Holding

Interest paid on debts allocated to an assessee after partition is not deductible because there is no overriding title; it is merely an application of the assessee's own income.

Summary

The respondents, former members of a Joint Hindu Family, received specific assets and certain family debts after a partition ordered by an arbitrator's award. They claimed that interest paid on these debts, especially to unsecured creditors, should be deductible as a diversion of income by an overriding title under the Income Tax Act. The Income Tax Officer, the Appellate Assistant Commissioner, and the Tribunal rejected the claim, holding that the interest was merely an application of the assessee's own income and not a diversion. The Gujarat High Court reversed this view, allowing the deduction, but the Supreme Court held that no overriding title existed, Section 94 of the Indian Trusts Act was inapplicable, and interest on such debts could not be deducted under Section 12(2) of the Income Tax Act. Consequently, the appeal by the Revenue was allowed.

Issues considered

Whether interest paid on unsecured creditors' debts allocated to the assessee after partition constitutes a diversion of income by an overriding title.
Whether such interest is admissible as a deduction under Section 12(2) of the Indian Income Tax Act, 1922.
Whether the interest should be taken into account while determining the real income of the assessee.

Legislation cited

Income Tax Act, 1922s. 12(2), s. 9(1)(1v)
Indian Succession Act, 1925s. 325
Indian Trusts Act, 1882s. 94

Subjects

income taxdeduction of interestjoint Hindu familypartitionoverriding titlereal incomeSection 12(2)Section 94 Trusts ActHindu lawliability for father's debts

Judgment

COMMISSIONER OF INCOME TAX GUJARAT A
v.
SHRI UDAYAN CHINUBHAI AND ORS.

AUGUST 20, 1996

[B.P. JEEVAN REDDY AND S.C. SEN, JJ.] B

Indian Income Tax Act, 1922: Section 9(1)(1v).

Income TCU'-AYs 1951-52, 1952-53 & 1954-55 to 1961-62-Unsecured
loans-Deduction of interest paid on-HUF-Partition of-Properties and C
debts of HUF allotted to assessees u11der award of arbitrator-Assessees liable
to pay Avyavaha1ic or illegal debts as per directions of court appoi11ti11g
arbitrator-Assessees incurred interest 011 such debts paid to unsecured
creditors-Held : Appellate T1ibu11al was right in 11ot allowing such interest
as admissible (ieduction-Deductio11s could be allowed 011ly under provisions
of Income Tax Act a11d 11ot merely no ground of liability to pay interest 011 D
debts or 011 pri11ciple or real i11come-S.94 of Trusts Act a11d S.325 of India11
Succession Act not applicable i11 such a case-India11 Tmsts Ac• 1882, S.94
(since repealed)-Indian Succession Act, 1925, S.325.

fllcome Tax-Expenditu.re incun-ed to meet legal obligatio11-Deduc-
E
tibility of-From taxable income-field : depmded 011 11ature of obliga-
tiorr-There should be diversion of income to meet obligation before it
reached assessee.

The respondents-assessees were allotted certain properties of the
Joint Hindu Family as a result of partition under an award of the ar- F
bitrator. Some of the liabilities of the joint family had also been allotted
to the assessees, Under the award the assessees were liable to pay the
Avyavabaric or illegal debts of their father as per directions of court
appointing the arbitrator. The claim of the assessees in the individual
assessments for the assessments years 1951.-52, 1952-53 and 1954-55 to
1961-62 was that the assessees had to pay interest on various liabilities . G
taken over by them and these interest payments should be considered as
diversion of their income from properties by an overriding title and should
be allowed as admissible deductions. The Income Tax Officer rejected the
claim of the assesses which was upheld by the Appellate Assistant Com-
missioner and the Appellate Tribunal. On appeal the High Court bad held H
789
790 SUPREME COURT REPORTS [1996] SUPP. 4 S.C.R.

A that the provisions under the Hindu Law, Indian Trusts Act and the
arbitrator's award created an overriding title in favour of the creditor to
have their liabilities paid from the assets which came into the hands of the
assessees. Therefore, the interest paid to unsecured creditors out of the
assets received by the assessee on partial partition were diverted by
overriding title and did not form part of real income of the assessees.
B Accordingly, the High Court answered the reference in favour of the
assessee and against the Revenue. Being aggrieved the appellant-Revenue
preferred the present appeal.

