JUDGMENT Satish Chandra, J.
1. These four references raise the same question of law, namely, whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that on a correct interpretation of the relevant rules of the U.P. Medical Manual, 25% of the gross fees received by the assessee from Central Government employees was not the income of the assessee.
2. In each reference the assessee is a member of the Medical Service of the State. He is the authorised medical attendant of Central Government employees as well. He received different sums of money as fee for professional service rendered to the Central Government servants. The, assessee claimed that in view of rule 197C of the U.P. Medical Manual, the State Government was entitled to 25% of the fee received by the assessee. This portion of the total fee received by the assessee in respect of the Central Government employees was not his income and was not taxable in his hands. The Income-tax Officer repelled this contention and brought the 25% receipts also to tax. This view was upheld on appeal. The assessee took the dispute to the Income-tax Appellate Tribunal. The Tribunal held:
".....the rules framed for such a deduction are very much obscure.
In fact the rules suggest that the paying department will itself deduct 25%. In any event after going through all these rules we have no hesitation in holding that the amount payable to the U.P. Govt. at the rate of 25% of the fees realised by the authorised medical attendant is embodied in the nature of his employment as such. Under the circumstances the share of the U.P. Govt. is an overriding charge so much so that whenever an assessee receives an amount by way of receipts his actual income would be 75% and he will be holding 25% for and on behalf of the U. P. Government. This being so it is really of no consequence as to how does the assessee maintain his books of account, i.e., either on mercantile basis or cash basis."
3. In the case of Dr. P. N. Awasthi, the Appellate Assistant Commissioner held that the entire receipts of fees were income. The assessee had paid Rs. 540 to the State Government in the relevant accounting period. He was entitled to a deduction of this sum as revenue expense. The Tribunal, however, observed that the liability to make over 25% of the fees accrued or arose as soon as the fees were received from the Central Government employees, because this 25% was a charge on the gross fees receivable in terms of Rule 197C of the U.P. Medical Manual which governed the appointment of the appellant.
"Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable."
5. In Commissioner of Income-tax v. Sitaldas Tirathdas, [1961] 41 ITR 367, 374, 375 (SC) the Supreme Court held:
"In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessce as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. 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 readies 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 consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income 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."
6. In that case the assessee's wife had obtained a decree for maintenance allowance against him. He claimed deduction of the maintenance allowance paid under the decree on the ground that his real income was his total income less the maintenance allowance paid. In support he relied upon the Privy Council decision in Bejoy Singh Dudhuria v. Commissioner of Income-tax, [1933] 1 ITR 135, 138 (PC). In Dudhuria's, [1933] 1 ITR 135, 138 (PC) case the step-mother of the Raja had brought a suit for maintenance and a compromise decree was passed under which she 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 Privy Council upheld the claim of the Raja that the maintenance allowance paid by him to his step-mother was not his income at all. The Privy Council observed :
"When the Act by Section 3 subjects to charge 'all income' of an 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 stepmother ; 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 allocation of a sum out of his revenue before it becomes income in his hands."
Hidayatullah J., speaking for the Supreme Court, illustrated the difference between the case of application of income coming to the hands of the assessee and a case where the income had been diverted by an overriding title from the person who would have received it otherwise by referring to P. C. Mullick v. Commissioner of Income-tax, [1938] 6 ITR 206 (PC). In Mullick's case, [1938] 6 ITR 206 (PC) a testator appointed the appellants as executors and directed them to pay Rs. 10,000 out of the income on the occasion of his addyasradh. The executors paid Rs. 5,537 for such expenses and sought to deduct the amount from the assessable income. The Judicial Committee disallowed the deduction. It observed that the payments were made out of the income of the estate coming to the hands of the executors and in pursuance of an obligation imposed upon them by the testator. It was not a case in which 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, [1933] 1 ITR 135 (PC) case. Coming to the facts of the case, Hidayatullah J. observed, [1961] 41 ITR 367, 372, 375 (SC) :
"In our opinion, the present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The case is one of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of another's income."
