Back
1938 Supreme(SC) 7
Privy Council At Calcutta
Sir George Rankin, Sir Shadi Lal, Lord Romer, Justice Lord Russell of Killowen, JJ.
Messrs P.C. Mullick and another -Appellant
Versus
Commissioner of Income-tax, Bengal -Resopndent
Appeal No. 32 of 1937
Decided On : 01-02-1938
W.W. Box and Co., Hubert Hull, W. Wallach, L.P.E. Pugh
Income received by executors and subsequently applied to fulfill a testator's directions is not 'diverted by overriding title' and remains part of the executors' taxable income.
Headnote:(A) Income-tax Act - Sections 4(3)(viii), 40, and 66 - Computation of taxable income of executors - Expenses for religious rites and probate costs - Diversion of income by overriding title - Where executors receive the whole income of an estate and apply a portion of it pursuant to the directions of a testator, such payments are not regarded as income diverted by an overriding title from the recipient, but as applications of income received by the executors.
(B) Assessment of executors - Nature of assessment - If an assessment is treated as being upon executors in regard to their income, it cannot be converted into an assessment upon trustees for a residuary beneficiary if the estate has not been cleared and the proceedings have consistently treated the assessees as executors.
Facts of the case:
The executors of a will were directed to pay debts, expenses for religious rites, and costs of obtaining probate out of the income of the estate. The tax authorities included these expenditures in the computation of the taxable income of the executors. The executors contended that these sums, being obligations to be discharged out of the income, should be excluded from the chargeable income.
Findings of Court:
The payments for religious rites and probate costs were made out of the income of the estate coming to the hands of the executors in pursuance of obligations imposed by the testator. These were not instances where income was diverted by an overriding title before reaching the executors.
Issues: Whether provisions for religious expenses and costs of probate, specifically directed to be paid out of income by a will, should be excluded from the chargeable income of the executors.
Ratio Decidendi: The court held that a distinction exists between income diverted by an overriding title and income that is received by a person who then applies it in a particular way. Since the executors received the income and then applied it according to the testator's directions, the amounts remained part of their taxable income.
Result: Appeal dismissed.
Legal Category Hierarchy
-
taxation
-
income tax
-
taxable income
- diversion of income vs application of income
- executors and trustees
-
taxable income
-
income tax
-
wills and succession
- probate and administration
Lord Russell of Killowen:-
The executors of a testator (one Akshoy Kumar Ghose, deceased) appeal from a judgment of the High Court of Judicature at Fort William in Bengal delivered on a reference by the Commissioner of Income-tax under S. 66, sub-ss. 1 and 2, Income-tax Act. The testator died in October 1931. By his will he appointed the appellants (and another) his executors. He directed them to pay his debts out of the income of his property, and to pay Rs. 10,000 out of the income of his property on the occasion of his "Addya Shradh" for expenses in connexion therewith to the person entitled to perform the Shradh. He also directed his executors to pay out of the income of his property the costs of taking out probate of his will. After conferring out of income benefits on his second wife and his daughter and (out of the estate) benefits on the sons, if any, of his daughter, and after providing for the payment out of income "gradually" of diverse turns to some persons, and certain annuities to others, be bequeathed all his remaining property (in the events which happened) to a son taken in adoption after his death by his wife, viz. one Ajit Kumar Ghosh who is still a minor. The title of the son is defeasible in the event of his dying childless during lifetime of the testator's wife, and until he attains the age of 25 years the property has to remain in the possession of the executors who are to defray the expenses of education, maintenance and other necessary expenses out of the income of the estate. By an assessment order dated 26th October 1933, the executors were assessed to income-tax for the year 1933-34 in respect of their income of the previous year. During that year (viz. 1932-33) the executors had expended a sum of Rs. 5537 for expenses in connexion with the "Addya Shradh" and a sum of Rs. 1,25,000 for probate duty. They had also during the same period made certain payments to the persons entitled under the will to "gradual" payments and annuities. The Income-tax Officer assessed the income of the appellants of the year 1932-33, liable to tax for the year 1933-34, at Rs. 81,078.
He arrived at this figure by the following procedure: He ascertained the total taxable income received during the relevant year as amounting to Rs. 1,89,901, and the agricultural income (within the meaning of S. 4 (3) (viii) of the Act) so received at Rs. 90,015. He next ascertained the obligations which fell to be discharged by the executors during the year out of the income of the testator's estate. These obligations (which he termed "charges") were of different kinds. Some arose under the will of the testator's father; others consisted of the annuities payable under the testator's will and of the payments actually made during the year in respect of the sums thereby directed to be paid "gradually". These "charges" he treated (being, as he thought, bound to do so by the decision in Bejoy Singh Dhdhuria v. Commr. Income-tax, Calcutta , (1933) 20 AIR PC 145=143 IC 145=60 Cal 1029=60 IA 196 (PC) as of such a nature that the moneys required to meet them could not be regarded as income of the appellants. But, since the "charges" were payable out of the whole income whether taxable or not, he apportioned the "charges" between the taxable income and the agricultural income, allocating the sum of Rs. 35,520 to the taxable income with the result that of the said sum of Rs. 1,89,901 he treated only the sum of Rs. 1,54,381 as income of the appellants. This amount he further reduced by making deductions in respect of the Rs. 5537 expended during the year in respect of the testator's "Addya Shradh". Certain other adjustments had to be made (chiefly concerned with outgoings in respect of house property) which further reduced the sum of Rs. 1,54,381 to a sum of Rs. 1,22,396.
This he fixed as the "total income" of the executors. He then deducted from that total income so much thereof as was represented by interest on securities and dividends taxed at the sour
