Dwarka Prasad, J. -
(1.)THIS reference has been made by the Income-tax Appellate Tribunal, Jaipure Bench, Jaipur (hereinafter referred to as "the Tribunal"), by its order dated August 29, 1974, and the following three questions of law arising out of the Tribunal dated August 18, 1972, have been referred to this court for its opinion :
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of half share of income from property at Jhandewalan to Nitin Mohan under an agreement dated November 5, 1964, was not a case of diversion of any sum of money before it had become the income of the assessee ?
(2.)WHETHER, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the property income was assessable in the hands of the assessee under Section 23 of the I.T. Act, 1961 ?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of half share of income from property at Jhandewalan was not an annual charge on the property and, as such, not allowable under Section 24(1)(iv) of the I.T. Act, 1961 ? "
2. One Smt. Kowshalya Wati was allotted a plot of land bearing No. 25 in the Jhandewalan Extension at Delhi by the Delhi Development Authority in the year 1958. Although the terms of the aforesaid allotment are not available on the record, it appears that the allottee was required to construct a commercial building on the aforesaid plot. Smt Kowshalya Wati entered into an agreement with one Victor Kaul for undertaking the construction of the building on the plot of land in question. However, the agreement with Victor Kaul could not mature and then Smt. Kowshalya Wati entered into another agreement on March 2, 1963, with Smt. Savita Mohan Nagpal, the assessee, for making constructions on the plot of land. The construction work started in March, 1963, and the building was completed in December, 1964. As Smt. Kowshalya Wati could not comply with the terms of the agreement and failed to make payment of the stipulated amount to Smt. Savita Mohan, the latter became the absolute owner of the property in dispute.
3. On November 5, 1964, an agreement was executed between Smt. Savita Mohan and her son, Nitin Mohan, according to which both of them agreed to enter into a partnership with a view to manage the property in question " efficiently and profitably " and agreed to jointly make further constructions and earn rents from the property in question by leasing out the same. It was agreed between them that 50% of the net profits would go to Nitin Mohan, while the remaining 50% would go to Savita Mohan. As a result of the aforesaid agreement between the parties, lease deeds were got executed from the tenants jointly in favour of Smt. Savita Mohan Nagpal and Shri Nitin Mohan,
In respect of assessment year 1965-66, Savita Mohan Nagpal and Nitin Mohan submitted a return of income and sought assessment as a partnership firm. They also made an application under Section 184 of the I.T. Act, 1961, for registration of the firm. The ITO rejected the application for registration and assessed the entire income in the hands of Smt. Savita Mohan. He also valued the total investment made in the construction of the building at Rs. 1,82,000, instead of Rs. 1,56,256 declared by the asses-see and the difference of Rs. 25,744 was treated as the assessee's income from undisclosed sources. On appeal, the AAC by his order dated February 16, 1971, affirmed the finding arrived at by the ITO regarding rejection of the application for registration of the partnership firm; but he was of the view that on account of the agreement entered into between Savita Mohan and Nitin Mohan, the income from property should be divided equally between the two and that such income should be assessed in their hands in equal proportion as coparceners. He also accepted the valuation of the cost of construction as declared by the assessee.
Two appeals were filed by the Department before the Tribunal against the order passed by the AAC of Income-tax. Smt. Savita Mohan Nagpal filed cross-objections. The Tribunal by its order dated February 18, 1972, came to the conclusion that no legal partnership came into existence between Savita Mohan Nagpal and her son, Nitin Mohan, and, as such, the so-called firm could not be allowed registration. The Tribunal further held that without the execution of a registered document of transfer, half share in the ownership of the immovable property could not be transferred by Smt. Savita Mohan to her son and in the absence thereof, she continued to remain as the sole owner of the entire property. According to the finding of the Tribunal, the income from the property in question could only be assessed in the hands of Smt. Savita Mohan under Section 23 of the I.T. Act, 1961, and if she chose to give half of the said income to her son out of love and affection or otherwise, it would amount to application of the said income on her part. Thus, the finding of the Tribunal was that the present was not a case of diversion of any amount by Smt. Savita Mohan before the same became the income of the assessee but it was a simple case of application of a part of the income by the assessee. The Tribunal also held that no overriding charge was created by virtue of the agreement in favour of Nitin Mohan. Smt, Savita Mohan Nagpal filed an application under Section 256(1) of the I.T. Act before the Tribunal for making a reference and as already stated three questions reproduced above have been referred to this court by the Tribunal, as arising out of its order dated August 18, 1972.
