K. A. RAMACHAR AND ANOTHER vs. COMMLSSIONER OF INCOME TAX, MADRAS

CIVIL APPEAL No. 142/1960Supreme Court[1961] 3 S.C.R. 38010 January 1961Bench: 3 JudgesAuthor: J.L. KAPUR, M. HIDAYATULLAH, J.C. SHAH6 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that the High Court's answer was correct and dismissed the appeals. The Court reasoned that the deeds of settlement indicated that the profits were first to accrue to the assessee and were then applied for payments to the beneficiaries. Under the law of partnership, only the partner is entitled to profits; a stranger, even an assignee, cannot have a direct claim. The deeds allowed a payment to the wife and daughters to constitute a valid discharge for the firm, but legally, it was a portion of the assessee's profits. The Court referred to its recent decisions in Provat Kumar Mitter, Tulsidas Kilachand, and Commissioner of Income-tax, Bombay v. Sitaldas Tirathdas. It concluded that the rule in Bijoy Singh Dudhuria's case was not applicable because the profits were not diverted by an overriding title before they accrued to the assessee, as established in Sitaldas Tirathdas's case. The amounts were legally and factually portions of Rangachari's income after accrual.

What were the facts?

The assessee, A.R. Rangachari, a partner in a firm, executed three deeds of settlement on September 22, 1947, assigning a one-fourth share of his profits from the firm to his wife, married adult daughter, and minor daughter for 8 years. These deeds granted the beneficiaries the right to receive the profits absolutely and exclusively from the firm. For the assessment year 1947-48, profits due to Rangachari were credited to his account, and then specific amounts were transferred to the beneficiaries' accounts. The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal rejected the assessee's claims. The matter was referred to the High Court, which also ruled against the assessee. The appeals were filed with a certificate from the High Court.

What were the issues?

1. Whether the inclusion in the assessee's total income of the profits settled by him on his wife and two daughters is justified in law, specifically concerning the applicability of the third proviso to Section 16(1)(c) of the Income-tax Act, 1922. Assessee's contentions: - The amounts payable to his wife and daughters never became his income, being diverted by an overriding title. - The case is governed by the rule laid down by the Privy Council in Bijoy Singh Dudhuria's case. - The profits were excluded from his total income by reason of the third proviso to Section 16(1)(c). Revenue's contentions: - The High Court held that the third proviso was not attracted and that the income had accrued to the assessee in the first instance and was then applied for payments under the deeds. The judgment does not explicitly record separate arguments from the revenue, but it upholds the High Court's reasoning.

Which sections of the Income-tax Act were involved?

Section 16(1)(c), Section 16(3)

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Cited by 8 judgments on BharatTax

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380 SUPREME COURT REPOl{TS [1961] I96I structure. Under these circumstances it would be Th F . -t-N 1. 1 erroneous not to treat the amount of ''Undivided e trs a sona 0 fi , f . f d City Bank ~ ro ts as a part o the cap1tal un . v.

In our opinion therefore the amount designated as 1"he Commissioner "Undivided Profits " is a part of the reserves and has 0~ In~ome~~~, to be taken into account when computing the capital om ay uy and reserves within R. 2(1) of Schedule II of the Act.

Kapur J.

The question which was referred by the Tribunal should have been decided in the affirmative and in favour of the appellant and the amount should have been added to the capital as allowed by R. 2( 1) for the Chargeable Accounting Periods. In the result the appeal is allowed. The appellant will have its costs in this Court and in the High Court. january IO.

Appeal allowed. K. A. RA~IACHAR AND ANOTHER v. COM~llSSIONER OF INCOME TAX, 1\:!ADRAS. (J. L. 1\.APUH., M. HTDAYATULLAH and J. C. SHAH, JJ.) I ncome-tax~Assessee assigning portion of his profits of part- nership firm to his wife m•d daughters--Such profits, if can be includ- ed in the assessee's total income f

The order continues below.

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