# WEST BENGAL m v. IMPERIAL CHEMICAL INDUSTRIES (INDIA) PRIVATE LTD

- **Citation:** [1969] 3 S.C.R. 804
- **Court:** Supreme Court of India
- **Decided:** 1969-02-20
- **Bench:** J. C. Shah, V. Ramaswami, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/west-bengal-m-v-imperial-chemical-industries-india-private-ltd-4644
- **Pages:** 9

## Headnote

Indian Income-tax Act, 1922, ss. 3, 10(2) (xv) and 66(1)-Assessee
appointed sole selling agent of principal-Compensation paid to former
selling agents through accounts of assessee--Compensation paid through
assessee's accounts whether deductible expenditure-Payment whether
expenditure IG'id out for purposes of business-Payment whether urtdtr
overriding title-Tribunal's finding of fact that compensation was not paid
by assessee under any agreement with principal cannot be interfered with
by High Court when question not referred to it.
The Imperial Chemical Industries (Export) Glasgow was a subsidiary
of Imperial Chemical ~dustries London. With effect from 1st April 1948
the former terminated the services of four selling agents in India and in
their 'pface ·appointed the. respondent company (another subsidiary of the
Im pert al Chemiclll Industries, London) as their sole selling agents. The
four former selling agents were to be paid compensation fo~ the termination of their services and this was done through the accounts of the respondent. In its income returns for the years 1949-50, 1950..51, 1951-52
and 1952-53 the respondent showed as its income the net amount of commission arrived at after deducting from the gross commission the compen·
sation paid to the former selling agents. The Income-tax Officer in his
order for the year 1951-52 held that the said deductions were not permissible. His order was confirmed by the Appellate Assistant Commissioner
and the Income-tax Appellate Tribunal. The Tribunal held that there was
no agreement between the Imperial Chemical Industries (Export) Glasgow
and the respondent company casting on the latter the liability to pay the
compensation to the former selling agents out of the commission earned
by it; the Tribunal further said that even if there was an agreement it was
not acted upon. In reference under s. 66( I) of the Indian Income-tax
Act, 1922 the lligh Court took the opposite view and held that the claim
made by the respondent company was allowable. The revenue appealed
to this Court. The questions that fell for consideration were : (i) whether
the High Court was justified in interferin2 with the Tribunal's finding of
fact on a question not referred to it;
(ii) whether the compensation
amounts paid by the resPond.ent to the former selling agent• were expenditure laid out wholly and exclusively for the purpose of business;
(iii)
whether the income in question was diverted before it reached the respondent by virtue of an overriding title.
HELD : (i) It is well-established that the High Court is not a Court
of Appeal in a reference under s. 66( I) of the Act and it is not open
to the High Court in such a reference to embark upon a reappraisal of
the evidence and to arrive at findings of fact contrary to those of the
Appellate' Tribunal. It is the duty of the High Court while hearing the
reference to confine itself to the facts as foand by the Appellate Tribunal
and to answer the question of law in the context of those facts.
It is
true that the finding of fact will be defective in law if there is no evidence
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C.I.T. V. IMPERIAL CHEMICAL LTD.
805
to support it or if the finding is perverse.
But in the hearing of a reference under s. 66(1) Of the Act it is not open to the assessee. to
challenge such a finding of fact unless he has applied for the reference
of the speoific question under s. 66( 1). [809 B-D]
In the present case the assessee bad in its applications under s. 66(1)
expressly raised the question about the validity of the finding of the
Appellate Tribunal as regards the agreement but the question
was
not
referred by the Appellate Tribunal to the High Court and the contention
of the assessee with regard to the question must be deemed to have been
.rejected. The assessee did not thereafter move the High Court under s.
66(2) of the Act requiring it to call for a statement of the case on that
specific question.
The High Court was therefore in error in e

## Text

COMMISSIONER OF INCOME·TAX, CALCUTTA, NOW
A
WEST BENGAL m
v.
IMPERIAL CHEMICAL INDUSTRIES (INDIA) PRIVATE
LTD.
February 20, 1969
(J. C. SHAH, V. RAMASWAMI AND A. N. GROVER; JJ.]
