COMMISSIONER OF INCOME TAX Vs. ATMAPRAKASH AISHIRAM BATRAA

JUDGEMENT

(1.) THIS is an application by the CIT, Nagpur under s. 256 (2) of the IT Act 1961 (`the Act') for calling upon the Tribunal to state the case and to refer the following three questions to this Court of opinion under s. 256 (1).

(2.) THERE was a partial partition in respect of the capital of the HUF `Atmaprakash Aishiram Batra' which was recorded in the form of memorandum dt. 2nd April 1963. The family members consisted of Atmaprakash (Karta), his wife Bhagwatibai, minor son Sushilkumar and five unmarried minor daughters. As per the side memorandum the capital (after setting apart Rs.10,000 each for the education and marriage of the five daughters, was equally divided between Atmapraksah, his wife and monor son. The profits arising from various businesse in which the capital stands invested was to be divided in future in equal shares between the Karta, his wife and minor son. On 9th April 1963 further agreement took place between them in which it was additionally agreed that Shri Atmaprakash would continue the old business as proprietary concern and his wife and minor son would get minimum 9 per cent interest on the capital in the business assets. The mother acted as guardian of the minor in the agreement. The assessee had claimed recognition of partial partition under s. 171 of the Act. Recognition was granted by the ITO vide order dt. 6th June 1968. For the asst. yr. 1964-65 to 1975-76 Atmaprakash was assessed on the basic of the said partition. The assessment for the year 1976-76 was also made accordingly, but the CIT in revisional jurisdiction under s. 263 of the Act set it aside on the ground that this was a case of application of income and not diversion by overriding title. The ITO made a reference under s. 144A of the Act to the IAC for guidance to enable him to complete the assessment. The IAC directed the ITO to allow the claim treating 2/3rds income as having been diverted by overriding title to the wife and minor son.

(3.) NOW the true test for the application of rule of diversion of income by an overriding charge is whether the amount sought to be deducted never reached the assessee as his income. There are no doubt obligations, but they exist in every case. Deciding factor is the nature of the obligation. There is 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 become a part of income of the assessee. Where by the obligation, income is diverted before it reaches the assessee, it diversion by overriding charge, but where the income is required to be diverted to discharge on obligation after it reaches the assessee, it is application. The former is deducible, the latter is not. In Charandas Haridas' case (supra) dealing with asset of HUF, it is observed: