Commissioner of Income Tax, Madras vs S. Shanmuga Moopanar

Srinivasan, J.—One Subbiah Moopanar left a will dated 25th February, 1954. Under this will he made various bequests and left the rest of

his estate to Shanmuga Moopanar, the minor son of his brother, Sankara Moopanar. One of the clauses in the will stated :

In the calendar year following a couple of years after my death, the said minor, Shanmuga Moopanar, shall create a charity trust under the name

and style; T. S. Subbia Moopanar Memorial Charity Trust. He shall save by investing in the said nidhi on the 1st of June in every calendar year at

the rate of rupees ten thousand per year, from and out of the net profit, excluding expenses, got from my estate which shall be succeeded by him

and remain in his enjoyment. He shall pay to the said nidhi from the date of commencement of the nidhi for a period of ten years at the rate of

rupees ten thousand per year in cash and should see that a sum of rupees one lack be finally invested as capital for my charity trust. While saving is

made i the said manner for a period of ten years, in the meanwhile if necessary only the income that may be realised on the amount accrued as

principal for the aforesaid nidhi, shall be distributed in may name for sacred functions. The charitable things that are liked by be are as follows. . . . .

Thereafter, the clause set out the purpose for which the income arising from the accumulated capital of the trust should be utilised. It further set out

the manner in which trustees should be appointed, the succession to trusteeship and the rights and duties of the trustees.

The assessee is the minor, Shanmuga Moopanar, and in the accounts of the previous year relevant to the assessment year 1958-59 a sum of Rs.

10,000 was taken out of the profits of the business and credited to the trust. The assessee claimed that this amount was deductible from his taxable

income from the business. The Income Tax Officer rejected this contention holding that it was only an application of the income after it had accrued

to the assessee and that it was not therefore an admissible items of deduction under the provisions of the Act. An appeal was taken to the

Appellate Assistant Commissioner. The Appellate Assistant Commissioner, however, interpreted the terms of the will differently and took the view

that the sum of Rs. 10,000 was diverted by an overriding title and that therefore in computing the true income of the assessee that amount should

be excluded. The appeal was accordingly allowed. Against this order the department carried an appeal the true income of the assesses that amount

should be excluded the appeal was accordingly allowed. Against this order the department carried an appeal to the Appellate Tribunal, the

principle ground being that since the annual payment was enjoyed to be made out of the business, that itself should indicate that the payment was to

be made out of the accrued profits, that it to say, it was an expenditure after the income had accrued to the assessee the Tribunal, however,

rejected this contention. It observed :

The simple point for consideration is whether there is a diversion of income by overriding title or not. There can be doubt that the will charged a

payment of Rs. 10,000 before the assessee could claim any interest in the income of the year of account. As pointed out in Bejoy Singh Dudhuria

1 by the Privy Council it is not a case of the application by the assessee of part of his income in a particular way, but it is an allocation of a sum out

of the income before it could get into his hands as income. . . .

In this view therefore the Tribunal accepted the decision of the Appellate Assistant Commissioner as correct.

On the application of the Commissioner of Income Tax u/s 66(I) of the Indian Income Tax Act the following question was referred for the

determination of this court by the Tribunal :

Whether Rs. 10,000 is deductible from the profits of the business for the assessment year 1958-59 ?

Whether or not the view of the Tribunal is correct, it seems to us that the Tribunal has not examined the terms of the will in order to reach a proper

understanding of the provisions thereof the portion of the Tribunals judgment which we have extracted above merely purports to say that the facts

of the case came within the principle of the decision of the Privy Council in Bejoy Singh Dudhuria v. Commissioner of Income Tax Merely to

observe that by reason of an overriding title the income has been diverted before it reached the assessee is really begging the question. That was

the very point which the Tribunal had to decide and we regret to see that far from examining the question in any detail, the Tribunal has virtually

assumed what it had to decide.

The clause of the will that has been extracted earlier is the translation as it appears in the statement of the case. We are not satisfied with its

accuracy or its completeness. We accordingly called for the original Tamil document and we shall set out what appears to us to be a proper

translation of the relevant provisions of the will. After setting out that this is the last will and testament executed by him, the testator made the

following dispositions of his properties.

I bequeath to minor, Shanmuga Moopanar, the salt pans and the rights connected there with covered by licence No. M.E. 59. After my death my

brother, who is the natural guardian of the minor, shall obtain a transfer of the licence in the name of the minor and shall arrange for the carrying on

of the business of salt manufacture.