Indian Income-tax Act, 1922, ss. 3, 10(2) (xv) and 66(1)-Assessee
appointed sole selling agent of principal-Compensation paid to former
selling agents through accounts of assessee--Compensation paid through
assessee's accounts whether deductible expenditure-Payment whether
expenditure IG'id out for purposes of business-Payment whether urtdtr
overriding title-Tribunal's finding of fact that compensation was not paid
by assessee under any agreement with principal cannot be interfered with
by High Court when question not referred to it.
The Imperial Chemical Industries (Export) Glasgow was a subsidiary
of Imperial Chemical ~dustries London. With effect from 1st April 1948
the former terminated the services of four selling agents in India and in
their 'pface ·appointed the. respondent company (another subsidiary of the
Im pert al Chemiclll Industries, London) as their sole selling agents. The
four former selling agents were to be paid compensation fo~ the termination of their services and this was done through the accounts of the respondent. In its income returns for the years 1949-50, 1950..51, 1951-52
and 1952-53 the respondent showed as its income the net amount of commission arrived at after deducting from the gross commission the compen·
sation paid to the former selling agents. The Income-tax Officer in his
order for the year 1951-52 held that the said deductions were not permissible. His order was confirmed by the Appellate Assistant Commissioner
and the Income-tax Appellate Tribunal. The Tribunal held that there was
no agreement between the Imperial Chemical Industries (Export) Glasgow
and the respondent company casting on the latter the liability to pay the
compensation to the former selling agents out of the commission earned
by it; the Tribunal further said that even if there was an agreement it was
not acted upon. In reference under s. 66( I) of the Indian Income-tax
Act, 1922 the lligh Court took the opposite view and held that the claim
made by the respondent company was allowable. The revenue appealed
to this Court. The questions that fell for consideration were : (i) whether
the High Court was justified in interferin2 with the Tribunal's finding of
fact on a question not referred to it;
(ii) whether the compensation
amounts paid by the resPond.ent to the former selling agent• were expenditure laid out wholly and exclusively for the purpose of business;
(iii)
whether the income in question was diverted before it reached the respondent by virtue of an overriding title.
HELD : (i) It is well-established that the High Court is not a Court
of Appeal in a reference under s. 66( I) of the Act and it is not open
to the High Court in such a reference to embark upon a reappraisal of
the evidence and to arrive at findings of fact contrary to those of the
Appellate' Tribunal. It is the duty of the High Court while hearing the
reference to confine itself to the facts as foand by the Appellate Tribunal
and to answer the question of law in the context of those facts.
It is
true that the finding of fact will be defective in law if there is no evidence
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C.I.T. V. IMPERIAL CHEMICAL LTD.
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to support it or if the finding is perverse.
But in the hearing of a reference under s. 66(1) Of the Act it is not open to the assessee. to
challenge such a finding of fact unless he has applied for the reference
of the speoific question under s. 66( 1). [809 B-D]
In the present case the assessee bad in its applications under s. 66(1)
expressly raised the question about the validity of the finding of the
Appellate Tribunal as regards the agreement but the question
was
not
referred by the Appellate Tribunal to the High Court and the contention
of the assessee with regard to the question must be deemed to have been
.rejected. The assessee did not thereafter move the High Court under s.
66(2) of the Act requiring it to call for a statement of the case on that
specific question.
The High Court was therefore in error in embarking
upon a reappraisal of the evidence before the Appellate Tribunal and
setting aside the finding of the Appellate Tribunal that there was no
agreement as claimed by the assessee for the payment of compensation to
the former selling a~ents out of its own commission and that if there was
such an agreement it was not acted upon. [809 F-H]
India Cements Ltd. v. Commissioner of Income-tax,
60
I.T.R.
52,
Commissioner of Income-tax v. Sri Meenakshi Mills Ltd., 63 J.T.R. 609
and Commissioner of Income-tax, Bombay City 1 v. Greaves Cotton cl Co.
Ltd., 68 I.T.R. 200, applied.
(ii) In the absence of proof of the exact terms and condit.ions of the
agreement it was not possible to accept the argument that the amount
paid as compensation to the ex-agents was an 'expenditure laid out wholly
and exclusively for !he purpose of the business under s. 10(2) (xv) of
the Act. [810 DJ
(iii) The assessee's documents suggested that the payment of compensation was the exclusive liability of the I.C.I. (Exports)
Ltd. and the
assessee was not under a legal obligation to pay the amount of compensa~
tion to the outgoing agents.
