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PETITIONER: V. VENUGOPALA VARMA RAJAH

       Vs.

RESPONDENT: COMMISSIONER, AGRICULTURAL INCOME TAX, TRIVANDRUM, KERALA

DATE OF JUDGMENT06/10/1971

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. GROVER, A.N. KHANNA, HANS RAJ

CITATION:  1972 AIR  404            1972 SCR  (1)1000  1971 SCC  (3) 669

ACT: Kerala  Agricultural Income-tax Act, 1950, s.  9(1)-Property allotted   to  a  member  of  family-Income   utilised   for discharging obligations of assessee-When deemed to be income of family as assessee.

HEADNOTE: The  assessee  was  a Hindu undivided family  of  which  the appellant  was  the  Kamavan.   It  possessed   agricultural properties.   There  was a family settlement among  all  the members of the family then living.  The settlement  allotted some  properties  to some of the male members  but  did  not provide for their devolution.  Also the joint status of  the members  was not disrupted and the properties  allotted  for the enjoyment of the various members of the family continued to  be  the  properties of the  family.   The  liability  to maintain  the other male members and the  responsibility  of performing the marriages of the female members continued  to be  that of the Karnavan.  He was also responsible  for  the payment of land revenue in respect of the family  properties excepting some items. On the question whether the income of the properties put  in possession   of  the  male  members  under  the   settlement continued  to  be  the income of the  family  and  therefore liable to tax under the Kerala Agricultural Income-tax  Act, 1950,  the  department,  Tribunal  and  the  High  Court  on reference, held against the assessee. Dismissing the appeal to this Court, HELD : Section 9(1) of the Act is similar to s. 16(1) (c) of the Income-tax Act, 1922.  Under the latter section the test is  that  if the income in dispute is considered  as  having been applied to discharge an obligation of the assessee, the same  is liable to be included in the assessable  income  of the  assessee,  but if on the other hand the same  bad  been diverted by an overriding charge then it is not liable to be so included as it ceases to be the assessee’s income.  [1006 A-B) In  the  present  case, the arrangement  only  provided  for maintenance  and  did  not give any absolute  right  in  any portion  of  the  family properties to  any  one.   It  thus conferred benefit on the family inasmuch as it was  absolved

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of the responsibility of maintaining its members. [106-5  G- H] Further,  it  was not even a permanent arrangement  and  was revocable  if  there  was  any  substantial  change  in  the circumstances of the family.  The properties would ’go  back to the possession of the Karnavan on the death of the member to whom the property was allotted. [1005 C, D, E] The members of the family received the income of the various properties  allotted  to them on behalf of the  family,  and applied  the  same  in discharge of  an  obligation  of  the family.   Therefore,  the income reached the  hands  of  the family  as  soon  as  it reached the hands  of  any  of  its members. [1008 F-H] 1001 Hence, under s. 9(1) of the Act, the income should be deemed to be that of the assessee. [1005 F-G] Raja  Bejoy Singh Dudhuria v. C.I.T., Bengal, 1  I.T.R.  135 and  Mullick v. C.I.T. Bengal, 6 I.T.R. 206,  explained  and applied. C.I.T.,  Bombay City v. Sitaldas Tirathdas, 41  I.T.R.  367, followed. C.I.T.,  Bombay v. Makanji Lalji, 5 I.T.R. 539  and  C.I.T., Bombay City v. Ratilal Nathalal, 25 l.T.R. 426, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 266 of 1969. Appeal  by special leave from the judgment and  order  dated August  16,  1967  of the Kerala High  Court  in  Income-tax Referred Case No. 44 of 1966. C. K. Viswanatha Iyer and K. Jayaram, for the appellant. V. A. Seyid Muhammad and A. G. Pudissery, for the respon- dent. The Judgment of the Court was delivered by Hegde,  J.  The  appellant, Venugopala Varma  Rajah  is  the present Rajah of the Vengunad Swaroopan in Palghat District, Kerala State.  He is the Karnavan of his Tarwad.  He will be hereinafter referred to as the assessee.  The predecessor of the appellant, as the then Kamavan of the family,  submitted the return for the assessment year 1959-60 under the  Kerala Agricultural  Income-tax  Act  (which  will  hereinafter  be referred  to  as  the Act) showing a  gross  income  of  Rs. 1,21,912/-  and  a  net  income of  Rs.  84,065/60  P.  That ’represented  the  income from the properties  held  by  him under   the   family  Karar  dated  May  29,   1909.    The. Agricultural Income-tax Officer overruling the objection  of the assessee included in the income returned, the income  of the  properties  which  had been put in  possession  of  the junior members of the family under the aforementioned  Karar of 1909.  The net income so computed was Rs. 2,32,957/-  and a  tax  of Rs. 1,30,672/35 P. was imposed.   In  appeal  the Appellate  Authority  excluded from the taxable  income  the income  of the properties allotted to the "Rani  Group"  but sustained  the  addition  of the income  of  the  properties allotted  for the enjoyment of the male members.   Aggrieved by  the order of the Appellate Authority, the assessee  took up the matter in second appeal to the Appellate Tribunal  of the  Agricultural  Income-tax.  The  Tribunal  rejected  the contention  of  the  assessee  and  dismissed  the   appeal. Thereafter at the instance of the assessee, it stated a case under  s. 60(1) of the Act and submitted to the  High  Court for its opinion three questions of law namely L119SupCI/72 1002

