)(c) was not applicable, because what had been transferred was income first accruing to the assessee 9 whiles. 16(l)(c) contemplated income which accrued to a. person, to whom the transfer was made. The same reasons (excPpt th~ first) were given for rejecting the (I) (1933) I I.T.R. 135· Hidayatullah f. ~. ·. IL '-.. ..___,.. .. ··/ - "'~-"' .~ ~- . ;· ; I ' . . - SUPTIE:\IE C:OlTRT REPORTS [19611 "- '_{ 384 .. ____ ...........___._ ..... ' \ . ":- '\ . J96I . ~.· assessee's'. COntentionS • in respect -Of the .Other aSSeSS• ·· · .. - men t vear. : · · _- ·\. _ · · . · ~ ·. . . · K. A. Ramachar J • · • · It is not necessary to refe·r in ·detail to~the decisions . co-~mi;;ion~r of of the· A ppe1Iate Assist~nt Commissioner; th_e '~ribunal · Income-tax,Madras and the High Court~ ~The High Coh'rt in an Claborate - ... judgmen~ p~in.ted ou~· that ·s. 16{l)(c) ~lid 'nota:pply to llidayatullah]. these proceedings; and that t~1e· tlurd'·provtso ·was, therefore, not attracted .. ·· It also held that the iucome had o.ccrued to the. ass-essee 'in the first instance~ .and ·-···· had then: be~n-iipplied for payments under the deeds. This Court· has recently decided tliree cases which have· ·a· direct, bearing ·in.· this connection-. :_:In Provat Kumar-.iJiittei v.·. Commissioner .or lncome~tax~L JVest Bengal (1), • the assessee ·had· executed a deed of trust ·under which dividends:· from .. certain· shares,, -\vhich ~- - -·continued. tor be :his. ~a·ssets, .• wr.re trari.sferre:d _:to; his wife~ . It· ·was held~ that :the, case: diu . not: fall t within s; 16{l)(c), and that the: rulo in~Bijoy Singh Dudhuria's case (!j). also' did· not apply.~! In 1lulsidas -J(ilachand v. ·XheCommissioner of Income-li:u:, Bombay(3 ), th~ _husband had· created a tru-st -of the shares,. constituting hims.elf . as itne . trustee to pay :to the wife dividends from those . ·shares for a·-·period'.· of seven; ~·ears. -_. It ; was . ' held that the case was riot governed:by_s. 16(l)(c): but - ·--~·by _s: 16(3)(b). In -The. Commissio,ner. of ~1ncom~-_t(u;, -~~ -~ .Bombay v. Silaldas Tirathda8 (~), the rule laidi down _by .the ·.Privy .Councn· in 'Bijoy. Singh _Dudhuria's case (2) · . · · .. was considered ·along with:, the . c~se of the·_ Privy Council in P. c~ jJullick. v; Commissioner of-}ncf?me~ta;c, ·. · . . Beng~l (5), ·and. it was pointed: out,· Jhat. the ·tule in . . · Bijoy B·ingh Dudhuria's case (2 )_applied.orily· to ;those · - ~ .. ·.cases where-- it could. ·be. said that._by:an overriding :- . 'title the income was diverted :in such .a way. as·· nev:er · •: .- :· ·- Jo . become .. the·. income of the assessee... These ·three . . cases; in our ·opinion,- afford a complete answer .. to the • •• !. ·.contentions of the appellants.· . · , . - , -'· .. :' ·. · : . An examination· of. the deeds of settlement shows·. ·:,, · · .. ·that the disponer had stated· that frol!:r ·the profits ·_.· .· _ . "payable to him" certain amounts in specified shares were to -b~ paid_to his wi.fe and two daughters. _-;No (I) [t961] 3 s.c.R. 37.. .-_ {3). (1961) 3 s.c.n:. 351. (2) [1933] [ l.T. R. 135· (4} ( TQ6I] 2 S.C.R.-6H . - ~ -. . . . , . . . _ . _ (_S_)_ (z_93s] 6I.!.R. 206: ,. ; I .; ,~ -- . -·. -~ 3 S.C.R. SUPREl\IE COURT REPORTS 385 doubt, the assessee in those deeds created a right in I961 favour of the disponees to get the amounts direct I\. A. Ramachar from the firm, of which he was a partner. The tenor v. of the documents shows that the profits were first to Commissioner of accrue to him and were then applied for payments t.o Jncomt-tax, Madra! the disponees. Learned counsel for the appellants contended that what had been assigned was an action- llidayatullah f. able claim, to wit, the right to profits, and therefore the profits were diverted, before they accrued to the disponer. This, in our opinion, is neither in accord- ance with the law of partnership nor with the facts as we have found on the record. Under the law of pa.rtnership, it is the partner and the partner A>lone who is entitled to the profits. A stranger, even if he were an assignee, has not and cannot have a direct claim to the profits. By the deeds in question, the asse~see merely allowed a payment to his wife and daughters to constitute a valid discharge in favour of the firm; but what was paid was, in law, a portion of his profits, or, in other words, his income. A glance at the account books of the firm, l\lessrs. Chari and Ran1, clearly shows that the amounts were first credited in the Khata of Rangachari and then under his directions were transferred from his Khata to those of his wife and daughters. The dispositions, there- fore, were, in law and in fact, portions of the income of Rangachari, after the income had accrued to him, and tax was payable by him at the point of accrual. In view of the decision of this Court in Sitaldas Tirath- das's case (1), it cannot be said that the profits were diverted by an overriding title before they accrued to Rangachari; and the rule in Bijoy Singh Dudhuria.' s case {2} cannot be called in aid. For the above reasons, we are in entire agreement with the High Court in the answer given and dismiss these appeals with costs. (I) [1961] 2 S,CR. 634. 49 Appeal8 dismissrd. (2) [rqnl r I.T.R. t3.'i·