Commissioner of Income Tax, Bombay vs Shri Sitaldas Tirathdas

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Appeal No. 528 of 1959

Decision Date: 24 November 1960

Coram: M. Hidayatullah, J.L. Kapur, J.C. Shah

In this case the Supreme Court of India heard an appeal titled The Commissioner of Income‑Tax, Bombay City versus Shri Sitaldas Tirathdas, the judgment being delivered on 24 November 1960.

The appeal was authored by Justice M. Hidayatullah, and the bench consisted of Justice M. Hidayatullah, Justice J. L. Kapur and Justice J. C. Shah. The petitioner was the Commissioner of Income‑Tax, Bombay City and the respondent was Shri Sitaldas Tirathdas.

The reported citation of the judgment is 1961 AIR 728 and 1961 SCR (2) 634. Subsequent citations of the decision appear in various law reports, including R 1961 SC 1059, F 1967 SC 383, R 1969 SC 1160, RF 1972 SC 404, F 1976 SC 1973, R 1977 SC 1343, R 1977 SC 1523, RF 1977 SC 1657, and F 1989 SC 1443.

The issue before the Court concerned whether amounts paid as maintenance to the wife and children of the assessee under a consent decree could be deducted from the assessee’s total income for income‑tax purposes.

The headnote of the judgment explained that a consent decree had been passed against the assessee directing him to pay maintenance to his wife and children. Although the decree created no charge upon the assessee’s income, he claimed that the maintenance payments should be allowed as a deduction from his total income in his income‑tax assessment.

The Court held that the assessee was not entitled to such a deduction. It clarified that a deduction is permissible only when the income is diverted by an overriding title before it reaches the assessee; conversely, if the income reaches the assessee and only thereafter must be applied to satisfy an obligation, the deduction is not allowable.

The true test, according to the Court, was whether the amount sought to be deducted ever actually became the assessee’s own income. In the present case, the Court found that the wife and children received a portion of the assessee’s income after the assessee himself had already received the income as his own.

The Court noted that the decision in Bejoy Singh Dudhuria v. Commissioner of Income‑Tax (1933) I I.T.R. 135 was not applicable to the facts of the present case. The decision in P. C. Mullick v. Commissioner of Income‑Tax, Bengal (1938) 6 I.T.R. 206 was applied, and the Court also referred to several other authorities, namely Diwan Kishen Kishore v. Commissioner of Income‑Tax (1933) 11 I.T.R. 143; Seth Motilal Menekchand v. Commissioner of Income‑Tax (1957) 31 I.T.R. 735; Prince Khanderao Gaekway v. Commissioner of Income‑Tax (1948) 16 I.T.R. 294; Commissioner of Income‑Tax, Bombay v. Makanji Lalji (1937) 5 I.T.R. 539; Commissioner of Income‑Tax, Bombay v. D. R. Naik (1939) 7 I.T.R. 362; D. C. Aich, In re (1940) 9 I.T.R. 236; Hira Lal, In re (1945) 13 I.T.R. 512; and V. M. Raghavalu Naidu & Sons v. Commissioner of Income‑Tax (1950) 18 I.T.R. 787.

The procedural history indicated that the appeal, numbered 528 of 1959, was filed against the judgment and order dated 20 September 1957 of the former Bombay High Court in Income‑Tax Reference No. 15 of 1957. Counsel appearing for the appellant were Hardayal Hardy and D. Gupta, while counsel for the respondent comprised R. J. Kolah, S. N. Andley, J. B. Dadachanji, Rameshwar Nath and P. L. Vohra.

Finally, the Court recorded that the Commissioner of Income‑Tax, Bombay City, had filed this appeal under a certificate granted pursuant to section 66A(2) of the Income‑Tax Act, challenging the earlier judgment and order of the High Court.

