Should Alimony Paid Out of Salary Be Deducted From Salary For Tax Purpose?

The aforesaid question was answered in negative by Bombay High Court in

Commissioner Of Income Tax. v. M. P. Poncha. 211 ITR 1005 .

The Facts of the case

The assessee was employed as general manager of Premier Auto Electric Ltd. and derived his salary from the said company. He also had income from dividends, interest, etc. A suit was filed by the assessee in the Parsi Chief Matrimonial Court at Bombay, claiming divorce from his wife. A decree dated April 8, 1968, was passed by the court by the consent of the parties granting divorce to the assessee whereby he was required to pay to his wife with effect from April 1, 1968, a sum of Rs. 300 per month by way of permanent alimony plus a sum of Rs. 290 per month for maintenance of his minor son, Jamsheed, whose custody was given to his wife and sum of Rs. 60 per month as salary for the servant of the minor child. Total sum thus payable amounted to Rs. 650 per month or Rs. 7,800 per annum. No specific charge was created for payment of this amount by the consent decree.

After the passing of the consent decree, the assessee wrote a letter to his employers informing that he has been granted divorce by the Parsi Chief Matrimonial Court and he had to pay sum of Rs. 650 per month to his ex wife, Mini Poncha, and requesting them to deduct a sum of Rs. 650 per month from his salary for payment to her. In the said letter, it was also stated that his ex wife wanted to secure the said payment by creating a first charge on his salary and he agreed to the creation of the first charge on the salary.

Later, on January 7, 1969, by an agreement with the employers, the assessee agreed to the creation of the first charge on his salary in favour of his ex wife for the payment of a monthly sum of Rs. 650. The employers undertook to deduct the sum of Rs. 650 per month from his salary and "to deal with the same in such manner as directed by the said M. P. Poncha (assessee).

 

In the return for the assessment year 1969-70, the assessee claimed deduction from his income from salary of a sum of Rs. 7,800 paid by him to his ex wife by way of alimony to her and maintenance expenses to their minor son

The Decision

Hon’ble High Court held that such deduction is nt allowable for following reason

This case is squarely covered by the ratio of the decision of this court in the case of CIT v. V. G. Bhuta [1993] 203 ITR 249 wherein following the decision of the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367, it was held that the true test for finding out if there has been diversion of income by overriding charge, is whether the amount sought to be deducted, in truth, never reached the assessee as his income.

It was observed that obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive factor. 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 reaches 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.

 

Applying the above ratio, we find that in the instant case there is no diversion of income by overriding title. This is a clear case of application of income by the assessee for payment of alimony to his ex wife and maintenance of his minor child. The direction to the employers or the agreement with the employers to pay the agreed amount of Rs. 650 per month to the ex wife every month is only a mode of payment. It does not in any way amount to diversion of salary income before it accrues to the assessee. The employers are obliged to pay the amount only after the salary income accrues to the assessee and becomes payable to him. It is at that point of time that the employers have agreed or undertaken to pay as per the wishes of the assessee the sum of Rs. 650 per month to his ex wife. The employers have only agreed to deal with the amount of salary accrued to the assessee in such manner as directed by him. It is, in our opinion, a clear case of application of income which has accrued in the hands of the assessee. This is not a case of diversion of income by overriding title. The ratio of the decision of this court in V. G. Bhuta’s case [1993] 203 ITR 249 squarely applies.

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