I have also a business under the vilasam T. S. Subbiah Moopanar. Besides this, I have a business T. Shanmuga Moopanar Sons run in

partnership with my brother, Sankara Moopanar. I bequeath to the minor, Shanmuga Moopanar, the entirely of this business. After my death the

names of these businesses shall be changed to the vilasam of Shanmuga Moopanar. My interest in the partnership shall also be taken by minor,

Shanmuga Moopanar. He shall take my place as partner in the firm and shall continue to do the business while carrying on the business in that

manner, the minor shall pay over to the various persons such rights, properties, cash and rights of enjoyment as conferred below and take the

balance only as the capital of the business. In addition, he shall honour the conditions and distributions which I have indicated below.

3(a). The Income Tax, super-tax, surcharge, estate duty and other claims of the state shall be paid by minor, Shanmuga Moopanar, from the estate

funds.

(b) In the year following after the expiry of two years form the year of my death, Shanmuga Moopanar shall established a nidhi known as ""T. S.

Subbiah Moopanar Memorial Dharmakshema Nidhi."" On the first June of every English year he shall pay a sum of Rs. 10,000 to the nidhi from the

income of my estate which has devolved upon the minor and which is being enjoyed by him. He shall in this manner save for the nidhi a sum of Rs.

1 lack by the payment of Rs. 10,000 per year in cash. This sum shall be treated as the capital of the nidhi. During this period of 10 years the

income from such capital as has accrued to the nidhi shall be utilised in may name for certain purpose. Such charitable purposes which are to my

liking are these. . . . . . . .

The further clauses of the document may be briefly indicated. In clause 4, the wife of the testator, Subbalakshmi Ammal, was given a right of

residence in a house property. She was also given a right of enjoyment throughout her lifetime of the garage in Door No. 94 and the garden and

site. The testator further stated that he had intended to purchase 85 cents of nanja land for her, and he directed the minor to purchase a certain

Subbalakshmi Ammal during her lifetime. He made certain other bequests in her favour in clause 6. He directed the payment of cash of Rs. 1,000

to Pitchia and the purchase and the making over to him OF LAND not exceeding the value of Rs. 4,000. He also directed the purchase of a house

worth about 1,500 in that persons name. By clause 7 he directed the payment of Rs. 1,000 to one Shanmughasundaram and the purchase of land

of the value of Rs. 4,000 and a house worth about Rs. 1,000 on his account. A bequest of Rs. 200 was made to Kandiah Kambar, a menial in the

service of the testator. The further clauses proceeded to make his brother, Sankara Moopanar, the testamentary guardian of the minor, Shanmuga

Moopanar, and conferred a further right upon him to nominate any suitable person as guardian of the minor should occasion arise for such an

appointment. In is upon a consideration of the above recitals that we have to decide whether the direction regarding the creation of a trust and the

annual payment of Rs. 10,000 to the trust for a period of 10 years constitutes an overriding title which has the effect of diverting the income before

it accrued to the legatee, Shanmuga Moopanar.

Turning to the particular recital which directs the payment of this sum of Rs. 10,000 the exact expression used by The Testator is that ""The

minor shall from out of the income derived from the estate which has accrued to him and is being enjoyed by him, pay the sum of Rs. 10,000. In

the earlier part the will directs that Shanmuga Moopanar shall pay the cash, properties, etc., to the person indicated in the document and take only

the balance. In so far as creation or performance of the trust is concerned, he expresses himself in this manner ""he shall honour the conditions and

dispositions."" As first blush it certainly does appear as if both for the reason that the creation of the trust is postponed to a date two years

subsequent to the demise of the testator and the fact that the minor would have by that time entered upon the possession and enjoyment of the

estate, the direction regarding the creation of the trust is not a condition precedent to the right of the minor to take over the estate. The bequest

does not appear to have been made subject to the condition. The testator appears to recognise clearly that the minor would have obtained

possession of the estate and enjoyment thereof, and when in those circumstances he expressed a desire for the creation of trust of this description,

it seems difficult to consider the recitals as a condition, on compliance with which alone the legatee in entitled to take the estate.

The question whether there was a diversion by an overriding title came to be considered by the Supreme Court in Commissioner of Income Tax

v. Sitaldas Tirathdas. In that case the assessee sought to deduct certain sums from his income on the ground that under a decree he was required

to pay these sums as maintenance to his wife and children. No charge on the property of the assessee had been created by the decree. The

assessee relied upon the Privy Council decision in Bejoy Singh Dudhuria v. Commissioner of Income Tax. Their Lordships of the Supreme court

pointed out that in that Privy Council decision there was a charge for maintenance created by the assessee and the view taken by the Privy Council

was that the income must be deemed to have never reached the assessee having been diverted to the maintenance holders. Another case of the

Privy Council referred to by their Lordships is P. C. Mullick v. Commissioner of Income Tax. That was a case where a testator appointed certain

executors and directed them to pay Rs. 10,000 out of the income on the occasion of his sradh. When this amount was sought to be deducted from

the assessable income, the Judicial Committee confirmed the disallowance observing that the payments were made out of the income of the estate

coming into the hands of executors and in pursuance of an obligation imposed upon them by the testator. After examining the several cases which

applied principle of the Privy Council decision either correctly or incorrectly, their Lordships of the Supreme Court proceeded to say :

In our opinion, the true test is whether the amount sought to be deducted in truth, never reached the assessee 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 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 reaches the assessee, it is deductible; but where the income is required to be applied to

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 ones 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.....

