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

Judgment

SUPREME COURT REPOl{TS [1961] I96I structure. Under these circumstances it would be Th F . -t-N 1. 1 erroneous not to treat the amount of ''Undivided trs a sona 0 fi , City Bank ~ ro ts as a part o the cap1tal un . In our opinion therefore the amount designated as 1"he Commissioner "Undivided Profits " is a part of the reserves and has 0~ In~ome~~~, to be taken into account when computing the capital om ay uy and reserves within R. 2(1) of Schedule II of the Act. Kapur J. The question which was referred by the Tribunal should have been decided in the affirmative and in favour of the appellant and the amount should have been added to the capital as allowed by R. 2( 1) for the Chargeable Accounting Periods. In the result the appeal is allowed. The appellant will have its costs in this Court and in the High Court. january IO. Appeal allowed. K. A. RA~IACHAR AND ANOTHER COM~llSSIONER OF INCOME TAX, 1\:!ADRAS. (J. L. 1\.APUH., M. HTDAYATULLAH and J. C. SHAH, JJ.)

I ncome-tax~Assessee assigning portion of his profits of partnership firm to his wife m•d daughters--Such profits, if can be included in the assessee's total income for purposes of assessment~ Incometax ActJ 1922 (II of I922), S. I6(I)(c). One Rangachari, a partner of a partnership firm, assigned by means of a deed of settlement a fourth share of the profits of the firm each to his wife, a married adult daughter and a minor daughter for 8 years with the right to receive the said share of profits absolutely and exclusively from the firm. The question which arose before the High Court on a reference under s. 66(1) of the Income-tax Act was " \Vhether the inclusion in the assessee's total income of the profits settled by him on his wife and two daughters is justifiec.l in law?''

The assessee H.angachari relying on the rule laid down by the Privy Council in Bijoy Singh Dudhuria's case claimed that the amounts payable to his wife and two daughters never became his income, being diverted by an overriding title and that those amounts could not be included in his total income for the purposes of assessment being excluded by reason of the third provi~o to s. r6(1)(c) of the Incorne~tax Act. The High Court held that the third proviso was not attracted and that the income had accrued to the assessee in the first instance, and had then been applied for payments under the deeds. On appeal with a certificate of the High Court : Held, that the answer given by the High Court was co:rect. j I 3 S.C.H. SUPRE~IE COUR'l' ltEPOHTS An examination of the deeds of settlement showed that the 196I disponer had stated that from the profits " payable to him " certain amounts in specified shares were to be paid to his wife 1\. A. Ramacha" and two daughters. ~ o doubt, the assessee in those deeds created a right in favour of the disponees to get the amounts direct from Commissioner of the firm, of which he was a partner.

The tenor of the document Tncom~~tax,Mad,as showed that the profits 'Yere first to accrue to him and were then applied for payments to the dispon<.:es. Under the law of partnership, it i.s the partner and the partner alone 'vho is entitled to the profits. A stranger, even if he were an assignee, has not anrl cannot have a direct claim to the profits. By the deeds in question, the assessee merely allowed a payment to his wife and daughters to constitute a valid discharge in favour of the firm, but 'vhat was paid was, in law, a portion of his prof1ts or, in other words, his income. The rule in Bijoy Singh's case was not applicable to this case, and in view of the decision of this court in Sitaldas Tirathdas's case it cannot be said that the profits were diverted by an overriding title before they accrued to the assessee. Provat Kumar Mitter v. Commissioner of Income-tax, ll'est Bengal lrg6r] 3 S.C.R. 37· Tulsidas Kilachand v. The Commissioner of Income-tax [rg6r] 3 S.C. R. 351.

The Commissioner of Income-tax, Bombay v. Sitaldas Tirathdas [1961] 2 S.C. R. 634, applied. Bijoy Singh Dudhuria v. Commissioner of Income-tax, Benp,al [1933J r I.T.R. 135, held inapplicable. CIYJL APPELLATE JURISDICTIO~: Civil Appeals Nos. 142 and 143 of 1960. Appeals from the judgment and order dated July 21, 1955, of the Madras High Court in C.R. No. 32 of 1952. G. S. Pathak and Naunit Lal, for the appellants. K. N. Rajagopal Sastri and D. Gupta for the respondent. 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 : ::;UPREME COURT REPORTS [1961] "Whether the inclusion in the assessee~s total K.A. Ramachar income of the profits settled by him on his wife 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 September 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 irrevocable 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 Beneficiary 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 commencing 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. 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 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 ~ 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 transfezTed to the accounts of each of the three disponees.

In the same lvay, the profits oft he prey ions yf:'ar ending 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 concerned, 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 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 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 actionllidayatullah 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 accordance 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, therefore, 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 Tirathdas'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·