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             "(1) Whether the findings of the Tribunal that               the family karar of 1909 does not constitute a               diversion  of  family income  to  the  various               allottees thereunder is correct ?               (2) Whether the findings of the Tribunal  that               the provisions of sub-section (1) of sec. 9 of               the  Act  are  applicable  only  to  cases  of               diversion  of  income  and  not  otherwise  is               correct ?               (3) Whether the findings of the Tribunal  that               the  provisions of sub-sec. (1) of sec.  9  of               the  Act  are not applicable to the  facts  of               this case are correct ? Questions Nos. 2 and 3, in our opinion, do not bring out the import of sec. 9 (1) correctly but it is not necessary to go into  that aspect as our decision covers the real  point  in issue. The  Reference  originally  came up for  hearing  before a Division  Bench  but as the questions arising  for  decision were  considered to be of importance, the same was  referred to  a  Fun  Bench of three judges.  The High  Court  by  its judgment dated August 16, 1967 answered Question Nos. 1  and 2  against  the  assessee.   It did  not  answer  the  third question as it was of the view that answer to that  question was unnecessary in view of its findings on Questions Nos.  1 and 2. Thereafter this appeal was brought by certificate. The  assessee  in  this  case is the  H.U.F.  of  which  the appellant  was  the  Kamavan  at  the  relevant  time.   The question   for  decision  is  whether  the  income  of   the properties  put in possession of the male members under  the Karar of 1909 continues to be the, income of the family.  At present  we  are  not  concerned  with  the  income  of  the properties put in possession of the "Rani Group" in view  of the decision of the Appellate Authority which had not  began appealed against.  If the income in dispute continues to  be the  income of the family then the revenue is  justified  in bringing  the same to tax under the provisions of  the  Act. On the other hand if that income has ceased to be the income of the family, then the same cannot be brought to tax in the hands  of  the assessee.  Therefore, the  sole  question  is whether that income is the income of the family ? Section 9 of the Act provides               "9(1)  In  computing  the  total  agricultural               income of an assessee all agricultural  income               arising   to  any  person  by  virtue   of   a               settlement  or disposition, whether  revocable               or not, and whether effected before or after                1003               the  commencement  of  this  Act,  from  asset               remaining  the  property  of  the  settlor  or               disponer   shall   be   deemed   to   be   the               agricultural income of the settlor or disponer               and  all  agricultural income arising  to  any               person  by virtue of a revocable  transfer  of               asset  shall be deemed to be the  agricultural               income of the transferor               Provided  that  for the purpose of  this  sub-               section a settlement, disposition or  transfer               shall be deemed to be revocable if it contains               any  provision  for the transfer  directly  or               indirectly of the agricultural income or asset               to  the settlor, disponer or transferor or  in               any   way  gives  the  settlor,  disponer   or               transferor a right to reassume power  directly               or indirectly over the agricultural income  or