7. His Lordship emphasised:
"The matter in the present case would have been different, if such an overriding charge had existed either upon the property or upon its income, which is not the case. In our opinion, the case falls outside the rule in Bejoy Singh Dudhuria's, [1933] 1 ITR 135 (PC) case and rather falls within the rule stated by the Judicial Committee in P. C. Mullick's, [1938] 6 ITR 206 (PC) case ."
8. Referring to Commissioner of Income-tax v. D. R. Naik, [1939] 7 ITR 362 (Bom) Hidayatullah J. observed that in that case there was a decree of the court by which the assessee was entitled to receive properties as a residuary legatee, subject, however, to certain payments of maintenance to widows, which was a charge upon the properties. The learned judge held :
"This case also brings out correctly the principles "laid down by the Judicial Commiteee that if there be an overriding obligation which creates a charge and diverts the income to some one else, a deduction can be made of the amounts so paid."
8. Hidayatullah J. contrasted this with the decision in P. C. Mallick and D. C. Aich, In re, [1940] 8 ITR 236 (Cal). In that case, under a will, certain payments had to be made to the beneficiaries. In the will it was stated that the amounts were to be paid "out of the income of my property". Hidayatullah J. observed that the payments could only be made out of the income received by the executors and trustees from the property, and the sum was assessable to income-tax in the hands of the executors. The case was in line with the decision of the Privy Council in P. C. Mullick v. Commissioner of Income-tax, [1938] 6 ITR 206 (PC).
9. Reference was also made to Hira Lal, In re, [1945] 13 ITR 512 (Lah) An award which was made a rule of the court allowed certain maintenance allowance to the widows. These allowances were made a charge upon the property. It was held that inasmuch as the payments were obligatory and subject to an overriding charge they must be excluded.
10. Hidayatullah J. observed, [1961] 41 ITR 367, 373 (SC):
"Here too, the amount payable to the widows was diverted from the family to them by an overriding obligation in the nature of a charge, and the income could not be said to accrue to the joint Hindu family at all."
11. The principle deducible from these decisions seems to be whether an obligation is on the income or is in the nature of a charge upon the source of the income, that is, on the income earning apparatus. The former is the case of an application of income, the latter of diversion at source by an overriding title.
13. These cases show that a receipt which is part of the consideration for the sale is a business receipt and is income in the hands of the receiver. Though the sales tax was charged over and above the actual sale price in the one case, and the empty bottles security deposit in the other, was taken in addition to the cost of the goods, they were both held income liable to income-tax because they were an integral part of the commercial transaction of sale. They were a part of the consideration for the sale and, therefore, part of the price of what was sold. In Chowringhee Sales Bureau's, [1973] 87 ITR 542 (SC) case the appellant was held entitled to claim deduction of the amount of sales tax as and when it paid the same to the Government.
14. These cases establish that whatever receipt accrues owing to the business or professional transaction is income. Even though the dealer was under the Sales Tax Act statutorily liable to pay the sales tax realised by him to the State Government, yet it was held that the receipt was a trading receipt liable to income-tax in his hands subject to deduction being claimed as revenue expenditure as and when the payment was made to the State exchequer.
15. The decision of the. Supreme Court in Commissioner of Income-tax v. Imperial Chemical Industries India (P.) Ltd., [1969] 74 ITR 17 (SC) related to payment of compensation for termination of agency. The I.C.I. (Export) Limited terminated the selling agency for explosives in India of four agents with effect from April 1, 1948, and the respondent was appointed sole selling agent in India. The I.C.I. (Export) Limited had to pay the outgoing agents compensation at the rate of two-fifths, two-fifths and one and two-fifths of the commission earned by the respondent for three years from April 1, 1958. The compensation was paid to the four outgoing agents through the accounts of the respondent's company. The respondent claimed deduction of these amounts in computing its profits, contending that there was an agreement between it and the I.C.I. (Export) Limited for payment to the outgoing agents. The plea was that the payment made to the outgoing agents was not income in its hands and was not taxable. Repelling the claim, the Supreme Court held that the Tribunal had found that the precise terms of the agreement between the assessee and the I.C.I. (Export) Limited had not been established. The payment of compensation was the exclusive liability of the I.C.I. (Export) Limited and the assessee was not under a legal obligation to pay the amount of compensation to the outgoing agents. It was not established that the payment of compensation was by an overriding title created either by the act of the parties or by operation of law. It was held that payment of compensation by the assessee to the outgoing agents was not by an overriding title. Though the assessee did pay out the amount sought to be deducted, yet since the precise liability upon the assessee to pay the amount was not established, it was held that an overriding title on the source of the assessee's income was lacking.
