High Court Of Gujarat
Jyotsnaben Narottamdas vs. CIT
Section 60
Asst. year 1968-69, 1969-70
A.M.Ahmadi & R.C.Mankad, JJ.
IT Ref No.303 of 1977
17th June, 1982
Counsel Appeared
K. C. Patel, for the Petitioner : B. R. Shah with G. N. Shah, for the Revenue
AHMADI, J.:
This reference relates to the asst. yrs. 1967-68 to 1969-70, the corresponding Samvat Years being 2022 to 2024. The facts leading to this reference, briefly stated, are as under.
2. Shri Narottamdas Chandulal, since deceased, the husband of the assessee was a partner in the firm of M/s Narottamdas Chandulal and Bros. formed under the partnership deed dated 5th January, 1968. Clause 11 of the said partnership deed provided that on the death of the said Narottamdas, his son and failing him his wife and failing her his daughters will succeed him to the extent of his share in the partnership-firm. Narottamdas expired on 30th September, 1963, leaving behind him his wife (the assessee) and four daughters. On the basis of the aforesaid cl. 11, the assessee was admitted as a partner in place of the said Narottamdas and a fresh partnership deed was executed on 23rd December, 1963, which was made effective from 1st October, 1963. Under the said partnership deed, the assessee stepped into the shoes of Narottamdas and became entitled to 31 per cent share in the profits and losses of the firm.
3. Narottamdas had executed a will on 15th January, 1963, cl. 6 whereof, when translated into English, reads as under : “I have got twenty-one (or thirty-one) naye paise share in the partnership firm of M/s Narottamdas Chandulal & Bros., Managing Agents of the Ahmedabad New Cotton Mills. This share may be held by my wife after my death on the condition that out of the annual income arising out of the said share, fifty per cent income should be distributed equally between my four daughters Nandini, Panna, Pratixa and Mamta as responsibility of Jyotsna of income arising out of the said partnership and my wife Jyotsna may take remaining fifty per cent of the income.”
4. It may also be mentioned that at the date of execution of this will, deceased Narottamdas did not have a son. He died without a male issue on 30th September, 1963. That is why under cl. 11 of the partnership deed dated 5th January, 1958, his wife, Jyotsna, the assessee before us, stepped into his shoes and was admitted as a partner to the extent of the share of Narottamdas as is obvious from the fresh partnership deed of 23rd December, 1963.
5. On the basis of cl. 6 of the will, the assessee sought and obtained assessment of one-half of the 31 per cent share as her income up to the asst. yr. 1966-67. The other half share in the profits of the partnership which she obtained, went to the four daughters under cl. 6 of the will.
6. On 7th December, 1966, the assessee executed a declaration whereby she donated the remaining half of 31 per cent share which was her income from the profits of the partnership to a trust known as ” Nandini, Panna, Pratixa and Mamta Trust” created under the document of 5 th October, 1966. Therefore, in the asst. yr. 1967-68, the entire 31 per cent share in the profits of the partnership was sought to be excluded on the ground that 50 per cent of that share went to the four daughters under cl. 6 of the will and the remaining 50 per cent went to the aforesaid trust by virtue of the donation or gift recorded under the declaration of 7th December, 1966. In the subsequent two asst. yrs. 1968-69 and 1969-70, the same stand was taken by the assessee. The ITO negatived her contention on the ground that she was admitted to the partnership by virtue of cl. 11 of the partnership deed dated 5th January, 1958, and not by virtue of cl. 6 of the will executed by Narottamdas. The ITO, therefore, came to the conclusion that the assessee was a partner in the firm in her own right and was entitled to 31 per cent share in the profits of the partnership-firm and, therefore, the payment of half share to the four daughters by virtue of cl. 6 of the will did not amount to a diversion of income by any overriding title and was merely an application of income. As regards the assessee’s claim that she had assigned the remaining half share to the trust, the ITO opined that the assignment was inconsistent with cl. 13 of the partnership deed dated 23rd December, 1963, which governed the relations between the partners, and, therefore, the assignment had no