Allowing the appeal, this Court
c
HELD : 1.1. There was considerable doubt whether the sons were
liable to pay the Avyavaharic debts of the father. After the award of the
arbitrator, these questions could not be raised by the sons. But the High
Court overlooked the fact that these debts were not a charge upon the HUF
D properties before the partition took place. The position continued to be the
same after the partition. rr a man incurs a debt, he will have to pay the
debt and till the debt is paid in full, he may have to pay interest on that
debt. But whether the interest is allowable as a deduction or not will
depend upon the provisions of the Income Tax Act. No question of diver-
sion of income by overriding title can arise in a case like this. A man has
E to pay his debts out of his income. Merely because of the liability to pay
the debts, it cannot be said that the income from the assets that he received
on partition stood diverted by overriding title to the creditors. The
Tribunal has rightly pointed out that the assessees were at liberty to spend
the income from the assets allotted to them as they liked. Tbe creditors
F could not insist that the debts had to be cleared before spending any money
out of the income received by the assessee from the assets. [798-B-E]

1.2. Section 94 (since repealed) of the Indian Trusts Act, 1882 cannot
apply to the facts of the instant case. In the instant case, all that has
happened is that as a result of the partition, the assessees had been
G allotted certain properties of the joint family. Some of the liabilities of the
joint family have also been allotted to the assessee. The interest payable.
in respect of these debts and liabilities will have to be paid by the asses sees.
It may be paid out of the income of the assets received on partition or
otherwise. There is no obligation to pay the debts out of any particular
H asset. It cannot be said that the creditors had acquired any beneficial
C.LT. v. UDA YAN CHINUBHAI 791

interest in any of the properties allotted to the assessee or that the A
property was held for the benefit of the creditors. The illustration (a) to
Section 94 of the Trusts Act merely embodies the principle that a man must
be just before he is generous. A man cannot give away all his properties
by will without making any provision for payment of his debts. The
executor of a will also cannot lawfully distribute the assets of the testator B
to the legal heirs without first having paid the debts of the testator in full.
Section 325 of the Indian Succession Act, 1925 provides that the debts of
every description must be paid before any legacy. But, this is not a case of
distribution of legacy by an executor at all. [799-C-F]

Joint Family of Udayall Chillubhai, Etc. v. Commissioner of l!lcome C
Tax, Gujarat, 63 ITR 416, referred to.

2.1. The argument of the assessees that they were legally bound to
discharge the debts along with interest under Hindu Law as well as under
the award of the arbitrator and the decree only the real income of the D
assessees reduced by the amount of interest paid by them was taxable
income, runs against the basic principles of the Income Tax Law. The
income of an assessee has to be computed in the manner laid do\Wl under
the Income Tax Act. The Act of 1922 had made elaboral< provisions for
classification of income under various heads and the deductions permis-
sible under each head. The assessee's claim, in effect, is what is not E
permissible in law as deduction under any of the Heads will have to be
allowed as a deduction on the principle of real income of the asses see. The
principles of computation of income will not change in any way because of
the partition. In the HUF could not get any deduction on account of
payment of interest on these loans, there is no principle on the basis of F
which a member of the joint family after partition will get deduction for
payment of interest on the loans. The income from the family properties
will not stand reduced by payment of interest to the creditors in the eye of
law. [800-E-F; 801-A-B]

2.2. The position can be viewed from another angle. The assessee has G
not received any conditional gift or bequest from any person in this case.
The true effect of partition of the joint family property is that each
coparcener gets a specific property in lieu of his undivided right in respect
of the totality of the property of the family. What the assessee has obtained
in this case is by virtue of his right in the joint family properties. He has H
792 SUPREME COURT REPORTS [1996] SUPP. 4 S.C.R.

A also been allotted some of the family debts to pay. The income that he earns
from the properties is his own income. When he pays interest ont of that
income, the interest will be income in the hand of the creditor. The income
from the property itself can never be treated as the income of the creditor.
What the creditor gets is interest income. The assessee pays interest out
of his own income. (801-C-D]
B
V.N. Sari11 v. Ajit Kumar Poplai, AIR (1966) SC 432, relied ou.

3. The assessee will have to bear the burden of the liabilities that
have been allotted to him. The interests on the loans will have to be paid
to the creditors. But such payment will only be application of income. The
c income from the assets were received by the assessee. Payment to the
creditors may have been made out of that income. The application of the
-·
income will not in any way alter the character of the income received by
the assessee. The Tribunal has found as a fact that the assessee was free
to spend the income received from the assets as he liked. It cannot be said
D that this income was not the real income of the assessee. (802-A-B; FJ

77ze Conunissioners of Inland Revenue v. Patterson, 9 Tax Cases 163,
relied on.

Pondicherry Rly. Co. Ltd. v. The Commissio11er of Income-Tax,
E Madras, 5 I.T.C. 363, Gresham Life Assurance; Society v. Styles, (1892) A'.C.
309 and Moti Lal Chhadami Lal Jain v. Commissioner of Income-Tax, 190
ITR 1, referred to.

Raja l3ejoy Singh Dudlwria v. Commissioner of Income-Tax, Bengal
and Commissioner of Income Tax; Bombay City II v. Sita/das Tirathdas, 41
F
ITR 367, held inapplicable.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1595 to
1634 of 1977.

G From the Judgment and Order dated 27.4.76 of the Gujarat High
Court in I.T.R. Nos. 1-4 and 15 of 1974. ..
Dr. V. Gaurishankar, S. Rajappa and S.N. Terdol for the Appellant.

Samuel Parekh, Ms. Indoo Verma, Amit Dhingra and P.H. Parekh
H for the Respondents.
C.l.T. v. UDAYAN CHINUBHAI [SEN, J.] 793

The Judgment of the Court was delivered by A
SEN, J. The Tribunal referred the following questions of law to the
Gujarat High Court at the instance of the assessee :

"(1) Whether on the facts and in the circumstances of the case and
particularly in view of the facts that B
(a) on partial partition of the HUF the assessee received not
only assets but also certain liabilities of the HUF and

(b) the income from the assets received on the partition had
been considered in computing the total income of the asses- C
see.

the Tribunal was right in holding that a part of the interest in
respect of amounts due to unsecured creditors should not be
allowed either by way of an over-riding title or otherwise? D
(2) Whether, on the facts and in the circumstances of the case, the
Tribunal was right in holding that such interest as was disallowed
was not admissible deduction u/s. 12(2) of the 1.1.T. Act, 1922?

(3) Whether, on the facts and in the circumstances of the case, the E
Tribunal was right in holding that the said interest should not be
taken into account while determining the real income of the
appellant?"

The relevant years of assessment were 1951-52, 1952-53 and 1954-55
to 1961-62. The High Court answered question Nos. 1 and 2 in favo•u of F
the assessee and against the Revenue.

The facts of the case as recorded by the Tribunal in its appellate
order dated 22.11.1972 were as follows. Sir Chinubhai Madhavlal had filed
a suit in the High Court of Bombay in 1948 against his three sons, Udayan
Chinubhai, Kirtidev Chinubhai, Achyut Chinubhai and his wife Lady G
Tanumati Chinubhai and also his mother Lady Sulochana Chinubhai claim-
ing severance of the joint status of the undivided Joint Hindu Family of the
plaintiff and the defendants. The family had considerable movable and
immovable properties. There were also various debts and liabilities of Sir
Chinubhai who was the Karla of the joint family. Some debts were also H
794 SUPREME COURT REPORTS [1996] SUPP. 4 S.C.R.

A incurred by Udayan Chinubhai and Lady Tanumati for maintenance and
support and/or education of some of the defendants. With a view to settle
these disputes and differences between the parties, Shri K.M. Munshi,
Advocate was appointed sole arbitrator. A direction was given by the Court
that the defendants will not be permitted to challenge the debts and
liabilities as Avyavaharic or illegal or incurred for illegal or immoral
B purposes. In other words, the defendants will not be entitled to say that
these debts were not payable by and binding on the joint family. The Court
also directed that Shri Munshi should ascertain and determine the debts,
liabilities, claims and demands which were binding on the joint family and
also determine whether any of these debts and liabilities etc. were to be
c taken over by the defendants. The Court further directed that as far as
practicable, Shri Munshi would allot to the plaintiffs and also to the
-
defendants such debts, liabilities, claims and demands as related to the
properties and businesses coming to the respective shares of the parties.

D Shri Munshi gave an interim award on 23.8.1950 which followed by
a final award of 15.6.1951. ·Under these awards, certain properties were
given to Sir Chinubhai and certain other properties were given to Lady
Tanumati and her three sons. The debts were similarly determined and
certain liabilities were to be taken over by Sir Chinubhai Madhavlal and
others by Lady Tanumati and her three sons. There was no separate
E allocation either of the assets or the liabilities amongst Lady Tanumati and
her three sons.

In the case offoint Family of Udayan Chinubhai, Etc v. Commissioner
of Income Tax, Gujarat, 63 !TR 416, a question arose as to whether Lady
F Tanumati and her three sons constituted a Hindu Undivided Family. The
dispute came up to this Court and it was held that after a decree in terms
of the award of Shri Munshi was passed, Lady Tanumati and her three sons
could not be treated as an Hindu Undivided Family. The original Hindu
Undivided Family had no existence. Tanumati and her three sons did not
succeed to the properties of the HUF but were allotted their respective
G shares of properties which were held by them as tenants in common.
•
In view of the decision of this Court, assessments were made in the
case of Lady Tanumati and her three sons in the status of individuals and
not as an HUF. The claim of the assessees in the individual assessments
H was that the assessees had to pay interest on various liabilities taken over
C.I.T.v. UDAYANCHINUBHAl[SEN,J.) 795

by them and these interest payments should be considered as diversion of A
their income from properties by an overriding title. It may be mentioned
that the income of the assessees consisted of income from immovable
property, business income and income from other sources. Some of the
debts were secured against immovable properties. The Income Tax Officer
in working out the property income, allowed these interest payments as B
admissible deductions. However, he was of the view that the other interests
could not be allowed as deductions.

The assessee also made a claim that interest payments should be
allowed as deduction under Section 12(2) of the Indian Income Tax Act,
1922 because these interests had to be paid solely for the purpose of C
making or earning income. The Income Tax Officer held that there was no
nexus between payment of interest and earning of the income. Merely
because, the liabilities and the assets were inherited together from an
ancestor or received as a result of partition, it did not follow that the
interest was payable for earning the income. It was further pointed out by
the Income Tax Officer that the assessee had not even proved that the D
liabilities were incurred by the previous owner or by the family before its
partition to purchase the income-yielding assets.

The case of the assessee was placed before the Income Tax Officer
in another way. It was argued that the coparceners were entitled to their E
shares in the assets of the joint family at the time of partition. But what
they received were assets attached with the liabilities and the real income
was only that income which remained after payment of interest for such
liabilities. This argument was also rejected by the Income Tax Officer.

The assessee went up in appeal to the Appellate Assistant Commis- F
sioner who was of the view that the interest payable on debts due to
secured creditors were to be allowed as deduction under Section 9(l)(iv)
of the Indian Income Tax Act, 1922, but interest payable to unsecured
creditors did not qualify for deduction.

The Appellate Assistant Commissioner also rejected the contention G
of the assessee that some of assets had been purchased by raising loans
because there was no evidence to prove this contention. The assessee also
claimed allowance of interest against income from dividends. The Appel-
late Assistant Commissioner held that in the absence of clear evidence, this
claim could also not be allowed. Similarly, the claim for allowance of H
796 SUPREME COURT REPORTS [1996] SUPP. 4 S.C.R.

A interest against income from deposits were disallowed on the ground that
the deposits were not )llade by raising any loan. Dealing with the other
arguments advanced on behalf of the assessee, the Appellate Assistant
Commissioner found that the liabilities taken over by Lady Tanumati and
her sons were not necessarily incurred in acquiring the assets from which
the assessee derived income. Unless there was a connection between the
B expenditure incurred and the income earned, the claim of interest could
not be allowed. The Appellate Assistant Commissioner further noted that
the partition had not brought about any change in the nature of ownership
of the properties. Tanumati and her sons had interest in the properties
even before the partition as members of the joint family. The Karta as well
c as the coparceners of the Hindu Undivided Family were liable for the debts
of the HUF. He also rejected the contention that there had been diversion
of income by overriding title. Merely b7cause liabilities and assets were
inherited from an ancestor or received on partition, the interest paid on
liabilities could not qualify for deduction against income from assets under
D the head "other sources.".

The Tribunal on further appeal rejected the contention of the asses-
see that there had been diversion of income by overriding title and also
that the real income of the assessee must be determined after deduction
of all the interest payments. The Tribunal held that the facts of the case
E did not show that the debts were automatically dovetailed with the HUF
properties which the sons or the wife had received on p'artition. It was not
as if the sons acquired the properties subject to overriding claim in respect
of the family debts which had been allotted to them. Tanumati and sons
could not have been prevented from using the income in any way they liked.
F No creditor had specific overriding claim in respect of any particular
income. The Tribunal came to the conclusion that there was tio overriding
title or diversion of income as a whole in this case. The Tribunal, however,
held that the argument based on the concept of real income had no basis
on the facts of this case. There could be no doubt that had the debts been
discharged before partition, the assets coming to the share of the assessee
G would have been much smaller and income from such assets would also
have been much less. The Tribunal pointed out that the debts had been
incurred before partition. Interests paid on these debts were not con-
sidered allowable in the case of the assessment of the HUF before parti-
tion. The fact that there was a partition did not give the creditors any better
H or more effective title. On the contrary, the sons were in a general way
C.l.T. v. UDA YAN CHINUBHAI [SEN, J.] 797

responsible for the payment of the debts of their father. This fact would A
not create any nexus between the claim of the allowance of the interest and
the income derived by the sons from properties received on partition. The
members had used the income as they liked as the creditors could not have
raised any objection to such expenditure. The claims of the creditors were
of a general nature. The creditors could not prevent the sons from getting B
the HUF properties on partition without satisfying the debts.

Aggrieved by the decision of the Tribunal, the assessee prayed for
reference of the questions of law .set out hereinabove to the High Court.
After an elaborate discussion of facts and law, the High Court answered
questions in favour of the assessee and against the Revenue. The High C
Court was of the view that when a partition took place, provisions had to
be made for the discharge of pre-partition debts of the father. If, for some
reasons, provision for discharge of liabilities had not been made or could
not be made, the persons who get the properties on partition held the
properties in their hands subject to the liability to satisfy the demands of D
the creditors. In this sense, the assessee held the property for the benefit
of the creditors to the extent necessary to satisfy the just demands of the
creditors in terms of Section 94 of the Indian Trusts Act, 1882.