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             assets :               Provided    further   that   the    expression               settlement,   disposition   shall,   for   the               purposes   of  the  sub-section  include   any               disposition  trust,  covenant,  agreement  or.               arrangement  and  the expression  "settlor  or               disponer"  in  relation  to  a  settlement  or               disposition  shall include any person by  whom               the settlement or disposition was made               Provided also that this sub-section shall  not               apply  to any agricultural income  arising  to               any  person  by  virtue  of  a  settlement  or dispo sition  which  is not  revocable  for  a               period exceeding six years or during the life-               time of the person and from which agricultural               income  the  settlor or  disponer  derives  no               direct  or  indirect  benefit  but  that   the               settlor  shall be liable to be, assessed  on               the  said agricultural income as and when  the               power to revoke arises to him." A Hindu Undivided Family is a person within the, meaning of s.2(m) of the Act. We shall now proceed to examine the nature of the Karar entered into in 1909.  The family of the assessee appears to have  been  one  of the premier  land  holding  families  in Malabar.  It appears to have had agricultural properties  in various  places.   To  the Karar in question  all  the  then living  members ( 12 in number) of the family were  parties. The  properties mentioned in ’A’ Sch. to the Karar were  set apart  for the maintenance, education and other expenses  of the  female  and male members residing in  Kalari  Kovilagom which is otherwise known as "Rani Group".  Under the  Karar, Karnavan   of  the  Tarwad  was  to  perform  the   marriage ceremonies of the female members of the Tarwad in accordance with the prevailing conditions and to meet 1004 the  expenses  thereof.  All other expenses of  female,  and male  members  residing  in Kalari are to be  met  from  the income of the ’A’ Sch. properties.  The members residing  in the  Kalari  have  no  right to  alienate  or  encumber  the properties  allotted to them and all government revenue  due in respect of those properties should be paid by them. Party No. 2, the second senior most member in the family was to   be  given  7,000  paras  of  paddy  annually  for   his maintenance and for this purpose paddy lands yielding  3,500 paras  of  paddy  shown in ’B’ Sch. were made  over  to  his possession  and  Party  No. 1, Karnavan of  the  Tarwad  was directed  to  give to- Party No. 2 from Malayalam  era  1085 onwards  3,500  paras of paddy.  Further  the  Karnavan  was directed that he should redeem "Karukakode Challa Nilam" and make over the same to Party No. 2, but after making over the same to Party No. 2, be was not to pay 3,500 paras of  paddy referred to earlier. "  C" Sch. properties yielding an income of 4,750  paras  of paddy were allotted for the enjoyment of Party No. 3. He was required to maintain himself from out of their income. Properties shown in ’D’ Sch. were set apart for the  mainte- nance  of Party No. 4. The land-revenue of B, C and  D  Sch. properties  was required to be paid by the Karnavan  of  the tarwad.   On  the death of Party No. 2 or  on  his  becoming Karnavan  of  the family, Party No. 3 was to take  over  the properties  allotted for the maintenance of Party No. 2  and Party  No.  4  was  to take  over  the  properties  for  the maintenance of Party No. 3. The Karar prohibited the persons who were in possession of the properties allotted for  their

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enjoyment  from alienating or encumbering those  properties, and  if in contravention of those terms, they alienated  any of those properties, the Karnavan was entitled to resume the properties  treating the alienation as void.  Clause  18  of the  Karar  prohibited  the parties  in  possession  of  the properties  from  cutting  and  selling  the  kuzhikoors  or dismantling  the  buildings  in  the  properties  in   their possession.   Clause 19 of the Karar prohibited the  parties from  enhancing  the munpattom amounts due  to  the  tenant. Clause  6  of the Karar provided that all the  male  members living  in  the Kalari, on completing the age of  21  should leave  the  Kalari and thereafter the  Kamavan  should  make arrangements   for  their  maintenance.   Karar   does   not stipulate   what  arrangement  he  should  make  for   their maintenance.  Therefore it follows that he may maintain them either  in  the  Tarwad  house  or  give  them   maintenance allowance either in the shape of paddy or cash.  It may also be  noted that the Karar does not provide as to  what  would happen if the number of members in the Tarwad  substantially increases.  One other thing that has got to 1005 be noted is that the Karar is silent as to what would happen to  the properties shown in Schs.  B, C and D after  Parties Nos.  2, 3 and 4 die, all of whom, we were told  have  died. Hence  Kamavan can take possession of them on behalf of  the family after their death. On an examination of the various clauses in the Karar, it is obvious  that  the  joint  status of  the  parties  was  not disrupted.   The arrangement made in the Karar was  only  an arrangement  for providing maintenance.  No party was  given any absolute right in any portion of the family  properties. The  properties mentioned in the Karar continued to  be  the properties  of the family.  The arrangement made  under  the Karar cannot even be considered as a permanent  arrangement. The  properties were not divided on the basis of  Thavazies. The  liability to maintain the male members, aged more  than 21  years excepting Parties Nos. 2, 3 and 4 continued to  be that  of the Karnavan.  The Karar also does not provide  for devolution  of  the properties allotted to Parties 2  to  4. Hence  those  properties  must necessarily go  back  to  the possession of the Karnavan after those Members die.  We have earlier  seen  that  the responsibility  of  performing  the marriage  ceremonies of the female members continued  to  be that  of  the  Karnavan.  He is  also  responsible  for  the payment of land revenue in respect of the family  properties excepting  properties  included in Sch. (A)  to  the  Karar. Under  these circumstances, it is not possible to hold  that Karar  in question embodied an irrevocable  settlement.   In the  very nature of things, the arrangement made under  that Karar must be held to be one which is revocable if there  is any substantial change in the circumstances of the family. For our present purpose it is sufficient if we hold that the properties allotted for the enjoyment of the various members of the family under the Karar continued to be the properties of the family. In  view  of  s.  9(1) of the Act  in  computing  the  total agricultural income of the H.U.F., all agricultural  income arising from the assets remaining the property of the family should  be  deemed  to be the  agricultural  income  of  the family.   We  have earlier come to the conclusion  that  the agrrangement  made under the Karar is revocable if there  is substantial change in the circumstances of the family.  That arrangement confers benefit on the family inasmuch as it  is absolved  of  the  responsibility to  maintain  its  members which, otherwise is its responsibility.

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Section 9 (1) of the Act is similar to s. 16 (1) (c) of  the Indian Income-tax Act, 1922.  The latter section has come up for consideration by courts.  The courts have laid down  the test that if 1006 the  income in dispute is considered as having been  applied to  discharge  an obligation of the assessee,  the  same  is liable  to  be  included in the  assessable  income  of  the assessee but if on the other hand the same had been diverted by  an  overriding  charge,  then it is  not  liable  to  be included  in  the assessable income of the  assessee  as  it ceased to be his income.  If we apply this test to the facts of the present case, it is clear that the income in  dispute continued  to  be the income of the family.  It  was  merely applied to discharge an obligation of the family namely  the obligation to maintain the junior members of the family. At  first  sight some of the decided cases  on  the  subject appear  to  speak in conflicting voices.  But on  a  careful examination,  it is possible to find out the dividing  line. The earliest decision on the subject is that of the Judicial Committee  in Raja Bejoy Singh Dudhuria v.  Commissioner  of Income-tax,  Bengal(1).  The, assessee therein succeeded  to the  family  ancestral estate on the death  of  his  father. Subsequently his step-mother brought a suit for  maintenance against him in which a consent decree was made directing the assessee  to  make a monthly payment of a fixed sum  to  his step-mother and declaring that the maintenance was a  charge on the ancestral estate in the hands of the assessee.  While computing his income, the assessee claimed that the  amounts paid  by him to the step-mother under the decree  should  be excluded.    That  contention  was  not  accepted   by   the authorities  under the Act as well as by the High Court  but the Judicial Committee reversing their decision came to  the conclusion that though assessee’s liability under the decree did  not  fall within any of the  exemptions  or  allowances conceded  in ss. 7 to 12 of the Indian Income-tax  Act,  yet the  sums  paid by the assessee to his stepmother  were  not "income" of the assessed at all; the decree of the court  by charging  the  appellant’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;  it was  not a case of the application by the appellant of  part of  his  income  in  a particular way;  it  was  rather  the allocation  of  a sum out of his revenue  before  it  became income  in  his  hands.  This decision at  the  first  sight appears to lend support to the assessee’s contention but  in understanding  the  ratio of the decision, we must  bear  in mind  the  fact that in that case the  Advocate-General  had abandoned  before  the High Court the  contention  that  the assessee and his stepmother were members of undivided family and  accepted the Position that the appellant was liable  to be  assessed  as an individual and in no other  manner.   In view of this concession, the payment that had to be made  to the step-mother of the assessee became a (1)  1, I.T.R. 135. 1007 charge  on tile estate even before that estate  devolved  on him.  Therefore what the assessee got was the income of  the property minus what he had to pay to his step-mother. The  above conclusion of ours receives support from a  later decision of the Judicial Committee in P. C. Mullick and anr. (Executors)   v.  Commissioner  of  Income-tax,   Bengal(1). Therein a testator had by his will appointed the  appellants his executors and had directed them to pay Rs. 10,000/-  out

