of Income Tax, Gujarat Vs. Shri Udayan Chinubhai & Ors
 INSC 981 (20
S.C. (J) Sen, S.C. (J) Jeevan Reddy, B.P. (J) Sen, J.
JT 1996 (7) 309 1996 SCALE (6)48
20TH DAY OF AUGUST,1996 present:
Mr.Justice B.P.Jeeven Reddy Hon'ble Mr.Justice Suhas C.Sen Dr.V.Gaurishankar, Sr.Adv,
S.Rajappa and S.N.Terdol, Advs. with him for the appellant Samuel Parekh, Ms.Indoo
Verma,Amit Dhingra and P.H.Parekh, Advs. for the Respondents.
following Judgment of the Court was delivered:
of Income Tax, Gujarat. V. Shri Udayan Chinubhai &
Tribunal referred the following questions of law to the Gujarat High Court at
the instance of the assessee:-
Whether on the facts and in the circumstances of the case and particularly in
view of the facts that
partial partition of the HUF the assessee received not only assets but also
certain liabilities of the HUF and
the income from the assets received on the partition had been considered in
computing the total income of the assessee, the Tribunal was right in holding
that a part of the interest in respect of amounts due to unsecured creditors
should not be allowed either by way of an over-riding title or otherwise?
Whether, on the facts and in the circumstances of the case, the Tribunal was
right in holding that such interest as was disallowed was not admissible
deduction u/s 12(2) of the I.I.T. Act, 1922?
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?"
relevant years of assessment were 1951-52, 1952-53 and 1954-55 to 1961-62. The
High Court answered question Nos.1 and 2 in favour of the assessee and against
facts of the case as recorded by the Tribunal in its appellate order dated
22.11.1972 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 Phinubhai 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 for
maintenance and support and/or education of some of the defendants. With a view
to settle these disputes and differences between the parties, Shri K.M. Munshi,
Advocate was appointed sole arbitrator. A direction was given by the Court that
the defendants will not be permitted to challenge the debts and liabilities as Avyavaharic
or illegal or incurred for illegal or immoral purposes. In other words, the
defendants will not be entitled to say that these debts were not payable by and
binding on the joint family. The Court also directed that Shri Munshi should
ascertain and determine the debts, liabilities, claims and demands which were
binding on the joint family and also determine whether any of these debts and
liabilities etc. were to be taken over by the defendants. The Court further
directed that as far as practicable, Shri Munshi would allot to the plaintiffs
and also to the defendants such debts, liabilities, claims and demands as
related to the properties and businesses coming to the respective shares of the
gave an interim award on 23.8.1950 which followed by a final award of
15.6.1951. Under these awards, certain properties were given to Sir Chinubhai
and certain other properties were given to Lady Tanumati and her three sons.
The debts were similarly determined and certain liabilities were to be taken
over by Sir Chinubhai Madhavlal and others by Lady Tanumati and her three sons.
There was no separate allocation either of the assets or the liabilities
amongst Lady Tanumati and her three sons.
case of Joint Family of Udayan Chinubhai,etc.V. Commissioner of Income Tax,Gujrat
( 63 ITR 416),a question arose as to whether Lady Tanumati and her three sons
constituted a Hindu Undivided Family. The dispute came up to this Court and it
was held that after a decree in terms of the award of Shri Munshi was passed,
Lady Tanumati and her three sons could not be treated as an Hindu Undivided
Family. The original Hindu Undivided Family had no existence. Tanumati and her
three sons did not succeed to the properties of the HUF but were allotted their
respective shares of properties which were held by them as tenants in common.
view of the decision of this Court, assessments were made in the case of Lady Tanumati
and her three sons in the status of individuals and not as an HUF. The claim of
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.
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.
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 was
further pointed out by the Income Tax Officer that the assessee had not even
proved that the liabilities were incurred by the previous owner or by the
family before its partition to purchase the income- yielding assets.
case of the assessee was placed before the Income Tax Officer in another way.
It was argued that the coparceners were entitled to their shares in the assets
of the joint family at the time of partition. But what they received were
assets attached with the liabilities and the real income was only that income
which remained after payment of interest for such liabilities. This argument
was also rejected by the Income Tax Officer.
went up in appeal to the Appellate Assistant Commissioner who was of the view
that the interest payable on debts due to secured creditors were to be allowed
as deduction under Section 9(1)(iv) of the Indian Income Tax Act, 1922, but
interest payable to unsecured creditors did not qualify for deduction.