The High Court was also of the view that certain properties which
formed part of a Baronetcy Trust, were partitioned between the father on E
the one and the mother and the sons on the other. The properties were
trust properties. A consent decree was passed and an arbitrator was
appointed. Under the terms of the consent decree and arbitrator's award,
some of the debts of the family were allotted to the mother and the sons.
According to the High Court under the doctrine of pious obligation, the p
assessees were liable to pay the debts of the father. Apart from this liability
under the award of the arbitrator, the assessee undertook the liability to
discharge the debts. The provision under the Hindu Law, Indian Trusts
Act, the terms of the consent decree and the arbitrator's award created an
overriding title in favour of the creditors to have their liabilities paid from
.. the assets which came inio the hands of the assessee. Therefore, the
interest paid to unsecured creditors out of the assets received by the
G

assessee on partial partition were diverted by overriding title and did not
form part of the real income of the assessee.

In our view, the High Court overlooked the fact that the position of H
798 SUPREME COURT REPORTS [1996] SUPP. 4 S.C.R

A the creditors was not strengthened in any way by virtue of the partition that
had taken place. It is true that the award given by the arbitrator was
followed up by a decree in terms of the award. That, however, did not alter
the position of the creditors in any way. There was considerable doubt
whether the sons were liable to pay the Avyavaharic debts of the father.
After the award of the arbitrator these questions c0uld not be raised by
B
the sons. The arbitrator had given a finding that these debts will have to
be paid. Therefore, the wife and the sons were liable to pay a portion of
these debts which were allotted to them. But the High Court overlooked
the fact that these debts were not a charge upon the HUF properties
before the partition took place. The position continued to be the same after
c the partition. If a man incurs a debt, he will have to pay the debt and till
the debt is paid in full, he may have to pay interest on that debt. But
whether the interest is allowable as a deduction or not will depend upon
the provisions of the Income Tax Act. No question of diversion of income
by overriding title can arise in a case like this. A man has to pay his debts
D out of his income. Merely because of the liability to pay the debts, it cannot
be said that the income from the assets that he received on partition stood
diverted by overriding title to the creditors. The Tribunal has rightly
pointed out that the assessees were at liberty to spend the income from the
assets allotted to them as they liked. The creditors could not insist that the
debts had to be deared before spending any money out of the income
E received by the assessee from the assets.

We also to see how the provisions of Section 94 of India Trusts Act,
1882 can apply to the facts of this case. Section 94 which has since been
repealed by the Benami Transactions (Prohibition) Act, 1988 with effect
from May, 19, 1988 stood as under at the material time :
F
"94. Constructive trusts in cases not expressly provided for. - In
any case not coming within the scope of any of the preceding
sections, where there is no trust, but the person having possession
of property has not the whole beneficial interest therein, he must
G hold the property for the benefit of the persons having such
interest, or the residue thereof (as the case may be), to the extent
necessary to satisfy their just demands.

Illustrations

H (a) A, an executor, distributes the assets of his testator B to the
C.l.T. v. UDAYAN CHINUBHAI (SEN, J.] 799

legatees without having paid the whole of B's debts. The legatees A
hold for the benefit of B's creditors, to the _extent necessary to
satisfy their just demands, the assets so distributed.
'• (b) xx xx xx xx

(c) xxxxxxxx" B

It has not been shown that after partition, the assessee did not have
the entire beneficial interest in the properties allotted to him. It cannot be
said that the creditors had any interest in these properties in any manner.
If a man takes a loan simpliciter, the creditor does not acquire any interest
in the properties of the debtor. In this case, all that has happened is that
c
as a result of the partition, the assessees had been allotted certain proper-
ties of the joint family. Some of the liabilities of the joint family have also
been allotted to the assessee. The interest payable in respect of these debts
and liabilities will have to be paid by the assessees. It may be paid out of
the income of the assets received on partition or otherwise. There is no D
obligation to pay the debts out of any particular asset. It cannot be said
that the creditors had acquired any beneficial interest in any of the proper-
ties allotted to the assessee or that the property was held for the benefit
of the creditors.

The illustration to Section 94 merely embodies the principle that a
E
man must be just before he is generous. A man cannot give away all his
properties by will without making any provision for payment of his debts.
The executor of a will also cannot lawfully distribute the assets of the
testator to the legal heirs without first having paid the debts of the testator
in full. Section 325 of the Indian Succession Act, 1925 provides that the F
debts of every description must be paid before any legacy. But, this is not
a case of distribution of legacy by an executor at all. The assessee as a
member of the Joint Hindu Undivided family had interest in the properties
even before the partition took place. After partition he received his share
of the properties as of right. This is not a case of distribution of assets of G
a testator among the legatees without payment of the debts incurred by the
testator.