The appeal concerned a decision of the Bombay High Court dated September 20, 1957, in Income‑tax Reference No. 15 of 1957, and the matter was referred to the High Court for opinion by the Income‑tax Appellate Tribunal, Bombay. The specific question presented to the High Court was whether the assessee could be allowed a deduction of Rs 1,350 for the assessment year 1953‑54 and Rs 18,000 for the assessment year 1954‑55 from his total income of the preceding year. The assessee, Sitaldas Tirathdas of Bombay, derived income from several sources, the most important being property, stocks and shares, bank deposits and a partnership known as Messrs Sitaldas Tirathdas. He used the financial year as his accounting year. For the assessment years 1953‑54 and 1954‑55 his total income was respectively assessed at Rs 50,375 and Rs 55,160. He did not dispute these figures, but he sought to deduct from them the amounts of Rs 1,350 for the first year and Rs 18,000 for the second year on the ground that a court decree required him to pay these sums as maintenance to his wife, Bai Deviben, and to his children. A suit for maintenance allowance, separate residence, marriage expenses for his daughters and arrears of maintenance had been filed in the Bombay High Court as Suit No. 102 of 1951. By consent a decree was passed on March 11, 1953, ordering a maintenance allowance of Rs 1,500 per month payable by the assessee. For the accounting year ending March 31, 1953 only one payment was made; after deducting Rs 150 per month as rent for the flat occupied by his wife and children, the amount actually paid under the decree amounted to Rs 1,350. In the following year the monthly maintenance of Rs 1,500 amounted to Rs 18,000, which the assessee claimed as a deduction. No charge on any property was created, and the issue did not fall within section 9(1)(iv) of the Income‑tax Act. Nevertheless, the assessee relied on a Privy Council ruling in Bejoy Singh Dudhuria v. Commissioner of Income‑tax to support his claim for deduction. The Income‑tax Officer disallowed the deduction, a decision that was affirmed by the Appellate Assistant Commissioner. On further appeal the Tribunal observed that the case was “pure and simple” where the assessee was compelled to apply part of his income to maintain persons to whom he had a personal and legal obligation, and that the Income‑tax Act did not permit any deduction from total income in such circumstances. The Tribunal recorded that counsel for the assessee had argued that the deduction should be allowed because the “real total income” should be considered as the computed total income less the maintenance amount paid under the decree. The assessee also appears to have relied on a decision of the Lahore High Court in Diwan Kishen Kishore v. Commissioner of Income‑tax.”

In the matter before the Tribunal, the issue was referred to the High Court for its opinion. The High Court examined two earlier decisions of the same Court, namely Seth Motilal Manekchand v. Commissioner of Income‑tax (1957) 31 I.T.R. 735 and Prince Khanderao Gaekwar v. Commissioner of Income‑tax (1948) 16 I.T.R. 294. In both of those cases the Court had held that the test to be applied was identical, even where no specific charge on a particular property existed, provided that the assessee was under an enforceable legal obligation to make the payment. The Tribunal noted that in Bejoy Singh Dudhuria’s case (1933) 1 I.T.R. 135 there had been a specific charge created against the assessee for maintenance, and the Privy Council had observed that the income must be deemed never to have reached the assessee because it was diverted to the persons entitled to maintenance. The judgment under appeal adopted the view that the amount dictated by the decree should be considered as diverted to the wife and children and therefore never became income in the hands of the assessee. The Commissioner of Income‑tax challenged the correctness of this decision as well as the two earlier Bombay High Court rulings. The Court agreed with the Department’s contention. Before stating the governing principle for this and similar cases, the Court referred to several authorities that illustrate the problem. The leading authority is the Judicial Committee’s decision in Bejoy Singh Dudhuria (1933) 1 I.T.R. 135, where the step‑mother of the Raja obtained a maintenance decree ordering the Raja to pay Rs 1,110 per month, and the decree declared that amount a charge on the Raja’s properties. The Raja attempted to deduct the payment from his assessable income, but the Calcutta High Court disallowed the deduction. On appeal, Lord Macmillan of the Privy Council remarked that the learned Chief Justice’s view was wrong in rejecting the proposition that the sums paid to the step‑mother were not income of the appellant at all. He explained that Section 3 of the Act subjects “all income” of an individual to tax, meaning that only the income which actually reaches the individual is chargeable. Since the court decree imposed a specific payment on the appellant’s entire resources, the appellant’s income was diverted to his step‑mother and, to that extent, the amount he paid was not his income. It was not a matter of the appellant merely applying part of his income in a particular way; rather, it was an allocation of a sum out of his revenue before it became income in his hands.