It was not established that the payment of
compensation was by an ove'rriding title created either by the Act of the
parties or by the operation of law.
An obligation to apply the income in
a particular way before it is received by the assessee or before it has
accrued dr arisen to the assessee results in the diversion of income.
An
obligation to apply income accrued, arisen Or received amounts merely
to the apportionment of income and the income so applied is not deductible. The true test for the application of the rule of diversion of income
by an overriding title is whether the amount sought to be deducted in
truth never reached the assessee as his income. [810 H-811 HJ
Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, [1933]
1 I.T.R. 135, P .. C. Mullick v. Commissioner of Income-tax, [1938]
6
I.T.R. 206 and Commissioner of Income-tax, Bombay City 11 v. Sitaldas
Tirathdas, 41 I.T.R. 367, applied.
CML APPELLATE JURISDICTION: Civil Appeals Nos. 1549
to 1552 of 1968.
Appeals from the judgment airld order dated September 28,
1964 of the Calcutta High Court in Income-tax Reference No. 18
1961.
Sukumar Mitra, S. K. Aiyar, R. H. Dhebar, R. N. Sachthey
and B. D. Sharma, for the appellant (in all the appeals).
8 06
SUPREME COURT REPORTS
[1969] 3 S.C.R.
M. C. Chagla, T. A. Ramachandran and D. N. Gupta, for the
A
respondent (in all the appeals) .
The Judgment of the Court was delivered by
Rama.swami, J. These appeals are brought by certificate from
the judgment of the Calcutta High Court oated 28th September,
1964 in Income Tax Reference No. 18 of 1961.
The respondent (hereinafter called the assessee) is a private
limited company incorporated in India a.nd is a subsidiary of the
Imperial Chemical Industries, London, which holds the entire
share capital of the assessee.
The business of the assessee consists mainly of acting as selling agents in India for a large variety
of goods such as chemicals, dyes, explosives etc., manufactured or
purchased by its London principals and sold in· India. The Imperial Chemical Industries (Export) Glasgow [hereinafter referred
to as the LC.I. (Export) Ltd.] is another subsidiary of LC.I.
London which holds the entire share capital of LC.I. (Export)
Ltd.
The l.C.I. (Export) Ltd. had appointed as their selling
agents in India four companies, viz., ( 1) Gillanders Arbuthnot &
Co. Ltd., Calcutta, (2) Best & Co. Ltd., Madras, (3) Anglo-Thai
Co. Ltd. Bombay and ( 4) Shaw Wallace & Co. Ltd.
With effect
from 1st April, 1948, the l.C.I. (Export) Ltd. terminated the
services of the aforesaid selling agents and appointed the assessee
as its sole selling agent. The I.C.I. (Export) Ltd. had agreed to
pay to the former selling agents compensation at the rate of two
fifth, two fifth and one and two fifths of the commission earned
by the assessee for the three years from 1st April, 1948. The
compensation was paid to the four companies through the accounts
of the assessee.
For this purpose the modus operandi adopted
was as follows :-The compensatiQD. payable to the former agents
was spread over a period of three years and on the assumption
that the turnover was constant, the compensation payable to the
selling agents was on an average, an amount equal to the I 1/15th
of the commission earned by the assessee at the 1normal rates. In
order to a•rive at the amount of commission to be credited to the
assessee's profit and loss account each year the as•essee in the first
place credited the commission account and debited the I.CI.
(Export)
Ltd. account with the full amount of compensation
earned by it at normal rates on sales effected during the year.
Next, the assessee transferred from the commission account to a
special reserve account called the 'Exp1osives Ex-Airents Compensation Reserve Account', the proportion payable to the exagents as compensation, namely, II/15th (2/5+2/5+7l5=
11/5 x 1/3 = 11/15) (leaving 4/15th towards commissioo
account) so that funds misi;ht be accumulated for payment to the
four companies from time to time.
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The year of account of the assessee is from 1st October to
30th September every year.
As a result of the above method of
accounting, the following figures appeared in the assessee's books
of accounts :-
Gross
Transfer to
Net
Commission Reserve for Commission
compensati on
Rs.
Rs.
Rs.
1st April 1948 to 30th September I 948 ..
