The assessee, Sitaldas Tirathdas from Bombay had various sources of income, including property, shares, and bank deposits.
For the assessment years 1953-54 and 1954-55, his total income was Rs 50,375 and Rs 55,160 respectively.
He requested deductions of Rs 1350 and Rs 18,000 for those years, claiming they were maintenance payments to his wife and children under a court decree dated 31 March 1953.
The Income Tax department rejected the deduction claim, stating no property charge was created, and it didn't fall under Sec 9(1)(iv) of the Income Tax Act, 1922.
The Tribunal also denied the deduction stating that the Act does not permit such deductions. This was affirmed by the Appellate Assistant Commissioner.
The Tribunal referred the issue to the High Court, which ruled in the assessees’ favour, saying the income was diverted to his wife and children as per the court decree and the income never reached the hands of the assessee. Reliance was taken upon Bejoy Singh Dudhuria v. CIT [(1933) 1 ITR 135].
Now, the present appeal in the Supreme Court filed by the Commissioner of Income Tax.
ISSUE
Whether the assessee is entitled to a deduction of Rs 1350 and Rs 18,000 from his total income of the previous year relevant to Assessment Years on the ground of the maintenance allowance decree?
RULE
There is no such provision to claim a deduction against the maintenance allowance decree.
However, when an obligation or charge is made against a property, deductions from assessable income can be made if the amount sought to be deducted never truly reaches the assessee as income.
HELD
In Bejoy Singh Dudhuria Case, the stepmother obtained a maintenance decree declared as a charge on the individual’s property. The Privy Council ruled that the payment made to his stepmother was not considered as his income but rather a direct allocation from his resources i.e., properties or estate. This meant that the amount paid to his stepmother was not part of his income.
In P.C. Mullick v. CIT [(1938) 6 ITR 206], the testator directed the executors to pay Rs. 10,000/- out of income for addya sradh. The executors paid Rs 5537/- and sought to deduct it from assessable income. The privy council held that the payment was made through the income in hand of executors under an obligation imposed by the testator. It was observed that the income was not diverted in the present case and payment was made from estates coming in hand of the executor. (Distinguished Bejoy Singh Dudhuria Case)
Bombay High Court in the case of Seth Motilal Manekchand v. CIT, held that the parties under the partition deed, A and B intended to get only a portion of the managing commission and a certain amount paid to the wife of A was diverted before it became income of A and B. Hence, the amount paid to A’s Wife can be deducted by the A and B for assessing the income.
In order to determine whether a deduction can be made, the true test is whether the deducted amount actually reached the assessee's income. If an obligation is in place to divert the amount before it reaches the assessee, then any difference can be deducted. Conversely, if the obligation to pay or divert arises after the amount has reached the assessee, it cannot be deducted.
In the present case, the payments to the wife and children were made after the income reached the assessee and were considered an application of income, not a diversion before reaching him. Therefore, the deduction was disallowed. However, the case will be different if the overriding charge is on the property not on assessee’s total income.
The SC is of the opinion that the case in question does not fall under the rule in Bejoy Singh Dudhuria Case and rather falls under the rule in P.C. Mullick Case.
For the above reason court decided in favour of Income Tax Department and allowed the appeal.
COMMENTARIES RATIO/NOTE
It is only when income or a portion of income is diverted at the source by an overriding title before it started flowing into the channel which was to reach the assessee concerned that it could be excluded from his assessable income. [CIT V L Bansi Dhar (1968) 67 ITR 374 (Del)]
If the obligation is on the receipt of the income and not on the source of it, the legal effect is different. In the one case, income is diverted at source and hence cannot be deemed to have accrued or arisen therefrom. In the other case, the income has accrued and therefore, it has to be applied in a particular manner. In the former case, the income is not included at all. In the latter case it is.