Case: Commissioner of Income Tax Vs. Udayan Chinubhai and Others

of his income and an amount which by the nature of the obligation, cannot be said to be a part of the income of the assessee. Where by the obligation, income was diverted, before it reached the assessee, it was deductible; but where the income was required to be applied to discharge an obligation after such income reached 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 ones own income which had been received and was since applied. 31. 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 assessees income. 32. The principle laid down in the case of Sitaldas Tirathdas was explained by this Court in Moti Lal Chhadami Lal Jain v. CIT where it was held : (SCC p. 238, para 17). "Where the obligation flows out of an antecedent and independent title in the former (such as, for example, the rights of dependents 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 diversion. On the other hand, where the obligation is self-imposed or gratuitous (as here) it is only a case of an application of income." * 33. These observations were made while reiterating and explaining the principle laid down in the case of Sitaldas Tirathdas. The illustrations given in that passage indicate that in certain situations diversion of income at source may take place by an overriding title depending on the facts of the case. In Sitaldas case the assessee, a HUF, had granted a lease to a company of a plot of land for which the company agreed to pay rent of Rs. 21, 000.00 out of which Rs. 10, 000.00 was to be paid to a college run by a trust. It was held even though the amount was to be paid under the lease agreement to the college, no diversion of income at source had taken place. The entire rental income of Rs. 21, 000.00 had to be assessed as income of the HUF. 34. The second question in that case was in respect of a trust created by the HUF for charitable purpose. The Karta himself was to be the first trustee. The High Court was of the view that a valid trust had not been created. On a review of the facts, this Court held that a valid trust had come into existence. Consequently, the income of the trust could not be included in the income of the family. 35. This decision does not come to the aid of the respondents contention in any way. If a valid charitable trust is created, the income of the trust cannot be treated as the income of the settlor. The properties held by the Karta as trustee cannot be treated as properties of the HUF. This is not a case of diversion of income by overriding title, but transfer of the income-yielding property itself to the trustee. The Karta became a trustee of the charitable trust set up by the family. 36. The basic principle to be borne in mind in this type of cases is that when a person pays his debts or maintains his wife or children or anybody else whom he is obliged to maintain, the expenditure incurred in such cases will be application of the assessees income and not diversion of the income at source. If he does not pay what he should have paid and is compelled by a court order to pay, it will still not be a case of diversion of income at source. Even if a charge is created on the properties of the assessee for enforcing payment, the position in law will not change. This was made clear in the case of IRC v. Paterson [ 1924 (9) Tax(Cas) 163]. It must also be borne in mind that in Raja Bejoy Singh Dudhuria case the charge on the properties inherited by the Raja was created to secure payment of maintenance of his stepmother. Lord Macmillan quoted with approval the observation of Rankin, C.J. "The learned Chief Justice in his judgment, which was concurred in by his colleagues, Ghose and Buckland, JJ., deals with the case on the footing that, by the decree of the court, the appellants stepmother had a charge not only on his zemindary property from which his agricultural income was derived, but also on all his other sources of income included in the assessment. He rejects the suggestion that the appellants liability to his stepmother was of the same kind as his liability to provide for his wives and daughter, and states 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. The case was not one of a charge created by the Raja for the payment of debts which he has voluntarily incurred. Their Lordships agree that this is the correct approach to the question." * 37. This decision clearly indicates that payment made for maintenance of wife and daughter out of the income of an assessee will not be diversion of income at source nor will a charge created by an assessee for payment of voluntarily incurred debts have the effect of diverting the assessees income at source.

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

Explanation:
1[ds]14. 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 Avyavaharic debts of the father. After the award of the arbitrator, these questions could not be raised by the sons. The arbitrator had given a finding that these debts will have to be paid. Therefore, the wife and the sons were liable to pay a portion of these debts which were allotted to them. But the High Court overlooked the fact that these debts were not a charge upon the HUF properties before the partition took place. The position continued to be the same after the partition. If a man incurs a debt, he will have to pay the debt and till the debt is paid in full, he may have to pay interest on that debt. But whether the interest is allowable as a deduction or not will depend upon the provisions of the Income Tax Act. No question of diversion of income by overriding title can arise in a case like this. A man has to pay his debts out of his income. Merely because of the liability to pay the debts, it cannot be said that the income from the assets that he received on partition stood diverted by overriding title to the creditors. The tribunal has rightly pointed out that the assessees were at liberty to spend the income from the assets allotted to them as they liked. The creditors could not insist that the debts had to be cleared before spending any money out of the income received by the assessee from theThis decision does not come to the aid of the respondents contention in any way. If a valid charitable trust is created, the income of the trust cannot be treated as the income of the settlor. The properties held by the Karta as trustee cannot be treated as properties of the HUF. This is not a case of diversion of income by overriding title, but transfer of the income-yielding property itself to the trustee. The Karta became a trustee of the charitable trust set up by theThe basic principle to be borne in mind in this type of cases is that when a person pays his debts or maintains his wife or children or anybody else whom he is obliged to maintain, the expenditure incurred in such cases will be application of the assessees income and not diversion of the income at source. If he does not pay what he should have paid and is compelled by a court order to pay, it will still not be a case of diversion of income at source. Even if a charge is created on the properties of the assessee for enforcing payment, the position in law will not change. This was made clear in the case of IRCv. Paterson [ 1924 (9) Tax(Cas)It must also be borne in mind that in Raja Bejoy Singh Dudhuria case the charge on the properties inherited by the Raja was created to secure payment of maintenance of his stepmother. Lord Macmillan quoted with approval the observation of Rankin,learned Chief Justice in his judgment, which was concurred in by his colleagues, Ghose and Buckland, JJ., deals with the case on the footing that, by the decree of the court, the appellants stepmother had a charge not only on his zemindary property from which his agricultural income was derived, but also on all his other sources of income included in the assessment. He rejects the suggestion that the appellants liability to his stepmother was of the same kind as his liability to provide for his wives and daughter, and states 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. The case was not one of a charge created by the Raja for the payment of debts which he has voluntarily incurred. Their Lordships agree that this is the correct approach to the question."This decision clearly indicates that payment made for maintenance of wife and daughter out of the income of an assessee will not be diversion of income at source nor will a charge created by an assessee for payment of voluntarily incurred debts have the effect of diverting the assessees income at source