2,91,396
2,03,503
87,893
Year ending 30th September 1949 ••
7,67,294
5,41,526
2,25,768
Year ending 30th September 1950
7,52,204
5,29,284
2,22,920
Year ending 30th September J951
I0,20,922
4,00,052
6,20,870
TOTAL
28,31,816
16,74,365
11,57,451
For the assessment years
1949-50, 1950-51, 1951-52 and
1952-53 the assessee showed the net amounts of commission earned on the selling agencies by the I.C.I. (Export) Ltd. adding a
foot note that the· amounts were arrived at after deducting the
amount of compensation payable to the out-going agents. By his
order dated 28th January, 1957 for the assessment year 1951-52
the Income Tax Officer held that the deductions were not pennissible. In an appeal preferred by the assessee the Appellate Assis-
•ant Commissioner confirmed the assessment by his order dated
.<5th November, 1957. The assessee took the matter in further
appeal to the Appellate Tribunal which dismissed the appeal. The
Appellate Tribunal held that there was no justification for the ab-
~ence of a written agreement between the I.C.I. (Export) Ltd.
dl!d the assessee when the former selling agencies were terminated
an '. the assessee was appointed as the sole selling agent. It was
ob.;erved that the assessee was not collecting any commission on
behalf of the outgoing agents and it was not their legal obligation
to pay compensation to the out-going agents. If the assessee was
noi entitled to more than 3/5th of commission during the first
two years, it should have credited that amount whereas the
assessee had actually credited four-fifteenth on a notional basis
which was not in consonance with the arrangement. The conclusion reached by the App.ellate Tribunal was that "there was no
agreement between the assessee and the I.C.I. (Export) Ltd, and
if there was one it was not acted upon".
It was held by the
Appellate Tribunal' that the payment of compensation was not becacse of an overridin ~ title created either by the act of the parties
or by operation of Jaw.
At the instance of the assessee the following question of law
wa,s referred to the High Court under section 66 ( 1 ) of the IncomeTax Act, 1922 (hereinafter called the Act) :-
808
SUPREME COURT REPORTS
[1969] 3 S.C.R.
"Whether the inclusion by the Income Tax Officr.r
of
Rs. 2,03,503, Rs. 5,41,526, Rs. 5,29,284
and
Rs. 4,00,052 in the assessment for the years 1949-50,
1950-51, 1951-52 and 1952-53, for relevant accounting years ending the 30th Sept. 1948, 1949, 1950 and
1951 respectively in the computation of the total income
of the assessee is justified and correct ?"
The High Court answered the question in the negative in favour
of the assessee holding that the inclusion of the amount of compensation in the total income of the assessee for
the relevant
assessment years was not justified.
On behalf of the appellant it was contended that the High
Court had no legal justification for interfering with the finding
of the Appellate Tribunal that there was no proof of the agreement between the ·assessee and the I. C. I. "(Export) Ltd. with
regard to the quantum of commission to be paid to the assessee
for the period between 1st April, 1948 and 31st March, 1.951.
On this point reference was made by Mr. Chagla to (a) the Jetter
dated 11th March, 1947 from the I.C.I. (Export) Ltd. to M/s.
Gillanders Arbuthnot & Co., (b) the affidavits of Mr. W. A. Bell
and Mr. J. W. Donaldson and ( c) the Jetter dated 3rd January,
1958 of M/s. Lovelocke and Lewes,
Chartered Accountants,
Calcutta.
It was argued that these documents established that
there was an agreement between the I.C.I. (Export) Ltd. and the
assessee, that for the period !st April 1948 to 31st March, 1951
the assessee was entitled to receive as
its commission only
the amounts representing the difference between the normal rates
of commission and the compensation payable to the former agents
during that period. The Appellate Tribunal had considered all
these documents and reached the conclusion that there was no
agreement between the I.C.I. (Export) Ltd. and the assessee and
'if there was one it was not acted upon'. The Appellate Tribunal
remarked that the letter dated 11th March, 1947 from the I.CJ.
(Export) Ltd. set forth only the terms and conditions subject to
which the selling agencies of the out-going agents were terminated.
It was silent on the crucial question of commission to be paid
to the assessee during the three years from the date of its appo;ntment as sole selling agent.
The affidavits of Mr. Bell and Mr.
Donaldson were produced for the first time before the Appeltate
Assistant Commissioner.
The affidavits were made. tnany years
after the cru<;iaJ date of the appointment of the asse<•ee as the
. sole selling agent of the I.C.I. (Export) Ltd.