The first question which requires consideration in the present case is as to whether there was a diversion of the income representing 50% of the rent by the assessee, Smt. Savita Mohan, before it reached her hands or it was a case of application of her income by Smt. Savita Mohan Nagpal after the income had been received by her. As noticed already, the authorities including the Tribunal have taken the view that no legal partnership had come into existence as there was no venture in the nature of business disclosed by the deed dated November 5, 1964. It merely appears that Smt. Savita Mohan Nagpal and her son agreed to share the rental income arising out of the property in question through common management. The Tribunal also found as a fact that as a result of the aforesaid agreement entered into between Smt. Savita Mohan Nagpal and her son, Nitin Mohan, on November 5, 1964, the lease agreements in respect of the building constructed by Smt. Savita Mohan were executed by the lessees jointly in favour of both Smt. Savita Mohan and Nitin Mohan. A substantial part of the building was let out to the Posts and Telegraphs Department on a monthly rent of Rs. 4,000 on December 2, 1964. Another portion of the building was let out to a business concern on a monthly rent of Rs. 1,000 in June, 1965. According to the terms of the agreement dated November 5, 1964, Nitin Mohan and Savita Mohan Nagpal were entitled to share the net profits half and half, out of the rents of the building after payment of taxes and defraying of expenses. No attempt was made by Smt. Savita Mohan to part with the ownership of half of the property in question to her son and as such the Tribunal rightly held that Smt. Savita Mohan continued to remain as the sole owner of the entire property. However, the question that arises for consideration is as to what was the true income from such property in the hands of Smt. Savita Mohan. Nitin Mohan was neither the co-owner nor a coparcener having any right in the property in dispute.
(3.)A similar question arose before the Bombay High Court in Seth Motilal Manekchand v. CIT, 1957 31 ITR 735. In that case, Chagla, Chief Justice, as he then was, explained the difference between a claim that a particular amount was not the real income of the assessee and a claim for deduction of an amount from the income of the assessee, under the provisions of the I.T. Act. It was observed by the Bombay High Court in the aforesaid case as under (p. 739):
" In the first place, this is not a case where a claim is made in respect of any deduction under the provisions of the Income-tax Act. If such a claim had been put forward, then we would have to consider the various sections of the Act in order to determine whether the deduction is justified. But it is clear position in law, as we shall presently point out, that even though an assessee may not be allowed to claim a particular amount as a deduction falling within the provisions of the Act, he would be entitled to urge that his real income should be considered and if a certain amount is to be deducted in order to ascertain his real income, such a deduction would have to be made notwithstanding that the Income-tax Act made no provision for such a deduction. In all cases of tax, what has got to be considered is what is the income of the assessee and when that question arises what has got to be considered is the real income and not any artificial income, and for the purpose of ascertaining that real income every part of that income which may seem to be his income, if in fact it is not his income, if that part has been diverted and never constituted his real income, has got to be excluded. "
The aforesaid decision was relied upon by the Bombay High Court in Ratilal Daftari v. CIT, 1959 36 ITR 18, wherein it was held that the real income was what remains after deducting the amount which may be said to have been diverted and which never constituted the real income of the assessee and such amounts will have to be excluded from consideration before the real income of the assessee is reached.
The decision in Ratilal's case,  36 ITR 18 (Bom), was approved by their Lordships of the Supreme Court in Murlidhar Himatsingha v. CIT, 1966 62 ITR 323 (SC), and it was reiterated that for purposes of assessment, the real income of the assessee has to be reached, which remains after deducting the amount that may be said to have been diverted and that what constitutes his real income only could be assessed.