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PETITIONER: K.   A. RAMACHAR AND ANOTHER

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, MADRAS.

DATE OF JUDGMENT: 10/01/1961

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. KAPUR, J.L. SHAH, J.C.

CITATION:  1961 AIR 1059            1961 SCR  (3) 380  CITATOR INFO :  RF         1965 SC  59  (6)  D          1967 SC 383  (10,14)

ACT: Income-tax--Assessee  assigning  portion of his  profits  of partnership firm to his wife and daughters--Such profits, if can be included in the assessee’s total income for  purposes of  assessment--Income-tax  Act,  1922  (11  of  1922),   s. 16(1)(c).

HEADNOTE: One Rangachari, a partner of a partnership firm, assigned by means of a deed of settlement a fourth share of the  profits of the firm each to his wife, a married adult daughter and a minor  daughter  for 8 years with the right to  receive  the said  share of profits absolutely and exclusively  from  the firm.   The question which arose before the High Court on  a reference under s. 66(1) of the Income-tax Act was " Whether the inclusion in the assessee’s total income of the  profits settled by him on his wife and two daughters is justified in law ?" The assessee Rangachari relying on the rule laid down by the Privy Council in Bijoy Singh Dudhuria’s case  claimed that the amounts payable to his wife and two daughters never became his income, being diverted by an overriding title and that those amounts could not be included in his total income for  the purposes of assessment being excluded by reason  of the third proviso to s. 16(1)(c) of the Income-tax Act.  The High Court held that the third proviso was not attracted and that  the  income had accrued to the assessee in  the  first instance,  and had then been applied for payments under  the deeds.  On appeal with a certificate of the High Court: Held, that the answer given by the High Court was correct. 381 An  examination of the deeds of settlement showed  that  the disponer had stated that from the profits " payable to him " certain  amounts in specified shares were to be paid to  his wife  and  two daughters.  No doubt, the assessee  in  those deeds created a right in favour of the disponees to get  the amounts  direct  from the firm, of which he was  a  partner. The  tenor of the document In, showed that the profits  were first to accrue to him and were then applied for payments to

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the disponees. Under  the  law of partnership, it is the  partner  and  the partner  alone who is entitled to the profits.  A  stranger, even  if  he  were an assignee, has not and  cannot  have  a direct claim to the profits.  By the deeds in question,  the assessee merely allowed a payment to his wife and  daughters to  constitute a valid discharge in favour of the firm,  but what  was paid was, in law, a portion of his profits or,  in other words, his income. The  rule in Bijoy Singh’s case was not applicable  to  this case, and in view of the decision of this court in  Sitaldas Tirathdas’s  case  it cannot be said that the  profits  were diverted  by an overriding title before they accrued to  the assessee. Provat  Kumar  Mitter v. Commissioner  of  Income-tax,  West Bengal [1961] 3 S.C.R. 37. Tulsidas Kilachand v. The Commissioner of Income-tax  [1961] 3 S.C.R. 351. The Commissioner of Income-tax, Bombay v. Sitaldas Tirathdas [1961] 2 S.C.R. 634, applied. Bijoy  Singh Dudhuria v. Commissioner of Income-tax,  Bengal [1933] 1 I.T.R. 135, held inapplicable.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 142 and 143 of 1960. Appeals from the judgment and order dated July 21, 1955,  of the Madras High Court in C.R. No. 32 of 1952. G.   S. Pathak and Naunit Lal, for the appellants. K.   N. Rajagopal Sastri and D. Gupta for the respondent. 1961.  January 10.  The Judgment of the Court was  delivered by HIDAYATULLAH   J.-These  are  two  appeals  by   the   legal representatives of one A. R. Rangachari, who died during the pendency,  in the High Court at Madras, of proceedings in  a reference  under s. 66(1) of the Income-tax Act made by  the Income-tax Appellate Tribunal, Madras Bench.  The  following question was referred to the High Court for its decision: 382               "  Whether  the inclusion  in  the  assessee’s               total income of the profits settled by him  on               his wife and two daughters is justified in law               ? " The  High  Court answered the question in  the  affirmative. The  appeals have been filed with a certificate  granted  by the High court. Rangachari  was  one  of five partners of  a  firm,  Messrs. Chari and Ram, and held a six-anna share in the profits  and loss of the partnership.  On September 22, 1947, he executed three  deeds of settlement, which are marked Exts.   A,  A-1 and  A-2, in favour of his wife,, a married  adult  daughter and a minor daughter.  To each of them, he assigned a fourth share of the profits of the firm payable to him (but not the losses), for a period of 8 years, vesting the right in  them to  receive  the  said  share  of  profits  absolutely   and exclusively and declaring the settlements to be  irrevocable during  the above period.  It is not necessary to  refer  to the three documents, because the terms are the same.  A  few clauses of the deed, Ex.  A, may be quoted.  After  recitals which included the following:               "  Whereas  the Settlor has settled  upon  his               minor daughter, Srimathi Meera Bai, one-fourth               of  his share of profits payable to  him  from

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             the firm for a period of eight years;               And whereas out of natural love and affection,               the Settlor is desirous of conferring upon the               Beneficiary a similar portion of his share  of               profits  from the firm ", the deed goes on  to               say               " Now this Indenture witnesseth as follows:               1.....The  Settlor  hereby  assigns  unto  the               Beneficiary  all the rights of the Settlor  in               respect of one-fourth of his share of  profits               in  the firm (but not the losses)  payable  to               him during a period of eight years  commencing               from  the date hereof to be taken and  enjoyed               by  the Beneficiary in absolute and  exclusive               right.               2.....The Settlor shall not have any manner of               right or interest in the said one-fourth share               hereby  settled and the right to receive  from               the firm one-fourth of               383               the Settlor’s share during the said period  of               eight  years  shall exclusively  vest  in  the               Beneficiary.               3.....The   Beneficiary  shall   be   entitled               directly to receive and collect from the  firm               the  share of profits hereby  transferred  for               the       said      period      of       eight               years..................... 8.   This    settlement shall be irrevocable."               For the assessment year 1947-48  corresponding               to  a previous year ending on April 13,  1947,               the profits due to Rangachari amounted to  Rs.               86,491-13-0.  This amount was credited to  the               account  of Rangachari, and  Rs.  21,622-15-3,               being one-fourth thereof, were transferred  to               the  accounts of each of the three  disponees.               In  the same way, the profits of the  previous               year ending April 13, 1948, were disposed  of.               The assessee claimed that these amounts  could               not  be  included  in  his  total  income  for               purposes  of  assessment,  being  excluded  by               reason of the third proviso to s. 16(1)(c)  of               the  Income-tax Act.  He also  contended  that               the  amount  payable  to  his  wife  and   two               daughters  never  became  his  income,   being               diverted by an overriding title, and that  the               case was governed by the rule laid down by the               Privy  Council  in  Bijoy  Singh  Dudhuria  v.               Commissioner of Income-tax, Bengal (1).               The  assessee’s contentions were not  accepted               by the Income-tax Officer, and his appeals  to               the  Appellate Assistant Commissioner and  the               Tribunal  also  failed.   In  so  far  as  the               assessment  year  1947-48 was  concerned,  the               Income-tax  Officer held that the  income  had               already  accrued to the assessee, because  the               deeds  were  executed five  months  after  the               close of the account year.  He also held  that               the transfer to the minor daughter fell within               s.   16(3),   as   there   was   no   adequate               consideration  for the transfer.  With  regard               to the wife and married daughter, he held that               s.  16(1)(c) was not applicable, because  what               had been transferred was income first accruing               to    the   assessee,   while   s.    16(1)(c)