existence in law and payment to the trust by the assessee was also a mode of application of her income. In appeal, the AAC took the view that neither the will of the deceased, Narottamdas, nor the declaration made by the assessee could override cl. 11 of the partnership deed dated 5th January, 1968, or cl. 13 of the partnership deed dated 23rd December, 1963, which governed the relationship between the assessee on the one hand and her other partners on the other, and, therefore, in his view the entire income to the extent of 31 per cent share in the profits of the firm was assessable in the hands of the assessee. The Tribunal (Ahmedabad Bench) which heard the three appeals filed by the assessee repelled the contention advanced on behalf of the assessee that since the Revenue had, in the previous years, accepted the assessee’s contention that half of the 31 per cent share belonged to the four daughters by virtue of cl. 6 of the will, the Revenue was debarred on the principle of res judicata to take a somersault and now contend that even the said 50 per cent share out of the 31 per cent share in the partnership-firm profits was liable to be assessed as income in the hands of the assessee. The Tribunal also came to the conclusion that the will created a moral obligation so far as the assessee is concerned and that moral obligation was converted into a legal obligation by the execution of the declaration of 7th December, 1966, and, therefore, the assessee was entitled to a deduction of 50 per cent out of the 31 per cent share in the profits of the partnership-firm and there was no question of excluding the entire share income from her personal assessment. The assessee’s appeals were, therefore, partly allowed and a deduction to the extent of 50 per cent of the 31 per cent share received by the assessee from the partnership was permitted whereas for the other 50 per cent her appeals failed. The assessee, therefore, claimed a reference and the following questions formulated by the Tribunal have been referred to this Court for its opinion :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the Revenue was legally entitled to take a different view in connection with the assessee’s 1/2 share of 31 per cent in the firm of M/s Narottamdas Chandulal & Bros. even though in earlier years the assessee’s stand was accepted in this regard ?
(2) If the answer to the above question No. 1 is in the affirmative, whether the Tribunal was justified in holding that the will in question had not created any overriding title in relation to the said 1/2 share of 31 per cent in the said firm and that the same was only an application of income ?
(3) Whether the Tribunal exceeded its jurisdiction in holding that the assignment of 50 per cent of her share to Nandini, Panna, Pratixa and Mamta Trust was in furtherance of the obligation created by the will (annex. C) as that was neither party’s case before the Tribunal. If so, to what effect ?
(4) Whether the finding of the Tribunal that the moral obligation arising under the will (annex. C) was converted by the assessee into a legal obligation by the declaration (annex. D) is vitiated for want of evidence ?
(5) Whether the Tribunal was justified in holding that the declaration dated December 7, 1966 (annex. D), was made in furtherance of the obligation created by the will (annex. C) and that the obligation arising under the will and the creation of the trust were not two different aspects?
(6) Whether the Tribunal was right in holding that the assignment of 50 per cent share in the profit of the assessee-firm of M/s Narottamdas Chandulal & Bros. was in pursuance of the obligation arising under the will (annex. C) and that the assessee was, therefore, entitled to deduction of 50 per cent in respect of 31 Ps. share in M/s Narottamdas Chandulal & Bros. ?”
For the reasons which we will presently state, we do not think it necessary to answer questions Nos. 1 and 3, on the assumption that question No. 1 is answered against the assessee ; so far as question No. 2 is concerned, we answer the same in the negative, that is, against the Revenue. We answer question No. 4 in the affirmative and questions Nos. 5 and 6 in the negative, that is, against the Revenue. We may state that we were told at the bar that question No. 6 was formulated at the instance of the Revenue. We will now proceed to give our reasons in support of the aforesaid findings.