In our view, in the facts of this case, the principles contained in
Section 94 of the Indian Trusts Act cannot be invoked. The assets received
by the assessees on partition were not held by them in trust, constructive H
800 SUPREME COURT REPORTS (1996] SUPP. 4 S.C.R.

A or otherwise, for the benefit of the creditors.

The next point urged on behalf of the respondent is that under the
doctrine of pious obligation of a son to pay the debts of his father which
is well-recognised under Hindu Law, the sons were liable to pay the debts
of their father. Apart from this; under the award of the arbitrator and the •
B decree, the assessee was legally bound to discharge the debts which was
apportioned to them to pay. The interest accruing on these debts were also
to be paid by the assessee. In real terms, the assessee held the properties
for the benefit of the creditors to the extent it was necessary to satisfy the
debts of the creditors. It was argued that what is taxed under the Income
C Tax Act is the real income of the assessee. Having regard to the facts and
circumstances under which the assessee came to own and possess the
--
properties after partition of the HUF, the assessee could not have dis-
claimed the debts apportioned to him for payment. Since interests on the
debts had to be paid out of the income of the properties allotted to the
D assessee on partition, the income had to be reduced by the amount of
interest the assessee had to pay to the creditors.

This argument runs against the basic principles of the Income Tax
law. The income of an assessee has to be computed in the manner laid
down under the Income Tax Act. The Act of 1922 had made elaborate
E provisions for classification of income under various heads and the deduc- ;
tions permissible under each head. The assessee's claim, in effect is what
is not permissible in law as deduction under any of the Heads will have to
be allowed as a deduction on the principle of real income of the assessee.
If a man incurs debts in his business and has to pay interest thereon, then
F such interest will be deductible. But if a person with salary income only
incurs a debt, then interest on such debt cannot be allowed as deduction
in computation of salary income on any principle of real income. Even if
a man has business income, then unless it can be established that the loan
was obtained for business purposes, question of deduction of interest paid
on the loan from the business income cannot arise. Whether the assessee
G is a company or an individual or an HUF is quite immaterial for this
purpose. The Tribunal has pointed out that the HUF could not get any
deduction in its assessment on account of payment of inter~st on these
loans. The position after partition of the joint family remains the same. The
assessee as a member of the joint family, after partition, was allotted his
H share of the joint properties as well as some of the debts. The principles
C.I.T. v. UDAYAN CHINUBIW [SEN, J.] 801

of computation of income will not change in any way because of the A
partition. If the HUF could not get any deduction on account of payment

.. of interest on these loans, there is ;io principle on the basis of which a
member of the joint family after partition will get deduction for payment
of interest on the loans. The income from the family properties will not
stand reduced by payment of interest to the creditors in the eye of law.
B
The position can be viewed from another angle. The assessee has not
received any conditional gift or bequest from any person in this case. The
true effect of partition of the joint family property is that each coparcener
gets a specific property in lieu of his undivided right in respect of the
totality of the property of the family. (V.N. Sarin v. Ajit Kumar Poplai, AIR C
(1966) SC 432). What the assessee has obtained in this case is by virtue of
his right in the joint family properties. He has also been allotted some of
the family debts to pay. The income that he earns from the properties is
his own income. When he pays interest out of that income, the interest will
be income in the hand of the creditor. The income from the property itself D
can never be treated as the income of the creditor. What the creditor gets
is interest income. The assessee pays interest out of his own income. This
is a perfectly simple case.

Lord Scrutton in the case of The Commissioners of Inland Revenue
v. Paterson, 9 Tax Cases 163, dealing with a case where a debtor bought E
property with borrowed money and charged the proceeds of the property
in favour of the creditors to repay the debts, observed" ... I may ask, if they
are not income of the debtor whose income are th~y? ... Whose income
. was it that paid those debts? It seems to me that in any ordinary sense it
was the income of the debtor, the lady, which discharged the debts and
which she was obliged to allow to be used to discharge the debts by the F
charge she had given on that income to the creditor." Lord Scrutton
concluded by saying. "It appears to me, if it is not the debtor's income, it
must be the creditor's income, and I am not sufficiently topsy-turvy to think
of a creditor discharging debts due to him out of his own income." In the
case of Paterson (supra), a charge was created on the property from the G
income of which th,e debt was paid. In the case before us, there is not even
a charge. It is a simple case where the assessee has paid interests on loans
in the relevant years of assessment. The interests may have been paid out
of income derived from the property allotted to the assessee on partition
of the joint family property. But what was received by the assessee out of
the assets was his own income. H
802 SUPREME COURT REPORTS (1996] SUPP. 4 S.C.R.

A The asssessee will have to bear the burden of the liabilities that have
been allotted to him. The interests on the loans will have to be paid to the
creditors. But such payment will only be application of income. The income
from the assets were received by the assessee. Payment to the creditors
may have been made out of thar income. The application of the i~come
will not in any way alter the character of the income received by the
B assessee.