It is on an application of these tests propounded by the Supreme Court that we have to reach a conclusion one way or the other.

Mr. Srinivasan, learned counsel for the assessee, has referred to Commissioner of Income Tax v. Manilal Dhanji In that case the assessees

father had created a trust in respect of some shares and a sum of Rs. 30,000 for the benefit of his four sons including the assessee. The assessee

himself and two others were the trustees. The trustees were to hold the trust funds upon trust, to pay the net interest and income thereof to the

assessee for the maintenance of himself and his wife and for the maintenance, education and benefit of all his children till his death. Certain incomes

accrued from the said trust funds and the question whether this income was liable to be included in the total income of the assessee arose. Their

lordships construed the terms of the settlement deed and held that the expression extracted above was not indicative of a mere desire or hope but

imposed a binding and obligatory trust. The assessee was not the sole beneficiary under the trust deed. He held the income on trust for himself, his

wife and children. That being so, the department was not entitled to include the income from the trust in the total income of the assessee as if he

was the sole beneficiary under the trust deed. We are not able to see what assistance this decisions affords. That was a clear case of the creation

of a trust and the assessee in that case was on of the trustees of a valid trust. The beneficiaries under the trust included persons besides the

assessee himself and that being so it clearly followed that income could not be regarded as the exclusive income of the assessee or for any reason

liable to be included in his total income. The learned counsel for the assessee has also referred to Seth Motilal Manekchand v. Commissioner of

Income Tax, where the rule in Bejoy Singh Dudhuria v. Commissioner of Income Tax was followed. Their Lordships of the Supreme court

referred to this decision in Commissioner of Income Tax v. Sitaldas Tirathdas, though they did not express any opinion about the correctness of

that decision. That was however a case where a managing agency was divided between two members of the Hindu joint family, the father and the

son each taking a moiety. It was stipulated that each of them should pay the mother a certain portion of the share in the managing agency

remuneration. The Bombay High Court took the view that under the deed of partition the father and son really intended that they were to receive

only a portion of the managing agency commission and that that part which has to be given to the mother was diverted before it became the income

of the father or the son. This decision also does not render any special help for consideration of this case except as laying down the proposition

that where a part of the income is diverted by an overriding title it cannot be taken as the income of the assessee.

In a recent decision decided by us in T.C. No. 137 of 1960 the question of construction of a will as in the present case arose. There the testator

who had no male issues gave to his wife the entirely of the income from the properties in these terms :

She shall however be entitled to utilise the income at her absolute discretion subject to the provisions for maintenance and education of my

daughters.

Thereafter followed the provision for maintenance and education of the daughters. There we took the view that was clear case where the

condition operated so as to create in effect a trust in favour of the daughters and accordingly no part of the trust fund became part of the income of

the assessee. We observed thus :

Whether the words of a will making a bequest to A upon condition that some benefit may be confirmed on B, constitute a mere charge in favour of

B or effectuate a trust is entirely a question of interpretation. One simple rule is to ascertain from the language of the instrument whether A, the

devisee or legatee, obtains a full beneficial interest in the legacy. If such be the case the condition of benefit to B can be given effect to by

recognising a charge in favour of B. If, however, the interpretation of the will leads to the conclusion that the testator intended that A should hold

the property for the benefit of himself and B, a trust and not a charge is necessarily created.

It seems to us that in contradistinction to the subsequent parts of the will where specific properties are given on specific directions for the

payment of certain monies to legatees were made, in so far as the creation of the memorial trust is concerned, the language employed by the

testator is wholly different. What he clearly states there is that from out of the income from the properties which have passed into the possession of

the devise and are under his enjoyment an annual sum of Rs. 10,000 should be found and allocated for the creation of the trust. Taken together

with devisee, the conclusion seems to us to be incapable that it was only a pious wish or a hope that the testator was expressing and that the

language does not lend itself to a construction similar to that adopted in the decisions of the Supreme court where an obligation diverting the

income before it reached the hands of the devise was found to exist. After a careful consideration of the terms of the will in the light of the decisions

above, we hold that this is clearly a case of an application of the income and not one of diversion by overriding title. The question is accordingly

answered in the negative and against the assessee. The assessee will pay the costs of the department. Counsel fee Rs. 250.

Questions answered in the negative.