Appellate Assistant Commissioner also rejected the contention of the assessee
that some of assets had been purchased by raising loans because there was no
evidence to prove this contention. The assessee also claimed allowance of
interest against income from dividends. The Appellate Assistant Commissioner
held that in the absence of clear evidence, this claim could also not be
allowed. Similarly, the claim for allowance of interest against income from
deposits were disallowed on the ground that the deposits were not made by
raising any loan. Dealing with the other arguments advanced on behalf of the assessee,
the Appellate Assistant Commissioner found that the liabilities taken over by
Lady Tanumati and her sons were not necessarily incurred in acquiring the
assets from which the assessee derived income. Unless there was a connection
between the expenditure incurred and the income earned, the claim of interest
could not be allowed. The Appellate Assistant Commissioner further noted that
the partition had not brought about any change in the nature of ownership of
the properties. Tanumati and her sons had interest in the properties even
before the partition as members of the joint family. The Karta as well as the
coparceners of the Hindu Undivided Family were liable for the debts of the HUF.
He also rejected the contention that there had been diversion of income by
overriding 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".
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 HUF properties which the sons or
the wife had received on partition. It was not as if the sons acquired the
properties subject to overriding claim in respect of the family debts which had
been allotted to them.
and sons could not have been prevented from using the income in any way they
liked. No creditor had 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 income had no basis on the facts
of this case. There could be no doubt that had the debts been discharged before
partition, the assets coming to the share of the assessee would have been much
smaller and income from such assets would also have been much less. The
Tribunal pointed out that the debts had been incurred before partition.
Interests paid on these debts were not considered allowable in the case of the
assessment of the HUF before partition. The fact that there was a partition did
not give the creditors any better or more effective title. On the contrary, the
sons were in a general way responsible for the payment of the debts of their
father. This fact would not create any nexus between the claim of the allowance
of the interest and the income derived by the sons from properties received on
partition. The members had used the income as they liked as the creditors could
not have raised any objection to such expenditure. The claims of the creditors
were of a general nature. The creditors could not prevent the sons from getting
the HUF properties on partition without satisfying the debts.
by the decision of the Tribunal, the assessee prayed for reference of the
questions of law set out hereinabove to the High Court. After an elaborate
discussion of facts and law, the High Court answered questions in favour of the
assessee and against the Revenue. The High Court was of the view that when a
partition took place, provisions had to be made for the discharge of
pre-partition debts of the father. If, for some reasons, provision for
discharge of liabilities had not be made or could not be made, the persons who
get the properties on partition held the properties in their hands subject to
the liability to satisfy the demands of the creditors. In this sense, the assessee
held the property for the benefit of the creditors to the extent necessary to
satisfy the just demands of the creditors in terms of Section 94 of the Indian
Trusts Act, 1882.
High Court was also of the view that certain properties which formed part of a
Baronetcy Trust, were partitioned between the father on the one hand and the
mother and the sons on the other. The properties were trust properties. A
consent decree was passed and an arbitrator was appointed. Under the terms of
the consent decree and arbitrator's award, some of the 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 assessee
undertook the liability to discharge the debts. The provision under the Hindu
Law, 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 assessee on partial partition were diverted by overriding title and did
not form part of the real income of the assessee.
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 anyway.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.
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,
Se 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
has to pay his debts out of his income. Mercy 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 the assets.
also fail to see how the provisions of Section 94 of Indian Trusts Act, 1882
can apply to the facts of this case.
94 which has since been repealed by the Benami Transactions (Prohibition) Act,
1988 with effect from May,
19, 1988 stood as
under at the material time:
Constructive trusts in cases not expressly provided for.- In any case not
coming within the scope of any of the preceding sections, where there is no
trust, but the person having possession of property has not the whole
beneficial interest therein, he must hold the property for the benefit of the
persons having such interest, or the residue thereof (as the case may be), to
the extent necessary to satisfy their just demands.
an executor, distributes the assets of his testator B to the legatees without
having paid the whole of B's debts. The legatees hold for the benefit of B's
creditors, to the extent necessary to satisfy their just demands, the assets so
(b) x x
x x x x x x (c) x x x x x x x x"
not been shown that after 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.
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.