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             contemplated income which accrued to a person,               to  whom  the  transfer was  made.   The  same               reasons  (except  the first)  were  given  for               rejecting the, (1)  [1933] 1 I.T.R. 135. 384 assessee’s  contentions in respect of the  other  assessment year. It  is not necessary to refer in detail to the decisions  of the  Appellate Assistant Commissioner, the  Tribunal  ,,,and the  High  Court.  The High Court in an  elaborate  judgment pointed  out  that  s.  16(1)(c)  did  not  apply  to  these proceedings, and that the third proviso was, therefore,  not attracted.  It also held that the income had accrued to  the assessee  in the first instance, and had then  been  applied for payments under the deeds. This  Court  has recently decided three cases which  have  a direct  bearing in this connection.  In Provat Kumar  Mitter v. Commissioner of Income-tax, West Bengal (1), the assessee had  executed  a deed of trust under  which  dividends  from certain  shares  which  continued to  be  his  assets,  were transferred to his wife.  It was held that the case did  not fall  within s. 16(1)(c), and that the rule in  Bijoy  Singh Dudhuria’s  case  (2)  also  did  not  apply.   In  Tulsidas Kilachand v. The Commissioner of Income-tax, Bombay(1),  the husband  had  created a trust of  the  shares,  constituting himself  as  the trustee to pay to the wife  dividends  from those shares for a period of seven years.  It was held  that the case was not governed by s. 16(1)(c) but by s. 16(3)(b). In  The  Commissioner  of  Income-tax,  Bombay  v.  Sitaldas Tirathdas  (4), the rule laid down by the Privy  Council  in Bijoy  Singh Dudhuria’s case was considered along  with  the case  of the Privy Council in P. C. Mullick v.  Commissioner of  Income-tax, Bengal (5), and it was pointed out that  the rule  in  Bijoy Singh Dudhuria’s case (2)  applied  only  to those  cases  where it could be said that by  an  overriding title  the  income was diverted in such a way  as  never  to become  the income of the assessee.  These three  cases,  in our opinion, afford a complete answer to the contentions  of the appellants. An  examination  of the deeds of settlement shows  that  the disponer had stated that from the profits " payable to him " certain  amounts in specified shares were to be paid to  his wife and two daughters.  No (1) [1961] 3 S.C.R. 37.       (3) [1961] 3 S.C.R. 351. (2) [1933] 1 I.T.R. 135.      (4) [1961] 2 S.C.R. 634, (5) [1938] 6 I.T.R. 206.                             385 doubt, the assessee in those deeds created a right in favour of the disponees to get the amounts direct from the firm, of which  he was a partner.  The tenor of the  documents  shows that  the profits were first to accrue to him and were  then applied for payments to the disponees.  Learned counsel  for the appellants contended that what had been assigned was  an actionable  claim,  to  wit,  the  right  to  profits,   and therefore the profits were diverted, before they accrued  to the  disponer.  This, in our opinion, is neither in  accord- ance  with the law of partnership nor with the facts  as  we have found on the record.  Under the law of partnership,  it is the partner and the partner alone who is entitled to  the profits.   Astranger, even if he were an assignee,  has  not and cannot have a direct claim to the profits.  By the deeds in  question, the assessee merely allowed a payment  to  his wife and daughters to constitute a valid discharge in favour of the firm; but what was paid was, in law, a portion of his

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profits,  or, in other words, his income.  A glance  at  the account  books of the firm, Messrs.  Chari and Ram,  clearly shows  that the amounts were first credited in the Khata  of Rangachari  and then under his directions  were  transferred from  his  Khata to those of his wife  and  daughters.   The dispositions, therefore, were, in law and in fact,  portions of the income of Rangachari, after the income had accrued to him, and tax was payable by him at the point of accrual.  In view  of the decision of this Court in Sitaldas  Pirathdas’s case  (1), it cannot be said that the profits were  diverted by  an overriding title before they accrued  to  Rangachari; and  the rule in Bijoy Singh Dudhuria’s case (2)  cannot  be called in aid. For  the above reasons, we are in entire agreement with  the High  Court  in the answer given and dismiss  these  appeals with costs.                       Appeals dismissed. (1)  [1961] 2 S.C.R. 634. 49 (2) [1933] 1 I.T.R. 135. 386