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of  the income of his property on the occasion of his  addya sradh for expenses in connection therewith to the person who was  entitled  to perform the sradh.  He had  also  directed them  to pay out of the income of his property the costs  of taking out probate of his will.  During the year of  account the   executors  had  paid  Rs.  5,537/-  for  expenses   in connection with the addya sradh and a sum of Rs.  1,25,000/- for probate duty.  The question arose whether those payments were  deductible  in computing the chargeable  income.   The Judicial  Committee  held  affirming  the  judgment  of  the Calcutta  High Court, that the payments made for  the  sradh expenses  and the costs of probate could not be excluded  in computing  the chargeable income.  Those were payments  made out  of the income of the estate coming to the hands of  the appellants  as  executors  and in  pursuance  of  obligation imposed  by the testator.  Their Lordships were  of  opinion that it was not a case in which a portion of the income  was by  an overriding title diverted from the person  who  would otherwise have received it as in Bejoy Singh Dudhuria’s  (2) case, but a case in which the executors having received  the whole  income  apply a portion of it in  a  particular  way. From  this  judgment of the Judicial Committee, it  is  dear that  the true test is that if the income in question is  an income  of the assessee, the application of the  same  being not  relevant  for  determining  its  assessability,  it  is assessable in his hands but if it is not his income then  it cannot form part of his assessable income. The  scope  of s. 16 (1) (c) of the Indian  Income-tax  Act, 1922 came up for consideration by this Court in Commissioner of  Income-tax,  Bombay  City v. Sitaldas  Tirathdas  (3)  . Therein  the assessee Sitaldas Tirathdas of Bombay had  many sources  of income, chief among them being property,  stocks and shares, bank deposits and share in a firm known as  M/s. Sitaldas  Tirathdas. He followed the financial year  as  his accounting year.  For the assessment years 1953-54 and 1954- 55,  his  total  income was  respectively  computed  at  Rs. 30,375/-  and  Rs.  55,160/-.   This  computation  was   not disputed  by him but he sought to deduct Rs. 1350/-  in  the first assessment year and a sum of Rs. 18,000/- (1) 1 I.T.R. 135. (3) 41, I.T.R. 367. (2) 6 I.T.R. 206. 1008 in  the  second assessment year on the-ground that  under  a decree, he was required to pay these sums as maintenance  to his  wife  and his children.  In support of  his  claim,  he relied  on the decision of the Judicial Committee  in  Bejoy Singh  Dudhuria’s  case (supra).  This Court  rejected  that contention observing (at pp. 374 and 375  of the Report)               "In our opinion, the true test is whether  the               amount sought to be deducted, in truth,  never               reached   the   assessee   as   his    income.               Obligations,  no  doubt, there  are  in  every               case,  but it is the nature of the  obligation               which  is  the  decisive  fact.   There  is  a               difference between an-amount which a person is               obliged to apply out of his income and  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  is               diverted before it reaches the assessee, it is               deductible,  but where the income is  required               to be applied to discharge an obligation after               such  income  reaches the assessee,  the  same

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             consequence,  in law, does not follow.  It  is               the  first kind of payment which can truly  be               excused  and  not  the  second.   The   second                             payment is merely an obligation to pay   another               a portion of one’s own income, which has  been               received  and is since applied.  The first  is               the case in which the income never reaches the               assessee  who even if he were to  collect  it,               does  so, not as part of his income,  but  for               and  on  behalf of the person to  whom  it  is               payable." Counsel  for  the  assessee  tried  to  lay  stress  on  the observation  of this Court that the income should reach  the hands  of  the assessee before it can be considered  as  his income.  According to him in the case before us, the  income in dispute never reached the hands of the assessee.  We  are unable to accept this contention as correct.  The income  is the  income  of  the family.  It reached the  hands  of  the family as soon as it reached the hands of any of the members of  the family who were entitled to receive it on behalf  of the family.  The members of the family received that  income on behalf of the family and applied the same in discharge of an  obligation of the family.  When this Court spoke of  the income reaching the hands of the assessee, it did not  refer to any physical act.  It was dealing with a legal concept  a receipt in law.  Viewed that way, it is quite clear that the income with which we are concerned in this case was received by the family. One other decision on the point in issue which we would like to refer is the decision of the Bombay High Court in Commis- (1)  5 I.T.R. 539. 1009 sioner  of Income-tax, Bombay v. Makanji  Lalji(1),  wherein Beaumont C.J., speaking for the court held that in computing the income of the H.U.F. for purposes of income-tax,  moneys paid to the widow of a deceased coparcener of the- family as maintenance and residence allowance cannot be deducted, even though  the  amount of such allowance has been  fixed  by  a decree  of  the  Court  and  has be  en  made  a  charge  on properties belonging to the family. It  is not necessary to refer to cases which deal  with  the diversion  of  the income of the assessee.  The test  to  be applied for finding out whether there is diversion of income or  not is set, out by this Court in Commissioner of  Income Tax, Bombay City, V. Ratilal Nathalal(1). For  the reasons mentioned above this appeal fails  and  the same is dismissed with costs. V.P.S.                            Appeal dismissed. (1) 25 I.T.R. 426. 1010