I assigned the dividends on my shares to my wife for her life but kept the shares. Is that dividend still my income?
Yes. The Supreme Court held that the deed of 19 January 1953 was not a transfer of any existing property. The assessee kept the shares and so kept the right to participate in the company's profits; what he made was a contract to make over to his wife, during her life, every dividend that might in future be declared on those shares. The company could pay only the registered shareholder or on his orders, so the income continued to accrue to him and was afterwards paid over under the contract. That is an application of income after it accrues, not a diversion before it accrues.
Decided by the Supreme Court (Supreme Court of India - S.K. Das, M. Hidayatullah and J.C. Shah, JJ (judgment delivered by S.K. Das, J)) on 1960-12-08, reported as 1961 AIR 1019; 1961 SCR (3) 37; (1961) 41 ITR 624. It bears on section 16(1)(c) of the Indian Income-tax Act, 1922, section 16(3) of the Indian Income-tax Act, 1922, section 60, section 61, section 4 of the Income Tax Act 1961, in Assessment & Scrutiny matters.
This is the clearest short statement of the difference between assigning the source and applying the income. Assign the source, so that it is no longer yours, and you are not taxed on income arising afterwards, subject to the statutory provisions that deem such income to be yours. Merely apply the income, so that it passes through you to its destination, and it remains yours even though you are legally bound to apply it that way. The Court also disposes of the argument built on Bacha F. Guzdar - that a shareholder's right to participate in profits exists independently of any declaration - by pointing out that the right was never parted with, and it distinguishes Bejoy Singh Dudhuria as a case of allocation out of revenue before it became the assessee's income.
Binding on every court and authority in India.
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The assessee was the registered holder of 500 ordinary shares of the Calcutta Agency Ltd. By an instrument of 19 January 1953, made in consideration of natural love and affection, he assigned to his wife the right, title and interest to every dividend and sum of money which might be declared or become due on those shares, expressly excluding their price or value, and covenanted to hand over or endorse dividend warrants to her and to instruct the company to pay her, she to hold the same absolutely during her natural life, the settlor to have no right, title or interest in them during that period. The shares themselves remained his. In the year ended 31 March 1953 dividends of Rs 12,000 were declared, and for 1953-54 the Income-tax Officer included that sum in the assessee's income. The assessee said the settlement was for his wife's lifetime so that the third proviso applied, and that the clubbing provision could not apply since the shares had not been transferred. The Department argued that the third proviso was repugnant to the main provision, that the transfer of the dividend was a mere application of income, and, before the Tribunal, that the deed was invalid for want of registration. The Tribunal rejected the repugnancy argument, expressed no opinion on application of income, and decided against the assessee on registration. Three questions were referred. The Calcutta High Court answered the first two for the assessee and the third against him, holding the settlement provided only for an application of the income. Only the third question came to the Supreme Court.
The appeal was dismissed with costs. On its true construction the instrument was not a transfer of any existing property of the assessee but a contract to transfer or make over in future every dividend and sum of money which might be declared or become payable on the shares, the other covenants being ancillary to that object. A transfer of property may be made in the present or in the future, but the property must be in existence. The assessee did not assign the shares and so retained the right to participate in the company's profits; what the beneficiary got was a right to receive from him whatever was declared. Since the company can pay the dividend only to the registered shareholder or on his orders, following Howrah Trading Co., the income continued to accrue to the assessee and was afterwards paid over under the contract, and was assessable in his hands. It was unnecessary to decide whether such a contract operates only as one to be specifically enforced when the property comes into existence, or fastens on the property as soon as it is acquired, because on either view the income accrues first to the settlor. The preliminary objection that the third question did not arise out of the Tribunal's order was overruled, the Tribunal having recorded that the point was raised by the Department and by implication decided against it, and no objection to the reference having been taken in the High Court.
The Court framed the case as one of construction of the deed, and then stated the underlying principle. If a person has alienated or assigned the source of his income so that it is no longer his, he may not be taxed on the income arising after that assignment, apart from special provisions which artificially deem it to be his; but if he merely applies the income, so that it passes through him to an ultimate purpose, it remains his income even though he has bound himself legally to apply it that way. The deed here fell on the application side, because nothing that produced the income had left the assessee's hands. The observations relied on from Bacha F. Guzdar, that a shareholder's right to participate in profits exists independently of any declaration and only its enjoyment is postponed, did not help, since that case decided whether dividend from a tea company was agricultural income and, on these facts, the right in question was retained rather than assigned. Bejoy Singh Dudhuria was distinguished as a case of allocation of a sum out of revenue before it became income in the assessee's hands - diversion before accrual rather than application after it.
