IMPORTANT POINT
In the facts and circumstances of the case income accruing to the Trust from the assignment by assessee of the 50% out of assessee s 10% share in a partnership firm can be treated as the income of the assessee.

Headnote:Income Tax Act, 1961-Section 60 -Partnership Act, 1932-Section 29(2)-Difference between diversion of income by over-riding title and a case of application of income by assessee-Respondent had 10% share in firm A-He assigned 50% share out of it to a Trust for benefit of his relatives-Whether could be added in the total income of the assessee? High Court answering in negative-Whether correct? (No)-Case law referred.
       Held : It may be pointed out that under the scheme of the Act, it is the total income of an assessee, computed under the provisions of the Act, that is assessable to income tax. So much of the income which an assessee is not entitled to receive by virtue of an over-riding title created in favour of a third party would get diverted at source and the same cannot be added in computing the total income of the assessee. The principle is simple enough but more often than not, as in the instant case, the question arises as to what is the criteria to determine, when does the income attributable to an assessee get diverted by over-riding title? The determinative factor, in our view, is the nature and effect of the assessee s obligation in regard to the amount in question. When a third person becomes entitled to receive the amount under an obligation of an assessee even, before he could lay a claim to receive it as his income, there would be diversion of income by over-riding title; but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by over-riding title. (Para 8)
       After discussing case law, Held : It is apt to notice that there is a clear distinction between a case where a partner of a firm assigns his share in favour of a third person and a case where a partner constitutes a sub-partnership with his share in the main partnership. Whereas in the former case, in view of section 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership, except, of course, to receive that part of the profits of the firm referrable to the assignment and to the assets in the event of dissolution of the firm, but in the latter case, the sub-partnership acquires a special interest in the main partnership. The case on hand cannot be treated as one of a sub-partnership, though in view of Section 29(1) of the Indian Partnership Act, the Trust, as an assignee, becomes entitled to receive the assigned share in the profits from the firm not as a sub-partner because no sub-partnership came into existence but as an assignee of the share of income of the assigner-partner. (Para 17)
       Held consequently : For the aforementioned reasons, we are of the view that the order under challenge cannot be sustained. It is, accordingly, set aside. Consequently, the share of the income of the assessee assigned in favour of the Trust has to be included in the total income of the assessee. The questions are, accordingly, answered in favour of the Revenue and against the assessee. The civil appeal is, accordingly, allowed but in view of the peculiar facts in which the appeal came to be filed, we make no order as to costs. (Paras 19 and 20)

JUDGMENT

Syed Shah Mohammed Quadri, J.-

Civil Appeal No. 1899 of 2002:

This appeal, by the Revenue, is directed against the judgment of the Division Bench of the High Court of Gujarat in Income Tax Reference No. 191 of 1980 dated 29th October, 1993 [Sunil J. Kinariwala vs. Commissioner of Income Tax reported in (1995) 211 I.T.R. 127].

2. At the instance of the Revenue, the Income Tax Appellate Tribunal (for short, the Tribunal ) referred the following questions, under Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act ), for the opinion of the High Court:

"(1) