1974 (8) TMI 12 - HC - Income Tax

Court rules managing agency commission not assessable as income, income diverted by overriding title

The court ruled in favor of the assessee, holding that the share of managing agency commission for the specified assessment years was not liable to be ... Diversion By Overriding Title, Right To Receive Issues Involved:1. Whether the amounts of share of managing agency commission for the assessment years 1957-58, 1958-59, 1959-60, and 1960-61 are liable to be assessed in the hands of the assessee as his income.Issue-Wise Detailed Analysis:1. Assessment of Managing Agency Commission in the Hands of the Assessee:The primary issue is whether the share of the managing agency commission received by the assessee for the specified assessment years should be assessed as his income. The share of the managing agency commission was receivable under an agreement dated February 26, 1951, between the assessee and his brother on one hand and Messrs. Forbes Forbes Campbell & Co. Ltd. (the managing agency company) on the other.2. The Deed of Gift and its Effect:The assessee executed a deed of gift on October 20, 1955, transferring his right to receive the share in the managing agency commission to his two married daughters. The deed of gift was executed out of natural love and affection, and the assessee informed the managing agency company of this transfer. The deed of gift was to be effective from the assessment year 1957-58.3. Income Tax Authorities' View:The income-tax authorities held that this was a case of application of income and not diversion of income by overriding title. The Tribunal confirmed this view, stating that the income must first accrue to the assessee before the donees (daughters) could claim it. The donees were not substituted for the assessee in the agreement, and the managing agency company was merely informed to make out two separate cheques in favor of the assessee's daughters.4. Legal Arguments:- Assessee's Argument: The assessee argued that the right to receive the commission was a benefit of contract which could be assigned. By executing the deed of gift and informing the managing agency company, there was a clear diversion of the source of income before it accrued to the assessee.- Revenue's Argument: The revenue contended that the share of the commission accrued as income to the assessee and was then applied by him in accordance with the deed of gift. The revenue argued that the source of income (the contract) remained with the assessee, and the income was his own, making it a case of application of income after it accrued.5. Judicial Precedents and Tests:The court referred to several authorities to establish the test for determining whether income is diverted by overriding title or merely applied after it accrues. The Supreme Court in Commissioner of Income-tax v. Sitaldas Tirathdas laid down the test: 'The true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income.'6. Analysis of the Agreement and Deed of Gift:The agreement dated February 26, 1951, contained reciprocal promises and obligations. Clause 6 specified that 7.5% of the managing agency commission was receivable by the assessee. The deed of gift executed by the assessee transferred his right to receive this commission to his daughters, to the entire exclusion of the assessee.7. Nature of the Right to Receive Commission:The right to receive the commission was considered an actionable claim under the Transfer of Property Act. The court held that the benefit of a contract can be assigned unless the obligations are of a personal character. The deed of gift transferred the source of income (the right to receive the commission) to the daughters before the income accrued to the assessee.8. Conclusion:The court concluded that the effect of the deed of gift was to transfer the source of income to the daughters before the income accrued to the assessee. Therefore, the income did not reach the assessee and could not be assessed in his hands. The court answered the question in the negative, ruling in favor of the assessee.Final Judgment:The amounts of share of managing agency commission for the assessment years 1957-58, 1958-59, 1959-60, and 1960-61 are not liable to be assessed in the hands of the assessee as his income. The revenue shall pay the costs of the assessee.