if a person has alienated or assigned the source of his income so that it is no longer his, he may not be taxed upon the income arising after the assignment of the source
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that the deed of 19 January 1953 was not a transfer of any existing property. The assessee kept the shares and so kept the right to participate in the company's profits; what he made was a contract to make over to his wife, during her life, every dividend that might in future be declared on those shares. The company could pay only the registered shareholder or on his orders, so the income continued to accrue to him and was afterwards paid over under the contract. That is an application of income after it accrues, not a diversion before it accrues. This was decided by the Supreme Court (Supreme Court of India - S.K. Das, M. Hidayatullah and J.C. Shah, JJ (judgment delivered by S.K. Das, J)) and bears on section 16(1)(c) of the Indian Income-tax Act, 1922, section 16(3) of the Indian Income-tax Act, 1922, section 60, section 61, section 4 of the Income Tax Act 1961. It is reported as 1961 AIR 1019; 1961 SCR (3) 37; (1961) 41 ITR 624. This is the clearest short statement of the difference between assigning the source and applying the income. Assign the source, so that it is no longer yours, and you are not taxed on income arising afterwards, subject to the statutory provisions that deem such income to be yours. Merely apply the income, so that it passes through you to its destination, and it remains yours even though you are legally bound to apply it that way. The Court also disposes of the argument built on Bacha F. Guzdar - that a shareholder's right to participate in profits exists independently of any declaration - by pointing out that the right was never parted with, and it distinguishes Bejoy Singh Dudhuria as a case of allocation out of revenue before it became the assessee's income. If it applies to you, the first step is this: Transfer the asset if you mean to transfer the income; an assignment of the fruits while keeping the tree leaves the income where it was.
The assessee was the registered holder of 500 ordinary shares of the Calcutta Agency Ltd. By an instrument of 19 January 1953, made in consideration of natural love and affection, he assigned to his wife the right, title and interest to every dividend and sum of money which might be declared or become due on those shares, expressly excluding their price or value, and covenanted to hand over or endorse dividend warrants to her and to instruct the company to pay her, she to hold the same absolutely during her natural life, the settlor to have no right, title or interest in them during that period. The shares themselves remained his. In the year ended 31 March 1953 dividends of Rs 12,000 were declared, and for 1953-54 the Income-tax Officer included that sum in the assessee's income. The assessee said the settlement was for his wife's lifetime so that the third proviso applied, and that the clubbing provision could not apply since the shares had not been transferred. The Department argued that the third proviso was repugnant to the main provision, that the transfer of the dividend was a mere application of income, and, before the Tribunal, that the deed was invalid for want of registration. The Tribunal rejected the repugnancy argument, expressed no opinion on application of income, and decided against the assessee on registration. Three questions were referred. The Calcutta High Court answered the first two for the assessee and the third against him, holding the settlement provided only for an application of the income. Only the third question came to the Supreme Court. The matter was decided on 1960-12-08 by the Supreme Court (Supreme Court of India - S.K. Das, M. Hidayatullah and J.C. Shah, JJ (judgment delivered by S.K. Das, J)). On those facts the Supreme Court held as follows. The appeal was dismissed with costs. On its true construction the instrument was not a transfer of any existing property of the assessee but a contract to transfer or make over in future every dividend and sum of money which might be declared or become payable on the shares, the other covenants being ancillary to that object. A transfer of property may be made in the present or in the future, but the property must be in existence. The assessee did not assign the shares and so retained the right to participate in the company's profits; what the beneficiary got was a right to receive from him whatever was declared. Since the company can pay the dividend only to the registered shareholder or on his orders, following Howrah Trading Co., the income continued to accrue to the assessee and was afterwards paid over under the contract, and was assessable in his hands. It was unnecessary to decide whether such a contract operates only as one to be specifically enforced when the property comes into existence, or fastens on the property as soon as it is acquired, because on either view the income accrues first to the settlor. The preliminary objection that the third question did not arise out of the Tribunal's order was overruled, the Tribunal having recorded that the point was raised by the Department and by implication decided against it, and no objection to the reference having been taken in the High Court.