The affidavits did
not mention the amount of commission to be paid to the out-2oing
agents and the affidavits were also not consistent with the entries
in the books of accounts of the assessee. The letter of M/s Lovelocke and Lewes was produced at a very late stage during the
hearing· of the appeal before the Tribunal and even otherwise the
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merely explains the method of accounting adopted by the
••sessee and did not carry the matter any further. In the circumstances, the Appellate Tribunal held that there was no agreement
between the assesseo and the I.CJ. (Export) Ltd. and if there was
any such agreement it was not acted upon. It is manifest that
the finding of the Appellate Tribunal on this question is a finding
on question of fact and the High Court was not entitled to interfere with this finding. It is well established that the High Court
is not.a Court of Aweai in a reference under s. 66(1) of the Act
and·it is llot open to the High Court in such a reference to embark
upon a reappraisal of the evidence and to arrive at findings of fact
contrary to those of the Appellate Tribunal. It is the duty of the
High Court whilC hearing the reference to confine itself to the facts
as found by the Appellate Tribunal and to answer the question of
law in the context of those facts. It is true that the finding o( fact
will be defective ~ law if there is no evidence to support it or if
the finding is ·perverse. But in the hearing of a reference under
s. 66(1) of d,!e Act it is not open to the assessee to challenge such
a finding of fact unless he has applied for the reference of the
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specific question under s.66(1 ). In India Cements Ltd .. v.
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Commissioner of Income Tax(') it was held by this Court that in
a reference. the High Court must accept the findings of fact reached by the Appellate Tribunal and it is for the party who applied
for a reference to challenge those findings of fact, first, by an
applicatioo. under s. 66 ( 1 ) . If the party concerned has failed
to file an application under s. 66( 1) expressly raising the question
about the validity of the finding of fact, he is not entitled to urge
before the High Court that the finding is vitiated for any reason.
The same view has been expressed by this Court in Commissioner
of Income Tax v. Sri Meenakshi Mills Ltd.(') and Commissioner
of Income Tax, Bombay City Iv. Greaves Cotton & Co. Ltd. (8).
In the present case the assessee has in his application under
s. 66 ( 1) expressly raised the question about the validity of the
fin~g of the Appellate Tribunal as regards the agreement but the
questjon was not refer.red by the Appellate Tribunal to the High
<;:ourt and the CQiltentJon of the assessee with regard to the quesuon must be deemed to have been rejected. The assessee did not
!he~after move the High Court under s. 66(2) of the Act requirmg 1t to call for a sta~~t of th.I) case on that specific question.
We are. therefore of·opllllon that the High Court was in error in
embarkmg upon a reappraisal of the evidence before the Aopellate Tribunal and setting aside the finding of the Appellate Tribunal. that "there .was no agreement as alleged in the affidavits of
Mr, W. A. BeU and Mr. J. W. Donaldson" and "if there was such
an agreement it was not acted upon".
(I) 60 I.T .R. 52.
(2) 63 I.T.R. 609.
(3) 68 I.T.R. 200.
810
SUPREME COURT REPORTS
[1969] 3 S.C.R.
It was argued by Mr. Chagla that even if the agreement was
not established, the amount paid by the assessee as compe,nsation
to the ex-agents was an expenditure laid out wholly and exclusively
for the purpose of the business and as such is allowable under
s. 10 ( 2 )(xv) of the Act. The contrary view point was urged on
behalf of the appellant. It was Pointed out that the assessee was
acting as the agent of the l.C.I. (Export) Ltd. for the payment
of compensation to the ex-agents and the payment was made not
in the character of a trader but in the character of the agent of its
principal. The contention of the appollant was that the assessee
got the right to sell goods after 1st April 1948 and for getting that
right the assessee parted with a portion of its commission for the
first two years after 1st April 1948 and paid very much more than
the commission earned in the third year. This position was borne
out by the accounts of the respondent which show that the assessee
received the commission at full rates and out of it created a reserve
account of which these compensations were made to the ex-agents.
We have already referred to the finding of the Appellate Tribunal
that no agreement between the assessee and the I.C.I. (ExPort)
Ltd. has been proved. ,In the absence of proof of the exact tenns
and conditions of the agreement it is not possible to accept the
argument of the assessee that the amount paid as compensation
to the ex-agents was an "expenditure laid out wholly .aind exclusively for the purpose of the business" under s. 10(2)(xv) of the
Act.
