Dividend income assignment: unregistered deed valid, proviso to section 16(1)(c) operative, and payment treated as application of income.

A unilateral deed assigning dividend income was not void for want of registration, because it operated as a gift or assignment of the right to receive income and did not attract section 25 of the Contract Act. The third proviso to section 16(1)(c) of the Indian Income-tax Act was not repugnant to the main clause; it merely carved out an exception for irrevocable settlements while leaving the deeming rule intact. Dividend income paid to the wife under the deed was only an application of the assessee's income, since the dividends first accrued to him and were then passed on under covenant; the income remained taxable in his hands.

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Issues: (i) whether the deed assigning dividend income required registration and was void for want of registration; (ii) whether the third proviso to section 16(1)(c) of the Indian Income-tax Act was repugnant to the main clause; (iii) whether the payment of dividend income to the wife under the deed was merely an application of the assessee's income.

Issue (i): whether the deed assigning dividend income required registration and was void for want of registration

Analysis: The deed was unilateral and did not create any contract between the parties, so section 25 of the Contract Act had no application. The disposition was in substance a gift or, at any rate, an assignment of the right to receive dividend income, and it did not become invalid merely because it was unregistered. The question whether it might otherwise be ineffective was distinct from the narrow question referred.

Conclusion: The deed was not void for want of registration and the answer was in favour of the assessee.

Issue (ii): whether the third proviso to section 16(1)(c) of the Indian Income-tax Act was repugnant to the main clause

Analysis: The proviso did not destroy the main clause. Read together, the clause and the proviso showed that the special deeming rule continued to operate except where the settlement or disposition was irrevocable for the period specified in the proviso. The proviso therefore carved out an exception without making the principal provision otiose.

Conclusion: The third proviso was not repugnant to the main clause and the answer was against the Department.

Issue (iii): whether the payment of dividend income to the wife under the deed was merely an application of the assessee's income

Analysis: The deed left the shares in the assessee's name and contemplated that dividends would first accrue to him and then be paid over to the wife by endorsement of the dividend warrant or by instructions to the company. Section 16(1)(c) applied only where income was effectively transferred so that it became the beneficiary's income at the outset. Where the income merely passed through the assessee under a voluntary covenant, it remained his income and was an application of income, not a diversion of income. The third proviso had no relevance because the case was outside the main clause itself.

Conclusion: The dividend receipts were merely an application of the assessee's income and were assessable in his hands; the answer was in favour of the Department.

Final Conclusion: The deed was not invalid for want of registration, the proviso to section 16(1)(c) remained operative, and the dividend income was taxable in the hands of the assessee because the arrangement effected only an application of income.

Ratio Decidendi: Section 16(1)(c) applies only where the settlement or disposition makes the income accrue directly to the beneficiary so that it ceases to be the transferor's income; if the income first accrues to the transferor and is merely paid over under a covenant, it remains assessable in the transferor's hands as an application of income.

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