The Court explained that the situation described involved an allocation of a sum from a person’s revenue before that sum actually became income in his hands, as noted in the decision reported at (1) (1933) 1 I.T.R. 135. The Court then referred to another Privy Council decision, P. C. Mullick v. Commissioner of Income‑tax, Bengal, which was reported in the same year. In that case the testator had appointed the appellants as executors of his estate and had directed them to pay Rs 10,000 out of the estate’s income on the occasion of his addya sradh ceremony. The executors actually paid Rs 5,537 toward those expenses and thereafter sought to deduct the amount from their assessable income. The Judicial Committee upheld the earlier decision of the Calcutta High Court that disallowed the deduction. The Committee observed that the payments were made out of the income of the estate that had come into the hands of the executors and that the executors were acting under an obligation imposed on them by the testator. It further held that this was not a case in which a portion of the income had been diverted by an overriding title from the person who otherwise would have received it, and it distinguished the earlier case of Bejoy Singh Dudhuria. The Court noted that the principles laid down in these authorities had been applied in different ways in Indian courts, and it proceeded to illustrate the distinction with the facts of another case, Diwan Kishen Kishore v. Commissioner of Income‑tax, reported at (3) (1933) 1 I.T.R. 143. In that matter the estate was impartible and governed by the law of primogeniture, and under the family custom an allowance was payable to the junior member of the family. According to an award given by the Deputy Commissioner, who acted as arbitrator, and in accordance with the will of the father of the estate holder, a sum of Rs 7,200 per year was to be paid to the junior member. The estate holder sought to deduct this amount on the ground that it was a necessary and obligatory payment, and therefore the assessable income should be reduced proportionately. The Court held that the amount never became part of the income of the family or of the eldest member; rather, it was a charge on the estate itself. The allowance payable to the junior member, in the context of an impartible estate, was treated as the separate property of the younger member, upon which he could be assessed, and the rule that an allowance given by the head of a Hindu coparcenary to its members as maintenance was liable to be assessed as income of the family did not apply. The Court also observed that if the estate had been partible and a partition could have taken place, the payment to the junior member out of the coparcenary funds would have been characterized differently. In the present circumstance, the payment to the junior member was a kind of charge that diverted a portion of the income from the assessee to the junior member in such a way that it could not be said that the amount became the income of the assessee.

The Court observed that the amount in question could not be treated as the income of the assessee. It referred to the decision in Commissioner of Income‑tax, Bombay v. Makanji Lalji (1), where the Court had held that when the income of a Hindu undivided family was being computed, any monies paid to the widow of a deceased coparcener as maintenance could not be allowed as a deduction, even though the maintenance had been ordered by a Court and had been recognised as a charge on the family’s property. The present case, however, was considered to be open to serious doubt because the principle laid down in Bejoy Singh Dudhuria’s case (2) appeared to apply. Although the High Court had attempted to distinguish the earlier Judicial Committee ruling, the Court noted that the distinction was based on a ground that was not truly material – namely, that in Bejoy Singh Dudhuria’s case (2) the Advocate‑General had withdrawn the argument that the step‑mother remained a member of the undivided Hindu family. The Court further pointed out that the present matter involved an assessment of the taxpayer as an individual, not an assessment of a Hindu undivided family. In the subsequent authority Commissioner of Income‑tax, Bombay v. D. R. Naik (3), the assessee was the sole surviving member of a Hindu undivided family. A Court decree had vested in the assessee certain properties as a residuary legatee, but it also imposed on him an obligation to make maintenance payments to widows who continued to be members of the family. The Court held that, although section 9 of the Income‑tax Act did not apply, the assessable income of the assessee was limited to the balance that remained after the maintenance charges had been satisfied. The factual matrix showed that there was a specific charge for maintenance, as recorded in the reports (1) (1937) 5 I.T.R. 539, (2) (1933) 1 I.T.R. 135 and (3) (1939) 7 I.T.R. 362, that was imposed on the assessee’s properties. This decision correctly restated the principle laid down by the Judicial Committee that where an overriding obligation creates a charge and diverts income to another person, the amounts paid under that charge may be deducted. The Court then contrasted this position with the decision in P. C. Mullick and D. C. Aich, In re (1). In that case, a will required certain payments to be made to beneficiaries together with other annuities. The Court held that those payments could be made only out of the income received by the executors and trustees from the property, and consequently the sum was assessable to income‑tax in the hands of the executors. It was emphasized that the will expressly provided that the amounts were to be paid “out of the income of my property,” meaning that the charge fell upon the income of the executors, who were the assessee. This ruling was consistent with the Privy Council’s decision in P. C. Mullick v. Commissioner of Income‑tax, Bengal (2). Finally, the Court referred to the case of Hira Lal, In re (3), where a joint Hindu family was subject to two awards made by arbitrators, illustrating the application of the same principles to different factual situations.

In a case concerning a joint Hindu family, the Court observed that certain maintenance allowances were payable to widows and that those payments were made as a charge upon the family property. Because the payments were obligatory and subject to an overriding charge, the Court held that they had to be excluded from the family’s income. The Court explained that the amount payable to the widows was diverted from the family to the widows by this overriding obligation, which functioned as a charge, and consequently the income could not be said to have accrued to the joint Hindu family at all. In the decision of Prince Khanderao Gaekwar v. Commissioner of Income‑tax (4), a family trust required that two grandsons of the settlor receive a portion of the trust income, and it also provided that if their mother lived separately, the trustees should pay her Rs 18,000 per year. The mother did live separately, and two deeds were executed under which the grandsons agreed to pay Rs 15,000 per year to the mother, thereby creating a charge on the trust property. The sons later paid Rs 6,000 in excess of their obligations and sought to deduct that excess from their assessable income. The Bombay High Court allowed the deduction, observing that although the payment was voluntary, it was subject to a valid and legal charge enforceable in a Court of law, and therefore the amount was deductible under section 9(1)(iv). The Court noted that there is a distinction between a charge created by a decree of Court and one created by agreement of parties, provided that the charge diverts income from the property so as to bring the matter within section 9(1)(iv) of the Act. It further clarified that the case was an application of that particular statutory provision and not an issue of an obligation arising from a money decree, whether income accrued or not. Accordingly, the Court regarded the case as distinguishable from the present matter and felt no need to examine whether, in the special circumstances of that case, the decision had been correct.