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 executor of a will
also cannot lawfully distribute the assets of the testator to the legal heirs
without first having paid the debts of the testator in full. Section 325 of the
Indian Succession Act, 1925 provides that the debts of every description must
be paid before any legacy. But, this is not a case of distribution of legacy by
an executor at all. The assessee as a member of the joint Hindu Undivided
Family had interest in the properties even before the partition took place.
After partition he received his share of the properties as of right. This is
not a case of distribution of assets of a testator among the legatees without
payment of the debts incurred by the testator.
view, in the facts of this case, the principles contained in Section 94 of the
Indian Trusts Act cannot be invoked. The assets received by the assesses on
partition were not held by them in trust, constructive or otherwise, for the
benefit of the creditors.
next point urged on behalf of the respondent is that under the doctrine of
pious obligation of a son to pay the debts of his father which is well-recognised
under Hindu Law, the sons were liable to pay the debts of their father.
from this, under the award of the arbitrator and the decree, the assessee was
legally bound to discharge the debts which was apportioned to them to pay. The
interest accruing on these debts were also to be paid by the assessee. In real
terms, the assessee held the properties for the benefit of the creditors to the
extent it was necessary to satisfy the debts of the creditors. It was argued
that what is taxed under the Income Tax Act is the real income of the assessee.
Having regard to the facts and circumstances under which the assessee came to
own and possess the properties after partition of the HUF, the assessee could
not have disclaimed the debts apportioned to him for payment. Since,interests
on the debts had to be paid out of the income of the properties allotted to the
assessee on partition, the income had to be reduced by the amount of interest
the assessee had to pay to the creditors.
argument runs against the basic principles of the Income Tax law. The income of
an assessee has to be computed in the manner laid down under the Income Tax
Act. The Act of 1922 had made elaborate provisions for classification of income
under various heads and the deductions 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 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, question of deduction of interest paid
on the loan from the business income cannot arise.
the assessee is a company or an individual or an HUF is quite immaterial for
this purpose. The Tribunal has pointed out that the HUF could not get any
deduction in its assessment on account of payment of interest on these loans.
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 the debts. The principles of computation of
income will not change in any way because of the partition.
HUF could not get any deduction on account of payment of interest on these
loans, there is no principle on the basis of which a member of the joint family
after partition will get deduction for payment of interest on the loans. The
income from the family properties will not stand reduced by payment of interest
to the creditors in the eye of law.
position can be viewed from another angle. The assessee has not received any
conditional gift or bequest from any person in this case. The true effect of
partition of the joint family property is that each coparcener gets a specific
property in lieu of his undivided right in respect of the totality of the
property of the family. (V.N. Sarin v. Ajit Kumar Poplai, AIR 1966 SC 432).
What the assessee has obtained in this case is by virtue of his right in the
joint family properties. He has also been allotted some of the family debts to
pay. The income that he earns from the properties is his own income. When he
pays interest out of that income, the interest will be income in the hand of
the creditor. The income from the property itself can never be treated as the
income of the creditor. What the creditor gets is interest income. The assessee
pays interest out of his own income. This is a perfectly simple case.
in the case of The Commissioners of Inland Revenue v.Paterson. 9 Tax Cases 163,
dealing with a case where a debtor bought property with borrowed money and
charged the proceeds of the property in favour of the creditors to repay the
debt, observed ". . . I may ask, if they are not income of the debtor
whose income are they? . .
Whose income was it that paid those debts? It seems to me that in any ordinary
sense it was the income of the debtor, the lady, which discharged the debts and
which she was obliged to allow to be used to discharge the debts by the charge
she had given on that income to the creditor." Lord Scrutton concluded by
saying, "It appears to me, if it is not the debtor's income, it must be
the creditor's income, and I am not sufficiently topsy-turvy to think of a
creditor discharging debts due to him out of his own income." In the case
of Patersons (supra), a charge was created on
the property from the income of which the debt was paid. In the case before us,
there 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.
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.
leading case of Pondicherry Railway Co. Ltd. v. The Commissioner of Income-tax,Madras, 5 I .T.C. 363, 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 Halsbury in Gresham Life
Assurance Society v. styles.(1892) A.C. 309 at p. 315 :
thing to be taxed" said his Lordship, is the amount of profits or gains.