There is no dispute that the deceased, Narottamdas, had 31 per cent share in the profits and losses of the partnership under the deed of partnership dated 5th January, 1958. On his death, since he died without a male issue, the assessee stepped into his shoes by virtue of cl. 11 of the said partnership deed. It, therefore, became necessary to admit the assessee as a partner to the extent of the share of Narottamdas in the fresh partnership deed executed on 23rd December, 1963, which was no doubt given effect to from 1st October, 1963, that is, from the day next to the date of demise of Narottamdas. Narottamdas was entitled in law to deal with the 31 per cent share in the partnership in any manner he liked because he had a disposable title over the said share. By virtue of cl. 6 of the will dated 15th January, 1963, reproduced earlier, he disposed of the 31 per cent share in the said partnership profits by bequeathing 50 per cent income therefrom to his four daughters, Nandini, Panna, Pratixa and Mamta. His bequest in favour of the four daughters created a legal right in favour of the daughters which could be enforced in a Court of law should such an eventuality arise. The testator Cast a responsibility on the shoulders of the assessee, Jyotsna to distribute 50 per cent of the income from his 31 per cent share to the aforesaid four daughters and to retain the remaining 50 per cent as her personal income. It became necessary to cast this responsibility on Jyotsna because the testator was aware that under cl. 11 of the partnership deed of 5th January, 1958, Jyotsna would step into his shoes since he did not have a male issue. It would, therefore, not be correct to say that cl. 6 of the will merely created a moral obligation on the assessee, Jyotsna, but in fact it created a legal right in favour of the four daughters to claim equal share out of 50 per cent of the 31 per cent share in the partnership profits and a corresponding obligation on jyotsna to disburse that amount as per the wish and desire of the testator. The testator has made it clear that so far as the assessee, jyotsna, is concerned, she will be entitled to retain only 50 per cent of the 31 per cent share in the partnership profits as her own interest. Viewed from this angle, it becomes clear that on the demise of Narottamdas only 50 per cent of the 31 per cent share out of the partnership profits accrued to jyotsna whereas the remaining 50 per cent fell to the share of the four daughters which jyotsna was under an obligation to disburse as per the desire of the testator. It would, therefore, not be correct to say that even the 50 per cent of the share of Narottamdas bequeathed to the four daughters was an income in the hands of jyotsna which she diverted after it had accrued to her. Therefore, the view taken that the payment of 50 per cent of the share to the four daughters was merely an application of the income which had accrued to the assessee under the partnership deed of 23rd December, 1963, is not correct. We, therefore, find it difficult to agree with the view of the Tribunal that cl. 6 of the will created a moral obligation on the assessee, jyotsna. In our opinion, the obligation created by that clause of the will requiring Jyotsna to disburse 50 per cent of the 31 per cent share of the partnership profits to the four daughters was a legal obligation which, could be enforced by the daughters in a Court of law should the assessee fail in her duty to disburse the income from the partnership to the extent of 50 per cent to the four daughters in equal shares.
9. As stated earlier, so far as the asst. yrs. 1964-65 to 1966-67 are concerned, the asseessee’s plea of exclusion of 50 per cent of the 31 per cent in the partnership income on the basis of cl. 6 of the will was allowed by the Revenue. In the subsequent asst. yr. 1967-68 the assessee donated or gifted the remaining 50 per cent of the 31 per cent share which accrued to her under cl. 6 of the will to Nandini, Panna, Pratixa and Mamta Trust created under the deed of 5th October, 1966, by Shri Bipin Chandulal Zaveri. This donation or gift came to be recorded in a declaration executed on 7th December, 1966, the relevant part whereof reads as under: “That I am a partner holding 31 nP. share in the firm of M/s Narottam Chandulal and Brothers, managing agents of the Ahmedabad New Cotton Mills Company Ltd., Ahmedabad.
10. That I, being desirous of assigning the benefits of 1/2 share of the said 31 nP. share in the said firm of M/s Narottam Chandulal and Brothers and thereby donated the same for the benefits of the beneficiaries named in the trust of ‘Nandini, Panna, Pratiksha and Mamta Trust’ executed on the 5 October, 1966, and the trustees of the said trust have accepted the said donation in view of the power vested in them by virtue of cl. 17 of the said trust.
11. I further declare that I hold the 1/2 share of the said 31 nP. share in the said firm of M/s Narottam Chandulal and Brothers in the capacity of trustee of the said trust and not in the capacity of the owner of the same.”
