Case: Provat Kumar Mitter Vs. Commissioner Of Income Tax,West Bengal

the question did not arise out of the Tribunals order. We must, therefore, overrule this contention. 7. Now, as to the correctness of the answer given by the High Court. Learned counsel for the appellant has contended that the High Court did not correctly construe the instrument of January 19, 1953, and on a proper construction, the High Court should have held that a right of property in praesenti was assigned in favour of the wife. Learned counsel has submitted that the assessee as a registered holder of 500 Ordinary shares of the Calcutta Agency Ltd., had a bundle of rights in the company : (1) a right to vote; (2) a right to participate in the distribution of assets on dissolution or liquidation of the Company; and (3) a right to participate in the profits, e.g., dividends which might be declared. It is contended that the aforesaid third right was assigned to the wife by the assessee, and that the High Court ignored the said assignment while it emphasised the other covenants for endorsing or handing over the dividend warrants, etc. In support of his contention learned counsel has relied on certain observations made by this Court in Bacha F. Guzdar v. Commissioner of Income-tax, Bombay, 1955-1 SCR 876 at p. 883: ((S) AIR 1955 SC 74 at p 77). That was a case in which the question that arose for decision was whether dividend declared by a company growing and manufacturing tea was agricultural income within the meaning of S. 2(1) of the Income-tax Act and hence exempt from income-tax under S. 4(3) (viii) of the said Act. It was held that the dividend of a shareholder was the outcome of his right to participate in the profits of the company arising out of the contractual relation between the company and the share holder, and the observations on which learned counsel has relied were to the effect that "the right to participate in the profits exists independently of any declaration by the company with the only difference that the enjoyment of profits is postponed until dividends are declared." 8. We do not think that those observations are of any assistance to the appellant in the solution of the question before us, which is really one of construction of the instrument of January 19, 1953. A transfer of property may take place not only in the present, but also in future; but the property must be in existence. It is clear to us that the instrument of January 19, 1953, was not a transfer of any existing property of the assessee. It was in its true nature a contract to transfer or make over in future every dividend and sum of money which may be declared or become due and payable on account or in respect of the shares held by the assessee, to his wife during her lifetime; the other covenants are ancillary in nature and subserve this main object of the contract. The assessee did not assign the shares and, therefore, retained the right to participate in the profits of the company; he did not part with that right. What the contract provide for was merely this: the beneficiary was given the right to receive from the assessee every dividend and other sum of money which may be declared or become due and payable in respect of the shares. If this is the true construction of the document, then it is clear to us that the answer given by the High Court to the question referred to it is correct. The High Court rightly pointed out that the Company paying the dividend can pay it only to the registered shareholder or under his orders (see Howrah Trading co. Ltd. v. Commissioner of Income-tax, Central, calcutta, 1959-36 ITR 215 : (AIR 1959 SC 775 )); therefore, S. 16(1)(c) of the Income-tax Act was not attracted nor the third proviso thereto, and the income continued to accrue to the assessee but was thereafter paid over to his wife under the terms of the contract. The income was, therefore, assessable in the hands of the assessee, because it was part of his income though applied subsequently towards payment to the wife under the terms of the contract. 9. In this view of the matter, it is not necessary to decide the further question if a contract of this nature operates only as a contract to be performed in future which may be specifically enforced as soon as the property comes into existence or is a contract which fastens upon the property as soon as the settlor acquires it. In either view, the income from the shares will first accrue to the settlor before the beneficiary can get it. Such income will undoubtedly be assessable in the hands of the settlor despite the contract. We think that the true position is that if a person has alienated or assigned the source of his income so that it is no longer his, he may not be taxed upon the income arising after the assignment of the source, apart from special statutory provisions like S. 16(1)(c) or S. 16(3) which artificially deem it to be the assignors income. But if the assessee merely applies the income so that it passes through him and goes on to an ultimate purpose, even though he may have entered into a legal obligation to apply it in that way, it remains his income. This is exactly what has happened in the present case. We need only add that the principle laid down by the Privy Council in Bejoy Singh Dudhuria v. Commissioner of Income-tax, 1933-1 ITR 135 : (AIR 1933 PC 145 ) does not apply to this case; because this is not a case of an allocation of a sum out of revenue before it becomes income in the hands of the assessee. In other words, this is not a case of diversion of income before it accrues but of application of income after it accrues.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]7. Now, as to the correctness of the answer given by the High Court. Learned counsel for the appellant has contended that the High Court did not correctly construe the instrument of January 19, 1953, and on a proper construction, the High Court should have held that a right of property in praesenti was assigned in favour of the wife. Learned counsel has submitted that the assessee as a registered holder of 500 Ordinary shares of the Calcutta Agency Ltd., had a bundle of rights in the company : (1) a right to vote; (2) a right to participate in the distribution of assets on dissolution or liquidation of the Company; and (3) a right to participate in the profits, e.g., dividends which might be declared. It is contended that the aforesaid third right was assigned to the wife by the assessee, and that the High Court ignored the said assignment while it emphasised the other covenants for endorsing or handing over the dividend warrants, etc8. We do not think that those observations are of any assistance to the appellant in the solution of the question before us, which is really one of construction of the instrument of January 19, 1953. A transfer of property may take place not only in the present, but also in future; but the property must be in existence. It is clear to us that the instrument of January 19, 1953, was not a transfer of any existing property of the assessee. It was in its true nature a contract to transfer or make over in future every dividend and sum of money which may be declared or become due and payable on account or in respect of the shares held by the assessee, to his wife during her lifetime; the other covenants are ancillary in nature and subserve this main object of the contract. The assessee did not assign the shares and, therefore, retained the right to participate in the profits of the company; he did not part with that right. What the contract provide for was merely this: the beneficiary was given the right to receive from the assessee every dividend and other sum of money which may be declared or become due and payable in respect of the shares. If this is the true construction of the document, then it is clear to us that the answer given by the High Court to the question referred to it is correct. The High Court rightly pointed out that the Company paying the dividend can pay it only to the registered shareholder or under his orders9. In this view of the matter, it is not necessary to decide the further question if a contract of this nature operates only as a contract to be performed in future which may be specifically enforced as soon as the property comes into existence or is a contract which fastens upon the property as soon as the settlor acquires it. In either view, the income from the shares will first accrue to the settlor before the beneficiary can get it. Such income will undoubtedly be assessable in the hands of the settlor despite the contract. We think that the true position is that if a person has alienated or assigned the source of his income so that it is no longer his, he may not be taxed upon the income arising after the assignment of the source, apart from special statutory provisions like S. 16(1)(c) or S. 16(3) which artificially deem it to be the assignors income. But if the assessee merely applies the income so that it passes through him and goes on to an ultimate purpose, even though he may have entered into a legal obligation to apply it in that way, it remains his income. This is exactly what has happened in the present case.