16. The decision of Commissioner of Income-tax v. Travancore Sugars and Chemicals Ltd., [1973] 88 ITR 1 (SC) is not helpful because in that case the court held that, viewed from any point of view, whether as a revenue expenditure or as an overriding charge on the profit-making apparatus, or as an expenditure laid out and expended wholly and exclusively for purposes of trade, the amount was an allowable deduction under Section 10 of the Act. The observation that the payment may be treated as diversion of income by an overriding charge on the profit-making apparatus appears to be on the basis that the payment was made under an obligation to pay the price for acquiring the business, which was a capital asset. In this manner the business, which was the profit-making apparatus, was treated as charged.
17. The decisions of the Kerala High Court in Commissioner of Income-tax v. Travancore Sugars and Chemicals Ltd., [1969] 71 ITR 385 (Ker) and Commissioner of Income-tax v. Travancore Sugars and Chemicals Ltd., [1973] 90 ITR 307 (Ker) to which our attention was drawn by the learned counsel for the assessee are not material. In these cases the question for consideration was whether the payment of certain amount to the Travancore Government under an agreement was an allowable expense under Section 10 of the Income-tax Act.
18. Learned counsel for the assessee referred to the decision of the Madras High Court in V. Ramaswami Naidu v. Commissioner of Income-tax, [1959] 35 ITR 33 (Mad). In that case the assessee held shares in a foreign company incorporated in Ceylon. At a meeting of the general body of shareholders of that company, certain dividends were declared. From the gross amount of the dividends the company deducted tax in accordance with Section 43(1) of the Ceylon Income-tax Ordinance, and paid the assessee only the balance. The question was whether the assessee should be assessed under the Indian Income-tax Act on the gross amount of the dividends including the Ceylon Income-tax that had been deducted. It was held that under the Ceylon Income-tax Ordinance the amounts deducted by the company by way of tax were moneys which it was entitled to retain for itself and which it was not bound to pay over to the Ceylon Government, and as the amounts so deducted were always the property of the company and at no point of time did the title to those amounts vest in the assessee, neither were the amounts received by, nor did they accrue or arise to, the assessees, and, therefore, they were not liable to be included in the income of the assessee for purposes of Indian income-tax. The finding that the amounts deducted by the company were moneys in which title remained with the company distinguishes this case. Otherwise the decision seems contrary to the decision of the Supreme Court in Chowringhee Sales Bureau v. Commissioner of Income-tax, [1973] 87 ITR 542 (SC).
19. The decision of the Supreme Court in Murlidhar Himatsingka v. Commissioner of Income-tax. [1966] 62 ITR 323 (SC) relates to a sub-partnership. In that case M, who was partner in a registered firm (Firm A), entered into a sub-partnership (Firm B) with his two sons and a grandson. Clause 5 of the deed of sub-partnership (Firm B) provided that the profits and losses of M in the registered firm (Firm A) shall belong to the sub-partnership (Firm B) and shall be borne and divided in accordance with the shares specified therein, but that the capital with its assets and liabilities would belong to M exclusively. It was held that when a sub-partnership is entered into, the partner changes his character vis-a-vis the sub-partners and the income-tax authorities, although other partners in the original partnership are not affected by the changes that may have taken place. The court held that we attach importance to the fact that losses were also to be shared and the right to receive profits and to pay losses became an asset of the firm. On this view it was held that the profits earned by M from the main firm were diverted to the sub-partnership by an overriding obligation.
20. The court referred to the observations of the Bombay High Court in Sitaldas Tirathdas v. Commissioner of Income-tax, [1958] 33 ITR 390 (Bom) that "it is not essential that there should be a charge, it is quite sufficient if there is a legally enforceable claim" and held that these observations must be treated as unsound. Merely because there is an obligation which could be legally enforced it does not result in diversion of income at source.