12. It is clear from a bare comparison of this declaration and particularly the use of the, word “donation” and the expression “the trustees of the said trust have accepted the said donation” that the declaration records an event which had already taken place before its execution on 7th December, 1966. In CIT vs. Nandiniben Narottamdas (IT. Ref. No. 26 of 1976, decided on 11/149-1981) (reported in (1983) 140 ITR 16), a declaration verbatim the same was considered and it was held that it was a memorandum in, respect of a lift of Nandini’s respective shares in the two firms in question in favour of the beneficiaries of the Panna, Pratixa and Mamta Trust. It was also clarified that what was gifted by the assessee was the share in the profits and losses of the said two firms. It was there found that by the said donation or gift, evidenced by the declaration, the assessee divested herself of the income-producing apparatus or asset and by the overriding title created in favour of the beneficiaries of the trust, the share income of the assessee stood diverted even before it reached her. As in this case even in that case, the assessee continued to collect the share income but it was held that she did so not as a part of her own income but for and on behalf of the beneficiaries of the said trust and, therefore, such income could not be taxed in the bands of the assessee. In view of this decision which is binding on us, there can be no manner of doubt that the assessee in the present case also gifted away her 50 per cent out of 31 per cent share in the partnership firm to the beneficiaries of the trust and, therefore, that income no more remained the income of the assessee and was, therefore, not liable to be brought to tax as her income. The Tribunal has, however, taken the view that what is transferred or gifted by the donation referred to in the declaration of 7th December, 1966, is only that 50 per cent of the 31 per cent share in the profits of the partnership which the deceased, Narottamdas, bequeathed to his four daughters in equal shares under cl. 6 of the will dated 15th January, 1963.
In other words, according to the Tribunal, the identity of the 50 per cent of the 31 per cent share in the profits of the partnership given by way of gift as recited in the declaration dated 7th December, 1966, was the same share which Narottamdas gave to his four daughters under cl. 6 of the will. According to the Tribunal, a moral responsibility was created under cl. 6 of the will which was converted into a legal responsibility by the declaration of 7th December, 1966, in so far as that very share which Narrottamdas bequeathed to his four daughters under cl. 6 of the will was concerned. We have already pointed out earlier that the obligation cast by cl. 6 of the will on the assessee, Jyotsna, to disburse the 50 per cent of the income derived under the 31 per cent share in the partnership to the four daughters was a legal obligation which the four daughters could enforce in a Court of law, should the assessee be found to have defaulted in carrying it out. For the asst. yrs. 1964-65 to 1966-67, half of the 31 per cent share in the partnership was excluded as that amount went to the share of the four daughters under cl. 6 of the will. By that clause the four daughters became entitled to 50 per cent of the income from the partnership in equal shares and it was not necessary for the assessee to execute any other document to carry out the intention of the testator. In other words, no formalisation was necessary so far as the right given to the four daughters under cl. 6 of the will is concerned. Besides, by the subsequent gift recorded in the declaration of 7th December, 1966, the 50 per cent income has been given to the beneficiaries of the trust called “Nandini, Panna, Pratixa and Mamta Trust”. The conduct of the assessee may also be examined in order to ascertain her intention behind the execution of the declaration of 7th December, 1966. Immediately after the execution of that document, that is, immediately after she donated or gifted away half of the 31 per cent share in the partnership income which had devolved to her under cl. 6 of the will, she claimed a total exemption in the return submitted for the asst. yr. 1967-68 and thereafter in the following two years.
