SURAJRATAN DAMANI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS references relates to the question whether the amounts of share of managing agency commission for the assessment years 1957 -58, 1958 -59, 1959 -60 and 1960 -61, respectively, are liable to be assessed in the hands of the assessee as his income. The share of managing agency commission was receivable under an agreement dated February 26, 1951, entered into between the assessee and his brother on the one hand and Messrs. Forbes Forbes Campbell and Co. Ltd. (hereinafter referred to as 'the managing agency company'). The managing agency company was the managing agent of Simplex Mills Co. Ltd. (hereinafter referred to as 'the mills company') since 1935. The assessee and his brother, B.R. Damani, acquired numerous shares in the mills company but the mills company refused to have the transfers registered in its books, with the result that certain dispute arose between the mills company and the managing agency company on the one hand and the assessee and his brother on the other. These dispute were ultimately settled in accordance with the terms of the deed of agreement entered into between the assessee as representing himself and his brother, B. R. Damani, on the one hand and the managing agency company on the other. The agreement is dated February 26, 1951. A detailed analysis of the rights and obligations under this agreement will be considered a little later. Clause 6 and clause 9 of this agreement deal with the rights of the assessee and his brother, B. R. Damani, to receive their shares in the commission as therein provided. Under clause 6 out of the managing agency commission received by the managing agency company 7 1/2% was receivable by the assessee and the other 7 1/2% was receivable by his brother, B. R. Damani. Up to and including in the assessment year 1956 -57, the assessee's 7 1/2% share in the managing agency commission was assessed in his hands. On October 20, 1955, the assessee executed a deed of gift transferring his right to receive the share in the managing agency commission to his two married daughters, Kamlabai Bagri and Sushilabai Somani. The deed of gift was executed out of natural love and affection. After the deed of gift was executed a copy thereof was sent by the assessee to the managing agency company along with the letter dated October 25, 1955.

(2.) THE deed of gift was to be effective for the first time in the previous year for the assessment year 1957 -58. The assessee claimed before the Income -tax officer that with effect from the assessment year 1957 -58, the managing agency commission was not assessable in his hands, but this claim was not acceptable by the income -tax authorities holding that this was a case of application of income and not for diversion of income by overriding title. The order of the Income -tax Officer was confirmed by the Appellate Assistant Commissioner and it was also confirmed in further appeal by Tribunal. The Tribunal primarily took the view that so long as the agreement dated February 26, 1951, subsisted, income must first accrue to the assessee before the donees under the gift deed could claim it. The donees would have to claim against the managing agency company unless the assessee had first earned the income. According to the Tribunal the donees had not been substituted for the assessee in the agreement, only the managing agency company has been informed that they may make out two separate cheques in favour of the assessee's daughters for the amount of the commission. According to the Tribunal the effect of this deed of gift read along with the letter was that the managing agency company can accept in token of discharge of their debt due to the assessee, the stamped receipt given by the donees as nominees of the assessee.

(3.) ON behalf of the assessee, Mr. Kolah urged that under the agreement dated February 26, 1951, entered into with the managing agency company the assessee had a right to receive 7 1/2% of the commission earned by the managing agency company; that a right to receive such commission was a benefit of contract which can be assigned; that by executing the deed of gift and giving intimation thereof to the managing agency company there was a clear diversion of source of income before income accrued or arose to the assessee and he submitted that when such is the case such income can never be assessed in the hands of the assessee. In support of this contention he incidentally stated that if after the deed of gift was executed by the assessee in favour of his two daughters and an intimation of such deed of gift was given to the managing agency company, the assessee were to file a suit against the managing agency company for his 7 1/2% share in the commission, such a suit would fail on the ground that the assessee has no cause of action thereto. On the other hand, Mr. Joshi on behalf of the revenue contended that the share of 7 1/2% in the managing agency commission accrued as income to the assessee but it was thereafter applied by him in consonance was that there is a clear distinction between obligation to spend money in a particular manner attaching to income and a similar obligation attaching to a source of income; that every income that accrues or arise is liable to be taxed regardless of the distinction or disposal; that no treatment meted out to income after it has accrued or arisen affects liability to tax; that in the present case the source of income is a contract with the managing agency company dated February 26, 1951, and under the terms thereof the income is earned by the assessee and his brother by reason of their carrying out the several obligations contained in that instrument; that the assessee has not abrogated or assigned the source of income which is a contract in this case and the income which accrues under the contracts is his own income. According to his submission since the income that accrues is that of the assessee the case is one of application of income of the assessee after it has accrued or arisen and not one of diversion of the source of income.