The Court then considered the matter of V. M. Raghavalu Naidu & Sons v. Commissioner of Income‑tax (1), where the assessee consisted of the executors and trustees of a will who were required to pay maintenance allowances to the mother and widow of the testator. The assessee attempted to deduct those allowances, but the claim was disallowed. The learned judges, Satyanarayana Rao and Viswanatha Sastri, distinguished this case from the Privy Council decision in Bejoy Singh Dudhuria (2). Justice Viswanatha Sastri observed that the testator was under a personal obligation under Hindu law to maintain his wife and mother, and that if he spent a portion of his income on such maintenance, he could not deduct that amount from his assessable income; the position of the executor was no better. Justice Satyanarayana Rao added that the amount in question was not an allowance charged upon the estate by a court decree or otherwise, and that the testator himself had no right or title to receive it. Consequently, the income received by the executors included the maintenance payment, and a portion of that income was applied in discharging the obligation, leading to the conclusion that the deduction could not be permitted.

The Court observed that the executors received income that included an amount paid as maintenance, which was applied toward discharging an obligation and which the testator himself had no right or title to receive; this situation was illustrated by reference to the authorities (1) (1950) 18 I.T.R. 787 and (2) (1933) 1 I.T.R. 131. The last cited authority was a decision of the Bombay High Court that appeared to influence the reasoning in the present matter, namely Seth Motilal Manekchand v. Commissioner of Income‑tax (1). In that case the managing agency of a Hindu joint family comprised A, his son B and A’s wife; a partition was effected and it was agreed that the managing agency remuneration would be divided, with A and B each receiving a half‑share while each was required to pay A’s wife the amount of two annas and eight pies out of their respective half‑shares. Chief Justice Chagla and Justice Tendolkar held that, under the deed of partition, A and B had intended to receive only a portion of the managing‑agency commission and that the sum paid to A’s wife was diverted before it became the income of A and B, consequently permitting a deduction. The learned judge further explained at page 741 that, although the submission of Mr Kolah that the payment constituted a charge was accepted, it was unnecessary to decide that issue because it would only be relevant if a claim for deduction under section 9(1)(iv) of the Income‑Tax Act concerning immovable property were being considered; instead, the court was satisfied that Bhagirathibai possessed a legally enforceable right to her two annas and eight pies share and that the partner was under a legal obligation to pay that amount. The Court noted that several cases have examined this problem from various perspectives, with some applying the principle correctly and others not, but it declined to assess the correctness of those decisions in light of their facts. In the Court’s view the proper test is whether the amount sought to be deducted, in truth, never reaches the assessee as his income; obligations exist in every case, but the nature of the obligation is the decisive factor. There is a distinction between an amount that a person is obliged to apply out of his income and an amount that, by the nature of the obligation, cannot be said to form part of the assessee’s income; where the obligation causes income to be diverted before it reaches the assessee, that amount is deductible.

The Court explained that when income must be applied to satisfy an obligation only after that income has already reached the assessee, the legal effect of deductibility does not follow. Such a payment belongs to the second category, which is merely an obligation to pay another a portion of one’s own income that has already been received and is now being allocated. By contrast, the first category involves a payment in which the income never reaches the assessee; even if the assessee were to collect it, the collection is made not as part of his own income but on behalf of the person to whom the amount is payable. In the present matter, the Court observed that the wife and children of the assessee, who remained members of his family, received a portion of the assessee’s income after the assessee himself had taken the income into his own hands. Consequently, the situation constituted an application of a portion of the income to discharge an obligation, rather than a case in which an overriding charge made the assessee a mere collector of another’s income. The Court noted that the facts would have been different had an overriding charge existed on the property or its income, which was not so. Accordingly, the Court held that the case fell outside the rule articulated in Bejoy Singh‑Dudhuria’s case and instead fell within the rule stated by the Judicial Committee in P. C. Mullick’s case. For these reasons, the Court concluded that the question referred to the High Court should be answered in the negative, that the answer given by the High Court was to be set aside, and that the question would be answered negatively. The appeal was therefore allowed with costs both here and in the High Court. (1) (1933) 1 I.T.R. 135. (2) (1938) 6 I.T.R. 206.