21. A conspectus of these authorities shows that the existence of obligation to pay is not enough. The true test is, whether the obligation is in the nature of a charge on the source, that is, the profit earning apparatus of the income. Such a charge obligation may be created by charging the property, or, by making the source of income, the capital asset of another (as in the case of a sub-partnership) ; or by an obligation to pay the price of acquiring a business, or a capital asset from its income. In such cases the source is charged with an overriding title which diverts the income. A mere obligation to pay another is an application of income.
22. From the statement of the case it does not appear that the assessee in any of these references has actually paid the 25% of the fee to the State Government. In any event, nothing will turn upon it because in none of the present cases the assessee claimed deduction of the amount paid by him to the State Government as revenue expense. Their case is that the 25% of the receipts are not the assessee's income at all.
23. The only relevant provision in the U. P. Medical Manual is rule 197-C. It provides:
"197-C. The fees for medical attendance on Government servants belonging to the Central Government at their residence or at the residence of the Medical Officer or consulting room are:
Per visit ` Rs.
1. First consultation
(a) For a Civil Surgeon 16
(b) For a Provincial Medical Service (I) Officer 4
(c) For a P. M. S. (II) or Subordinate Medical Service Officer 2
2. Subsequent consultations in respect of the same case
(a) For a Civil Surgeon 10
(b) For a Provincial Medical Service (I) Officer 3
(c) For a P. M. S. (II) or Subordinate Medical Service Officer 1-8
3. Medical Examination for physical fitness, etc.
(a) By a Civil Surgeon I
(i) For examining officers of the All India Services 16
(ii) For examining other gazetted officers 10
(iii) For examining subordinate non-gazetted officers 5
(b) By Provincial Medical Service (I) Officer 4
(c) By a P. M. S. (11) or Subordinate Medical Service Officer 2
(d) By a Medical Committee For all cases of officers and officials 16 NOTES--(1) The fees for visits at night shall be double those prescribed in the schedule above. (2) The Central Government servants should themselves pay the charges of hospital treatment and later claim reimbursement from their departments of the portion of the expenses to which they are entitled on the authority of the certificate granted by the hospital authorities. (3) Rules for medical attendance on Central Government servants are given in appendix J. (4) 25 per cent of the fee should be credited to Government and the balance paid to the officer concerned."
24. As observed by the Tribunal the rules for the 25 per cent. deduction are obscure. The assessee has not established the precise terms. There is no material to show that Rule 197C of the Manual is a statutory rule so as to become a condition of service. This rule lays down the scale of fees for medical attendance which the medical officer is entitled to charge from the Central Government servant. The fourth note provides for the division of the fees which has accrued as a result of the professional service rendered by the assessee. It provides for a division of the amount which has come into existence as fees. The fourth note says that 25 per cent. of the "fee" should be credited to Government and the balance paid to the officer. The direction, if any, is on the patient. It does not cast any obligation on the medical practitioner. The fourth note is merely directory. It does not create any charge on the professional service rendered by the assessee. If at all, it provides for the division of fees, that is to say, of the professional receipt already earned or accrued owing to the assessee having rendered professional service. It appears that the patient is requested to make payment of 25 per cent. of the fees to the Government for and on behalf of the assessee. The fourth note contemplates transfer of 25 per cent. of the fees that has been earned by the assessee and brought into existence. There is no overriding title to the source of the income. The payment by the patient of 25 per cent. of the fees earned by the medical officer to the Government may be a term embodied in the nature of the employment of the medical officer but that, in our opinion, is neither material nor relevant. It is none the less a case of application of income. If the assessee pays 25 per cent. of the fees received by him to the State Government the same will be deductible as an allowable expense as has been done in the case of Dr. Awasthi.
25. We would answer the question by saying that the Tribunal was not right in holding that under the relevant rules to the U. P. Medical Manual 25 per cent. received as fee from the Central Government employees was not the assessee's income. The Commissioner of Income-tax would be entitled to costs which we assess at Rs. 200 in each case.