The Court framed the case as one of construction of the deed, and then stated the underlying principle. If a person has alienated or assigned the source of his income so that it is no longer his, he may not be taxed on the income arising after that assignment, apart from special provisions which artificially deem it to be his; but if he merely applies the income, so that it passes through him to an ultimate purpose, it remains his income even though he has bound himself legally to apply it that way. The deed here fell on the application side, because nothing that produced the income had left the assessee's hands. The observations relied on from Bacha F. Guzdar, that a shareholder's right to participate in profits exists independently of any declaration and only its enjoyment is postponed, did not help, since that case decided whether dividend from a tea company was agricultural income and, on these facts, the right in question was retained rather than assigned. Bejoy Singh Dudhuria was distinguished as a case of allocation of a sum out of revenue before it became income in the assessee's hands - diversion before accrual rather than application after it. In the words reproduced by the source cited on this page: "if a person has alienated or assigned the source of his income so that it is no longer his, he may not be taxed upon the income arising after the assignment of the source"
It was decided by the Supreme Court on 1960-12-08 and is reported as 1961 AIR 1019; 1961 SCR (3) 37; (1961) 41 ITR 624. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 16(1)(c) of the Indian Income-tax Act, 1922, section 16(3) of the Indian Income-tax Act, 1922, section 60, section 61, section 4, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed with costs. On its true construction the instrument was not a transfer of any existing property of the assessee but a contract to transfer or make over in future every dividend and sum of money which might be declared or become payable on the shares, the other covenants being ancillary to that object. A transfer of property may be made in the present or in the future, but the property must be in existence. The assessee did not assign the shares and so retained the right to participate in the company's profits; what the beneficiary got was a right to receive from him whatever was declared. Since the company can pay the dividend only to the registered shareholder or on his orders, following Howrah Trading Co., the income continued to accrue to the assessee and was afterwards paid over under the contract, and was assessable in his hands. It was unnecessary to decide whether such a contract operates only as one to be specifically enforced when the property comes into existence, or fastens on the property as soon as it is acquired, because on either view the income accrues first to the settlor. The preliminary objection that the third question did not arise out of the Tribunal's order was overruled, the Tribunal having recorded that the point was raised by the Department and by implication decided against it, and no objection to the reference having been taken in the High Court. It arises in Assessment & Scrutiny matters, on section 16(1)(c) of the Indian Income-tax Act, 1922, section 16(3) of the Indian Income-tax Act, 1922, section 60, section 61, section 4 of the Income Tax Act 1961, and was decided by Supreme Court of India - S.K. Das, M. Hidayatullah and J.C. Shah, JJ (judgment delivered by S.K. Das, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Ask where the income first lands: if it must reach you before it can reach the other person, it is your income however binding your obligation to pass it on. Check the clubbing provisions separately - the Court did not decide whether they applied here, and a transfer to a spouse may be caught by them even where the source has genuinely gone. Take objections to the frame of a referred question at the time; the assessee's argument that the question did not arise out of the Tribunal's order failed partly because it had not been pressed in the High Court.
Still good law. The standard authority on assignment of income without assignment of the source; the harvested page records it as referred to and distinguished in later Supreme Court decisions of 1961 and 1967. No later decision doubting it was read as part of this exercise. The provisions of the 1961 Act on transfer of income without transfer of the asset, and on clubbing, are in different words and were not before the Court. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Decided under the Indian Income-tax Act, 1922 on sections 16(1)(c) and 16(3), with the appeal by certificate under section 66A(2); the batch line's sections 60, 61 and 4 of the 1961 Act are the corresponding provisions but were not construed. The appeal was confined to the third referred question. The Court expressly expressed no opinion on the answers to the first two - whether the unregistered deed was void and whether the third proviso was repugnant to the main provision - both of which had gone in the assessee's favour and had not been appealed by the Department. It also expressly left open whether such a contract is one to be specifically enforced when the property comes into existence or one that fastens on the property when acquired, and it did not decide whether the clubbing provision applied, holding only that the income was the assessee's in any event. The harvested page carries a reporter's headnote before the judgment; it has been ignored. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with costs. On its true construction the instrument was not a transfer of any existing property of the assessee but a contract to transfer or make over in future every dividend and sum of money which might be declared or become payable on the shares, the other covenants being ancillary to that object. A transfer of property may be made in the present or in the future, but the property must be in existence. The assessee did not assign the shares and so retained the right to participate in the company's profits; what the beneficiary got was a right to receive from him whatever was declared. Since the company can pay the dividend only to the registered shareholder or on his orders, following Howrah Trading Co., the income continued to accrue to the assessee and was afterwards paid over under the contract, and was assessable in his hands. It was unnecessary to decide whether such a contract operates only as one to be specifically enforced when the property comes into existence, or fastens on the property as soon as it is acquired, because on either view the income accrues first to the settlor. The preliminary objection that the third question did not arise out of the Tribunal's order was overruled, the Tribunal having recorded that the point was raised by the Department and by implication decided against it, and no objection to the reference having been taken in the High Court.
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