This would not have been her conduct if her intention in executing the deed of declaration dated 7th December, 1966, was merely to formalise what the testator had given away to the four daughters by virtue of cl. 6 of the will. In that case, she would have claimed exemption to the extent of 50 per cent only and not exemption to the extent of 100 per cent of the 31 per cent share in the partnership income. This conduct on the part of the assessee is a clear manifestation of her intention so far as the gift recorded in the deed of declaration dated 7th December, 1966, is concerned. We were also told at the bar that the assessee has paid the gift-tax in so far as the gift recorded in the declaration of 7th December, 1966, is concerned and this fact was admitted by Mr. B. R. Shah on behalf of the Revenue. This conduct of the assessee, in our opinion, is of a clinching nature and leaves no doubt in our mind that the gift recorded in the declaration was in respect of the remaining 50 per cent of the 31 per cent share in the partnership which devolved on the assessee under cl. 6 of the will of the deceased, Narottamdas. We, therefore, find it difficult to agree with the Tribunal when it says that the assessee created an overriding title in favour of the trust in which her four daughters are beneficiaries by the declaration of 7th December, 1966, in furtherance of the obligation created by cl. 6 of her husband’s will dated 15th January, 1963. In our opinion, the gift or donation, whereof a recital is made in the declaration of 7th December, 1966, stands on a separate or independent footing and has nothing to do with the bequest made in favour of the four daughters by the deceased, Narottamdas, under cl. 6 of his will. We are, therefore, of the opinion that there was no material with the Tribunal to jump to the conclusion that the declaration of 7th December, 1966, was in respect of the very same 50 per cent share bequeathed by deceased, Narottamdas, in favour of his four daughters under cl. 6 of his will dated 15th January, 1963. There was no justification for the Tribunal to reach the conclusion that by the execution of the declaration of 7th December, 1966, the assessee merely converted her moral obligation under the will into a legal obligation in respect of the very same 50 per cent share out of the income derived from the firm. The effort on the part of Mr. Shah was to explain this approach of the Tribunal by pointing out that the executors-trustees under the will of Narottamdas were under no legal obligation to act as such and it was entirely a matter of their volition to accept the responsibility cast on them as executors-trustees appointed under the will and that was why the Tribunal used the expression “moral obligation”. We are not impressed by this submission for the simple reason that the reference to “moral obligation” by the Tribunal is to what the testator stated in cl. 6 of the will. No declaration was necessary to convert that obligation into what the Tribunal calls “a legal obligation”, because by cl. 6. of the will itself a legal right was created in favour of the four daughters and a corresponding obligation was cast on the assessee, Jyotsna, to disburse the amount to the extent of 50 per cent of the income from the partnership equally to the four daughters. Mr. Shah also invited our attention to the various clauses of the trust deed dated 5th October, 1966, to point out that the provisions in the trust dead broadly fall into the pattern of the testator’s desire as manifested in the will of 15th January, 1963, and, therefore, the subsequent declaration of 7th December, 1966, whereby 50 per cent of the share went to the beneficiaries, namely, the four daughters, under the trust deed was nothing but an attempt on the part of the assessee to legalise or formalise her moral obligation under cl. 6 of the will. Merely because the provisions of the trust deed fall, as submitted by the learned counsel, in the pattern of the testator’s intention as manifested by the will of 15th January, 1963, we cannot jump to the conclusion, in the face of evidence to the contrary, that the declaration of 7th December 1966, was in respect of the very same 50 per cent share referred to in cl. 6 of the will.
For the above reasons we find it difficult to persuade ourselves to affirm the view taken by the Tribunal in the assessee’s three appeals disposed of by its order dated 28th June, 1975. As we are disinclined to uphold the Tribunal’s view on merits, we do not consider it necessary to go into the question of the application of the principle of res judicata and to decide whether the Revenue was debarred from taking a different view in regard to the asseseee’s one-half share in the 31 per cent share in the partner ship firm even though in the earlier years the assessee’s stand in this regard was accepted. We, therefore, do not answer question No. 1. However, assuming for the sake of argument that the principle of res judicata has no application, so far as question No. 2 is concerned, for reasons which we have stated earlier, we answer the question in the negative. For the same reasons we do not consider it necessary to answer question No. 3 but in the view that we have taken, we must answer question No. 4 in the affirmative, that is, in favour of the assessee and against the Revenue and questions Nos. 5 and 6 also in the negative, that is, against the Revenue.
The result is that the reference is answered accordingly with costs.
[Citation : 142 ITR 91]
