LexCOMMISSIONER OF INCOME TAX GUJARAT versus SHRI UDAYAN CHINUBHAI AND ORS.
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COMMISSIONER OF INCOME TAX GUJARAT A v. SHRI UDAYAN CHINUBHAI AND ORS. AUGUST 20, 1996 [B.P. JEEVAN REDDY AND S.C. SEN, JJ.] B Indian Income Tax Act, 1922: Section 9(1)(1v). Income TCU'-AYs 1951-52, 1952-53 & 1954-55 to 1961-62-Unsecured loans-Deduction of interest paid on-HUF-Partition of-Properties and C debts of HUF allotted to assessees u11der award of arbitrator-Assessees liable to pay Avyavaha1ic or illegal debts as per directions of court appoi11ti11g arbitrator-Assessees incurred interest 011 such debts paid to unsecured creditors-Held : Appellate T1ibu11al was right in 11ot allowing such interest as admissible (ieduction-Deductio11s could be allowed 011ly under provisions of Income Tax Act a11d 11ot merely no ground of liability to pay interest 011 D debts or 011 pri11ciple or real i11come-S.94 of Trusts Act a11d S.325 of India11 Succession Act not applicable i11 such a case-India11 Tmsts Ac• 1882, S.94 (since repealed)-Indian Succession Act, 1925, S.325. fllcome Tax-Expenditu.re incun-ed to meet legal obligatio11-Deduc- tibility of-From taxable income-field : depmded 011 11ature of obliga- tiorr-There should be diversion of income to meet obligation before it reached assessee. E The respondents-assessees were allotted certain properties of the Joint Hindu Family as a result of partition under an award of the ar- F bitrator. Some of the liabilities of the joint family had also been allotted to the assessees, Under the award the assessees were liable to pay the A vyavabaric or illegal debts of their father as per directions of court appointing the arbitrator. The claim of the assessees in the individual assessments for the assessments years 1951.-52, 1952-53 and 1954-55 to 1961-62 was that the assessees had to pay interest on various liabilities . G taken over by them and these interest payments should be considered as diversion of their income from properties by an overriding title and should be allowed as admissible deductions. The Income Tax Officer rejected the claim of the assesses which was upheld by the Appellate Assistant Com- missioner and the Appellate Tribunal. On appeal the High Court bad held H 789 790 SUPREME COURT REPORTS [1996] SUPP. 4 S.C.R. A that the provisions under the Hindu Law, Indian Trusts Act and the arbitrator's award created an overriding title in favour of the creditor to have their liabilities paid from the assets which came into the hands of the assessees. Therefore, the interest paid to unsecured creditors out of the assets received by the assessee on partial partition were diverted by B c overriding title and did not form part of real income of the assessees. Accordingly, the High Court answered the reference in favour of the assessee and against the Revenue. Being aggrieved the appellant-Revenue preferred the present appeal. Allowing the appeal, this Court HELD : 1.1. There was considerable doubt whether the sons were liable to pay the Avyavaharic debts of the father. After the award of the arbitrator, these questions could not be raised by the sons. But the High Court overlooked the fact that these debts were not a charge upon the HUF D properties before the partition took place. The position continued to be the same after the partition. rr a man incurs a debt, he will have to pay the debt and till the debt is paid in full, he may have to pay interest on that debt. But whether the interest is allowable as a deduction or not will depend upon the provisions of the Income Tax Act. No question of diver- sion of income by overriding title can arise in a case like this. A man has E to pay his debts out of his income. Merely because of the liability to pay the debts, it cannot be said that the income from the assets that he received on partition stood diverted by overriding title to the creditors. The Tribunal has rightly pointed out that the assessees were at liberty to spend the income from the assets allotted to them as they liked. Tbe creditors F could not insist that the debts had to be cleared before spending any money out of the income received by the assessee from the assets. [798-B-E] 1.2. Section 94 (since repealed) of the Indian Trusts Act, 1882 cannot apply to the facts of the instant case. In the instant case, all that has happened is that as a result of the partition, the assessees had been G allotted certain properties of the joint family. Some of the liabilities of the joint family have also bee
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