In the leading case of Pondicheny Railway Co. Ltd. v. The Commis-
sioner of lllcome-tax, Madras, 5 I.T.C. 363, it was observed by Lord Mac-
millan:
c "But profits on their coming into existence attract tax at that point
and the revenue is not concerned with the subsequent applicatioa
of the profits."

It was reiterated that the principle to be applied in cases like these
D was laid down by Lord Chancellor Halsbury in Gresham Life Assurance
Society v. Styles, (1892) AC. 309 at p. 315 :

"The thing to be taxed" said his Lordship, is the amount of profits
or gains. The word "Profits" I think is to be understood in its natural
-
and proper sense-in a sense which no commercial man would
E
misunderstand. But once an individual or company has in that
proper sense ascertained what are the profits of his business or his
trade, the destination of those profits or the charge which has been
made on those profits by previous agreement or otherwise is perfectly
immaterial. n
F
The Tribunal has found as a fact that the assessee was free to spend
the income received from the assets as he liked. It is difficult to see how
this income was not the real income of the assessee.

Strong reliance was placed on behalf of the assessee before the High
G Court as well as this Court on the decision of the Judicial Committee of
the Privy Council in the case of Raja Bejoy Singh Dudhuria v. Commissioner
of Income-Tax, Benga~ (1933) 1ITR135. There the Raja was the assessee.
He had succeeded to the family ancestral estate on the death of his father.
His step-mother brought a suit for maintenance against him which ul-
H timately resulted in a consent decree by which the Raja was directed to
C.I.T.v. UDAYANCHINUBHAI (SEN,J.J 803

make a monthly payment of a fJXed sum to his step-mother. This payment A
was declared a charge on the ancestral estate in the hands of the Raja. In
computing his income, it was claimed that the amounts paid by him to
his-step mother should be deducted. It was held by the Judicial Committee
that the assessee's liability under the decree did not fall within any of the
exemptions or allowances provided under Sections 7 to 12 of the Indian B
Income Tax Act, 1922. But the sums paid by assessee to his step-mother
were not his "income" at all. The decree of the Court by charging the
assessee's whole resources with a specific payment to his step-mother had
to that extent diverted his income from him and had directed it to his
step-mother. To that extent what he received for her was not his income.
Lord Macmillan observed that "it is not a case of the application by the C
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".

In that case, the step-mother had filed a suit for maintenance. Chief
Justice Rankin of Calcutta High Court had rejected the argument that the D
assessee's liability to his step-mother was of the same kind as his liability
to provide for his wives and daughter and stated that the position is the
• same as if the appellant "had received his various properties, securities and
businesses under a bequest from his father upon· the terms that these assets
were charged with an annuity for the maintenance of the widow". Lord
Macmillan observed that this was the correct approach to the question E
raised before it and emphasised that the decree of the Court by charging
the appellant's whole resources with a specific payment to the step-mother
had diverted his income from him. The amounts payable to the step-mother
under the decree could not be treated as the income of the assessee.
F
But this is not a case of a bequest at all. No charge has been created
on the assets received by the assessees on partition of the family by the
award or the decree passed in terms of the award. The income has not
been diverted at source in any way. This is a simple case of partition of
properties of a Joint Hindu Family. The assessee has been allotted his
legitimate dues on partitiQn. It has been pointed out by the Judicial G
Committee in the case of Bejoy Singh Dudhuria (supra) that if a charge was
created by the assessee or his father, for the payment of the debts which
he had voluntarily incurred, the position would not have been the same.

Strong reliance was also placed on the decision of Commissioner of H
804 SUPREME COURT REPORTS [1996] SUPP. 4 S.C.R.

A Income Tax, Bombay City II v. Sitaldas Tirathdas, 41 ITR 367. There the
assessee sought to deduct the amounts paid by him as maintenance to his
wife and children under a decree of Court passed by consent in a suit. No
charge was created on any property of the assessee at all. It was pointed
out by Hidayatullah, J. (as his Lordship then was) that this was a case in
which the wife and children of the assessee who continued to be members
B of his family received a portion of his ir.come after he had received it as
his oWII. It was, therefore, one ~f application of a portion of the income to
discharge an obligation and not one in which, by an overriding charge, the
assessee became only a collector of another's income. The assessee was
not, therefore, entitled to deduction claimed by him. Far from supporting
c the contention of the assessee, this decision directly goes against his case.
The assessee was under a legal obligation to maintain his wife and children.
A suit was filed and a decree was passed by consent. Even then, it was held
that it was a case of application of income to discharge an obligation. In
the case before us, the assessee is under an obligation to pay the creditors.
D If he derives income from the properties which had been allotted to him
and pays the creditors, it would be an application of income received by
him which cannot in any way be treated as diversion of income by an
overriding title. The creditors do not have any title to this income and claim
and portion of the income received out of the property as their own.
Hidayatullah, J. pointed out that mere obligations to pay does not have the
E effect of diverting income at source. It was the nature of the obligation
which was the decisive fact. There was 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 was diverted, before it
reached the assessee, it was deductible; but where the income was required
F
to be applied to discharge an obligation after such income reached the
assessee, the same c0nsequences in law did not follow. It was the first kind
of payment which could truly be excused and not the second. The second
payment was merely an obligation to pay another a portion of one's own
income which had been received and was since applied.
G
•
The case before us is a case where the assessee is obliged to pay all
the debts which have been allotted to him. But as was pointed out by
Hidayatullah, J. the obligation to apply the income to discharge a debt will
not amount to diversion of the income at source even before the amounts
H became the assessee's income.
C.I.T. v. UDAYAN CHINUBHAI [SEN,J.] 805

