Satish Chandra, J. - (1.) THESE four references raise the same question of law, namely, whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that on a correct interpretation of the relevant rules of the U.P. Medical Manual, 25% of the gross fees received by the assessee from Central Government employees was not the income of the assessee.
(2.) IN each reference the assessee is a member of the Medical Service of the State. He is the authorised medical attendant of Central Government employees as well. He received different sums of money as fee for professional service rendered to the Central Government servants. The, assessee claimed that in view of rule 197C of the U.P. Medical Manual, the State Government was entitled to 25% of the fee received by the assessee. This portion of the total fee received by the assessee in respect of the Central Government employees was not his income and was not taxable in his hands. The INcome-tax Officer repelled this contention and brought the 25% receipts also to tax. This view was upheld on appeal. The assessee took the dispute to the INcome-tax Appellate Tribunal. The Tribunal held: ".....the rules framed for such a deduction are very much obscure. IN fact the rules suggest that the paying department will itself deduct 25%. IN any event after going through all these rules we have no hesitation in holding that the amount payable to the U.P. Govt. at the rate of 25% of the fees realised by the authorised medical attendant is embodied in the nature of his employment as such. Under the circumstances the share of the U.P. Govt. is an overriding charge so much so that whenever an assessee receives an amount by way of receipts his actual income would be 75% and he will be holding 25% for and on behalf of the U. P. Government. This being so it is really of no consequence as to how does the assessee maintain his books of account, i.e., either on mercantile basis or cash basis." In the case of Dr. P. N. Awasthi, the Appellate Assistant Commissioner held that the entire receipts of fees were income. The assessee had paid Rs. 540 to the State Government in the relevant accounting period. He was entitled to a deduction of this sum as revenue expense. The Tribunal, however, observed that the liability to make over 25% of the fees accrued or arose as soon as the fees were received from the Central Government employees, because this 25% was a charge on the gross fees receivable in terms of Rule 197C of the U.P. Medical Manual which governed the appointment of the appellant. The principle in regard to the question whether a particular receipt is income liable to income-tax has been the subject-matter of several deci-sions of the Supreme Court. In Commissioner of Income-tax v. Shoorji Vallabhdas and Co., 1962 46 ITR 144, 146 (SC) the Supreme Court held : "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable."
(3.) IN Commissioner of INcome-tax v. Sitaldas Tirathdas, 1961 41 ITR 367, 374, 375 (SC) the Supreme Court held: "IN our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessce 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 an 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 readies 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 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 a 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." In that case the assessee's wife had obtained a decree for maintenance allowance against him. He claimed deduction of the maintenance allowance paid under the decree on the ground that his real income was his total income less the maintenance allowance paid. In support he relied upon the Privy Council decision in Bejoy Singh Dudhuria v. Commissioner of Income-tax, [1933] 1 ITR 135, 138 (PC). In Dudhuria's, [1933] 1 ITR 135, 138 (PC) case the step-mother of the Raja had brought a suit for maintenance and a compromise decree was passed under which she was to be paid Rs. 1,100 per month, which amount was declared a charge upon the properties in the hands of the Raja, by the court. The Privy Council upheld the claim of the Raja that the maintenance allowance paid by him to his step-mother was not his income at all. The Privy Council observed : "When the Act by Section 3 subjects to charge 'all income' of an individual, it is what reaches the individual as income which it is intended to charge. In the present case the decree of the court by charging the appellant's whole resources with a specific payment to his step-mother has to that extent diverted his income from him and has directed it to his stepmother ; to that extent what he receives for her is not his income. It is not a case of the application by the appellant of part of his income in a particular way; it is rather the allocation of a sum out of his revenue before it becomes income in his hands." Hidayatullah J., speaking for the Supreme Court, illustrated the difference between the case of application of income coming to the hands of the assessee and a case where the income had been diverted by an overriding title from the person who would have received it otherwise by referring to P. C. Mullick v. Commissioner of Income-tax, [1938] 6 ITR 206 (PC). In Mullick's case, [1938] 6 ITR 206 (PC) a testator appointed the appellants as executors and directed them to pay Rs. 10,000 out of the income on the occasion of his addyasradh. The executors paid Rs. 5,537 for such expenses and sought to deduct the amount from the assessable income. The Judicial Committee disallowed the deduction. It observed that the payments were made out of the income of the estate coming to the hands of the executors and in pursuance of an obligation imposed upon them by the testator. It was not a case in which a portion of the income had been diverted by an overriding title from the person who would have received it otherwise; and distinguished Bejoy Singh Dudhuria's, [1933] 1 ITR 135 (PC) case. Coming to the facts of the case, Hidayatullah J. observed, [1961] 41 ITR 367, 372, 375 (SC) : "In our opinion, the present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The case is one of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of another's income." ;