TaxTMI 
TaxTMI 
1996 (8) TMI 3
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....as disallowed was not admissible deduction under section 12(2) of the Indian Income-tax Act, 1922 ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the said interest should not be taken into account while determining the real income of the appellant ? " The relevant years of assessment were 1951-52, 1952-53 and 1954-55 to 1961-62. The High Court answered questions Nos. 1 and 2 in favour of the assessee and against the Revenue. The facts of the case as recorded by the Tribunal in its appellate order, dated November 22, 1972, were as follows. Sir Chinubhai Madhavlal had filed a suit in the High Court of Bombay in 1948 against his three sons, Udayan Chinubhai, Kirtidev Chinubhai, Achyut Chinubhai, and his wife, Lady Tanumati Chinubhai, and also his mother, Lady Sulochana Chinubhai, claiming severance of the joint status of the undivided joint Hindu family of the plaintiff and the defendants. The family had considerable movable and immovable properties. There were also various debts and liabilities of Sir Chinubhai who was the karta of the joint family. Some debts were also incurred by Udayan Chinubhai and Lady Tanumati fo....
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....the assessees in the individual assessments was that the assessees had to pay interest on various liabilities taken over by them and these interest payments should be considered as diversion of their income from properties by an overriding title. It may be mentioned that the income of the assessees consisted of income from immovable property, business income and income from other sources. Some of the debts were secured against immovable properties. The Income-tax Officer in working out the property income, allowed these interest payments as admissible deductions. However, he was of the view that the other interests could not be allowed as deductions. The assessee also made a claim that interest payments should be allowed as deduction under section 12(2) of the Indian Income-tax Act, 1922, because these interests had to be paid solely for the purpose of making or earning income. The Income-tax Officer held that there was no nexus between payment of interest and earning of the income. Merely because the liabilities and the assets were inherited together from an ancestor or received as a result of partition, it did not follow that the interest was payable for earning the income. It....
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....rriding title. Merely because liabilities and assets were inherited from an ancestor or received on partition, the interest paid on liabilities could not qualify for deduction against income from assets under the head "Other sources". The Tribunal on further appeal rejected the contention of the assessee that there had been diversion of income by overriding title and also that the real income of the assessee must be determined after deduction of all the interest payments. The Tribunal held that the facts of the case did not show that the debts were automatically dovetailed with the Hindu undivided family properties which the sons or the wife had received on partition. It was not as if the sons acquired the properties subject to overriding claims in respect of the family debts which had been allotted to them. Tanumati and her sons could not have been prevented from using the income in any way they liked. No creditor had a specific overriding claim in respect of any particular income. The Tribunal came to the conclusion that there was no overriding title or diversion of income as a whole in this case. The Tribunal, however, held that the argument based on the concept of real incom....
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....e debts of the family were allotted to the mother and the sons. According to the High Court under the doctrine of pious obligation, the assessees were liable to pay the debts of the father. Apart from this liability under the award of the arbitrator, the assessees undertook the liability to discharge the debts. The provision under the Hindu law, the Indian Trusts Act, the terms of the consent decree and the arbitrator's award created an overriding title in favour of the creditors to have their liabilities paid from the assets which came into the hands of the assessee. Therefore, the interest paid to unsecured creditors out of the assets received by the assessees on the partial partition was diverted by overriding title and did not form part of the real income of the assessees. In our view, the High Court overlooked the fact that the position of the creditors was not strengthened in any way by virtue of the partition that had taken place. It is true that the award given by the arbitrator was followed up by a decree in terms of the award. That, however, did not alter the position of the creditors in any way. There was considerable doubt whether the sons were liable to pay the Avya....
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.... partition, the assessee did not have the entire beneficial interest in the properties allotted to him. It cannot be said that the creditors had any interest in these properties in any manner. If a man takes a loan simpliciter, the creditor does not acquire any interest in the properties of the debtor. In this case, all that has happened is that as a result of the partition, the assessees had been allotted certain properties of the joint family. Some of the liabilities of the joint family have also been allotted to the assessee. The interest payable in respect of these debts and liabilities will have to be paid by the assessees. It may be paid out of the income of the assets received on partition or otherwise. There is no obligation to pay the debts out of any particular asset. It cannot be said that the creditors had acquired any beneficial interest in any of the properties allotted to the assessee or that the property was held for the benefit of the creditors. The illustration to section 94 merely embodies the principle that a man must be just before he is generous. A man cannot give away all his properties by will without making any provision for payment of his debts. The exe....
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....ns permissible under each head. The assessee's claim, in effect, is what is not permissible in law as deduction under any of the heads will have to be allowed as a deduction on the principle of real income of the assessee. If a man incurs debts in his business and has to pay interest thereon, then such interest will be deductible. But if a person with salary income only incurs a debt, then interest on such debt cannot be allowed as deduction in the computation of salary income on any principle of real income. Even if a man has business income, then unless it can be established that the loan was obtained for business purposes, the question of deduction of interest paid on the loan from the business income cannot arise. Whether the assessee is a company or an individual or an Hindu undivided family is quite immaterial for this purpose. The Tribunal has pointed out that the Hindu undivided family could not get any deduction in its assessment on account of payment of interest on these loans. The position after partition of the joint family remains the same. The assessee as a member of the joint family, after partition, was allotted his share of the joint properties as well as some of t....
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.... is not even a charge. It is a simple case where the assessee has paid interests on loans in the relevant years of assessment. The interests may have been paid out of income derived from the property allotted to the assessee on partition of the joint family property. But what was received by the assessee out of the assets was his own income. The assessee will have to bear the burden of the liabilities that have been allotted to him. The interests on the loans will have to be paid to the creditors. But such payment will only be application of income. The income from the assets were received by the assessee. Payment to the creditors may have been made out of that income. The application of the income will not in any way alter the character of the income received by the assessee. In the leading case of Pondicherry Railway Co. Ltd. v. CIT [1931] 5 ITC 363 ; AIR 1931 PC 165, 170, it was observed by Lord Macmillan : " But profits on their coming into existence attract tax at that point and the Revenue is not concerned with the subsequent application of the profits. " It was reiterated that the principle to be applied in cases like these was laid down by Lord Chancellor Halsbu....
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....e argument that the assessee's liability to his step-mother was of the same kind as his liability to provide for his wives and daughter and stated that the position is the same as if the appellant "had received his various properties, securities and businesses under a bequest from his father upon the terms that these assets were charged with an annuity for the maintenance of the widow". Lord Macmillan observed that this was the correct approach to the question raised before it and emphasised that the decree of the court by charging the appellant's whole resources with a specific payment to the step-mother had diverted his income from him. The amounts payable to the step-mother under the decree could not be treated as the income of the assessee. But this is not a case of a bequest at all. No charge has been created on the assets received by the assessees on partition of the family by the award or the decree passed in terms of the award. The income has not been diverted at source in any way. This is a simple case of partition of properties of a joint Hindu family. The assessee has been allotted his legitimate dues on partition. It has been pointed out by the Judicial Committee in ....
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.... the assessee, the same consequences in law did not follow. It was the first kind of payment which could truly be excused and not the second. The second payment was merely an obligation to pay another a portion of one's own income which had been received and was since applied. The case before us is a case where the assessee is obliged to pay all the debts which have been allotted to him. But as was pointed out by Hidayatullah J., the obligation to apply the income to discharge a debt will not amount to diversion of the income at source even before the amounts became the assessee's income. The principle laid down in the case of Sitaldas Tirathdas [1961] 41 ITR 367 (SC) was explained by this court in Moti Lal Chhadami Lal Jain v. CIT [1991] 190 ITR 1, where it was held : " Where the obligation flows out of an antecedent and independent title in the former (such as, for example, the rights of dependants to maintenance or of coparceners on partition, or rights under a statutory provision or an obligation imposed by a third party and the like), it effectively slices away a part of the corpus of the right of the latter to receive the entire income and so it would be a case of di....