The word "profits" I think is to be understood in its natural and
proper sense-in a sense which no commercial man would misunderstand. But once
an individual or a company has in that proper sense ascertained what are the
profits of his business or his trade,the destination of those profits or the
charge which has been made on those profits by previous agreement or otherwise
is perfectly immaterial." The Tribunal has found as a fact that the assessee
was free to spend the income received from the assets as he liked. It is
difficult to see how this income was not the real income of the assessee.
reliance was placed on behalf of the assessee before the High Court as well as
this Court on the decision of the Judicial Committee of the Privy Council in
the case of Raja Bejoy Singh Dudhuria v.Commissioner of Income-Tax, Bengal
(1933 (1) ITR 135), There the Raja was the assessee.
succeeded to the family ancestral estate on the death of his father. His
step-mother brought a suit for maintenance against him which ultimately
resulted in a consent decree by which the Raja was directed to make a monthly
payment of a fixed sum to his step-mother. This payment was declared a charge
on the ancestral estate in the hands of the Raja. In computing his income, it
was claimed that the amounts paid by him to his-step mother should be deducted.
It was held by the Judicial Committee that the assessee's liability under the
decree did not fall within any of the exemptions or allowances provided under
Sections 7 to 12 of the Indian Income Tax Act, 1922. But the sums paid by the assessee
to his stepmother were not his "income" at all. The decree of the
Court by charging the assessee's whole resources with a specific payment to his
step-mother had to that extent diverted his income from him and had directed it
to his step-mother. To that extent what he received for her was not his income.
Lord Macmillan observed that "it is not a case of the application by the
appellant of part of his income in a particular way, it is rather the
allocation of a sum out of his revenue before it becomes income in his
that case, the step-mother had filed a suit for maintenance. Chief Justice
Rankin of Calcutta High Court had rejected the 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.
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 the case of Bejoy Singh Dudhuria
(supra) that if a charge was created by the assessee or his father, for the
payment of the debts which he had voluntarily incurred, the position would not
have been the same.
reliance was also placed on the decision of Commissioner of Income Tax, Bombay
City II v. Sitaldas Tirathads (41 ITR 367). There the assessee sought to deduct
the amounts paid by him as maintenance to his wife and children under a decree
of Court passed by consent in a suit. No charge was created on any property of
the assessee at all.It was pointed out by Hidayatullah, J (as his Lordship then
was) that this was a case in which the wife and children of the assesses who
continued to be members of his family received a portion of his income after he
had received it as his own. It was, therefore, one of application of a portion
of the income to discharge an obligation and not one in which, by an overriding
charge, the assesses became only a collector of another's income.
was not, therefore, entitled to deduction claimed by him. Far from supporting
the contention of the assessee, this decision directly goes against his case.
The assessee was under a legal obligation to maintain his wife and children. A
suit was filed and a decree was passed by consent. Even then, it was held that
it was a case of application of income to discharge an obligation. In the case
before us, the assessee is under an obligation to pay the creditors. If he
derives income from the properties which had been allotted to him and pays the
creditors, it would be an application of income received by him which cannot in
any way be treated as diversion of income by an overriding title. The creditors
do not have any title to this income and claim any portion of the income
received out of the property as their own. Hidayatullah, J. pointed out that
mere obligations to pay does not have the effect of diverting income at source.
It was the nature of the obligation which was the decisive fact. There was a
difference between an amount which a person is obliged to apply out 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 one's own
income which had been received and was since applied.
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.
principle laid down in the case of Sitaldas Tirathdas (supra) was explained by
this Court in Moti Lal Chhadami Lal Jain v. Commissioner of Income-Tax (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 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." These observations were made while
reiterating and explaining the principle laid down in the case of Sitaldas Tirathdas
(supra) . 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's case. the assessee, an 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
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
decision does not come to the aid of the respondent's contention in anyway.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.
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.
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 assessee's 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 The Commissioners of
Inland Revenue v. Paterson (supra). It must also be borne in mind that in Raja Bejoy
Singh Dudhuria's Case (supra), the charge on the properties inherited by the
Raja was created to secure payment of maintenance of his step-mother. 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 appellant's step- mother had a charge not only
on his zamindary 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 appellant's liability to his step-mother 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 will have the effect of diverting the assessee's income at
the reasons aforesaid, we are of the view that these appeals must succeed. All
the three questions are answered in the affirmative and in favour of the
revenue and against the assessee. There would be no order as to costs.
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