It was finaUy contended on behalf of the resPondent that by
virtue of an overriding title the income was diverted before it
reached the assessee, and so, the amount of compensation paid to
the ex-agents did not form part of the income of the assessee. In
other words,_ the contention was that the compensation payable
to the ex-agents was diverted from the income of the assessee by
an overriding title arising under th_e agreement between the assessee
and the I.CJ. (Export) Ltd.
The argument was stressed that the
commission payable as compensation to the ex-agents did not form
part of the income of the assessee.
We are unable to accept this
argument as correct.. ·'We have ·already Pointed out that the finding of the Appellate Tribunal is that the precise terms of the agreem~nt between the assessee and the I.C.I, (ExPort) Ltd. have not
been established. In any event, even on the basis of the affidavits
of Mr. Bell and Mr. Donaldson the payment of compensation to
the ex-agents was apparently made bv the assessee for and on behalf of the I.C.I. (Export) Ltd.
The assessee's documents suggest that the payment of compensation was the exclusive liability
of the I:C.I. (Export) Ltd. and the assessee ~as not uEder a le¥al
obligation to pay the a~ount of compensation to the out-go~ng
·agents. It is not established that the payment of compensatt?n
was by an overriding title created either by the act of the parties
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or by the operation of law.
An obligatioino to apply the income in
a particular way before it is received by the assessee or Before it
has accrued or arisen to the assessee results in the diversion oi.
income. An obligation to apply income accrued, arisen or received
amounts merely !!> the apportionment of income and the income
so applied is not deductible. The true test for the applicati0\11 of
the rule of diversion of income by an overriding title is whether
the amount sought to be deducted in truth never reached the
assessee as his income.
The leading case on the subject is Raja
Bejoy Singh Dudhuria v. Commissioner of Income Tax(') where
the step mother of the Raya had brought a suit for maintenance
amid a compromise decree was passed in which the step mother 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 Raja sought to .deduct this amount from his assessable inco~:
1
which was disallowed by the High Court at Calcutta. On apJ?Cll'
to the Judicial Committee Lord Macmillan observed as follows :-
"But their Lordships do not agree with the learned
Chief Justice in his rejection oi. the view that the sums
paid by the appellant to his step mother were not
'income' of the appellant at all. This \II their Lordships'
opinion is the true view of the matter.
When the Act by section 3 subjects to charge 'all
income' of the 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 step-mother; 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 allo-
~tion of a sum out of his rev~nue before it becomes
income in his hands".
Another case of the Judicial Committee is reported in P. C. Mullick
v. Commisisoner of Income Tax('), where, a testator appointed
the appellants as executors and directed them to pay Rs. 1 O 000
out of th~ income on the occasion of his addya sradh. The 'executors paid Rs. 5,537 for such expenses, and sought to deduct the
amount from the assessable income. The Judicial Committee
confirmed the decision of the Calcutta High Court disallowing the
deduction and observed that the payments were made out of the
income of the estate coming to the hands of the executors and in
pursuan~. of an o~ligation imposed upon them by the testator.
The Jud1c1al Committee observed that it was not a case in which
(I) [1933] 1 l.T.R. 135.
(2)'[1938] 6 I.T.R. 206.
812
SUPREME COURT REPORTS
[1969] 3 S.C.R.
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 case('). In Commissioner of
.Jncome Tax Bombay City II v. Sitaldas Tirathdas('), Hidayatullah, J., speaking for the Court observed as follows :-
"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 reaches 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 cqnBequence,
in law, does not follow. It is the first kind of payment
which can truly be excused and not the second.
The
second paymqn.t is merely an obligation to pay another
a portion of one's in~me, 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 view of the principle laid down in these authorities we are of
opinion that the payment of compensation , by the assessee to the
ex-agents was not by an overriding title created either by act of
the parties or by operation of law.
We accordingly reject the
argument of Mr. Chagla onl this aspect of the case.
For the reasons expressed we hold that the judgment of the
Calcutta HiglrCourt dated 28th September, 1964 should be set
aside and the question referred by the App:l!ate Tribunal should
be answered in the affirmative and agamst the assessee.
The
appeals are accordingly allowed with costs. One hearing fee.
G.C.
Appeals allowed.
(1) (1933) I.T.R. 135.
(2) 41 I.T.R. 367.
A
B
c
D
E
F