The principle laid down in the case of Sitaldas Tirathdas (supra) was A
explained by this Court in Moti Lal Chhadami Lal Jain v. Commissioner of
Income-Tax, 190 ITR 1 where it was held :

"Where the obligation flows out of an antecedent and independent
title in the former (such as, for example, the rights of dependents
B
to maintenance or of coparceners on partition, or rights under a
statutory provision or an obligation imposed by a third party and
the like), it effectively slices away a part of the corpus of the right
of the latter to receive the entire income and so it would be case
of diversion. On the other hand, where the obligation is self-im-
posed or gratuitous (as here), it is only a case of an application of C
.
income. "

These observations were made while reiterating and explai'1ing the
principle laid down in the case of Sita/das Tirathdas (supra). The illustra-
tions given in that passage indicate that it certain situations diversion of D
income at source may take place by an overriding title depending on the
facts of the case. In Sitaldas's case, the assessee, an HUF, had granted a
• lease lo a company of a plot of land for which the company agreed to pay
rent of Rs. 21,000.00 out of which Rs. 10,000.00 was to be paid to a college
run by a trust. .-,t was held even though the amount was to be paid under
the lease agreement to the college, no diversion of income at source had E
taken place. The entire rental income of Rs. 21,000.00 had to be assessed
as income of the HUF.

The second question in that cas·e was in respect of a trust created by
... the HUF for charitable purpose. The Karta himself was to be the first
trustee. The High Court was of the view that a valid trust had not been F
created. On a review of the facts, this Court held that a valid trust had
come into existence. Consequently, the income of the trust could not be
included in the income of the family.

This decision does not come to the aid of the respondent's contention G
in any way. If a valid charitable trust is created, the income of the trust
cannot be treated as the income of the settior. The properties held by the
Karla as trustee cannot be treated as properties of the HUF. This is not a
case of diversion of income by overriding title, but transfer of the income-
yielding property itself to the trustee. The Karla became a trustee of the
charitable trust set up by the family. H
806 SUPREME COURT REPORTS [1996] SUPP. 4 S.C.R.

A The basic principle to be borne in mind in this type of cases is that
when a persori pays his debts or maintains his wife or children or anybody
else whom he is obliged to maintain, the expenditure incurred in such cases
will be application of the assessee's income and not diversion of the income
at source. If he does not pay what he should have paid and is compelled
by a Court order to pay, it will still not be a case of diversion of income at
B source. Even if a charge is created on the properties of the assessee for
enforcing payment, the position in law will not change. This was made clear
in the case of The Commissioners of Inla11d Revenue v. Paterson, (supra).
It must also be borne in mind that in Raja Bejoy Singh Dudhuria's Case
(supra), the charge on the properties inherited by the Raja was created to
secure payment of maintenance of his step-mother. Lord Macmillan
c quoted with approval the observation of Rankin, C.J. : ·•

"The learned Chief Justice in his judgment, which was concurred
in by his colleagues, Ghose, and Buckland, JJ., deals with the case
on the footing that, by the decree of the court, the appellant's
D step-mother had a charge not only on his zamindary property from
which his agricultural income was derived, but also on all his other
sources of income included in the assessment. He rejects the
suggestion that the appellant's liability to his step-mother was of •
the same kind as his liability to provide for his wives and daughter,
and states that the position is the same as if the appellant "had
E received his various properties, securities and businesses under a
bequest from his father upon the terms that these assets were
charged with an annuity for the maintenance of the widow." The
case was not one of "a charge created by the Raja for the payment
of debts which he has voluntarily incurred." Their Lordships agree
that this is the correct approach to the question."
F
This decision clearly indicates that payment made for maintenance
of wife and daughter out of the income of an assessee will not be diversion
of income at source nor will a charge created by an assessee for payment
of voluntarily incurred debts will have the effect of diverting the assessee's
G income at source.

For the reasons aforesaid, we are of the view that these appeals must
succeed. All the three questions are answered in the affirmative and in favour
of the revenue and against the assessee. There would be no order as to costs.

V.S.S Appeal allowed.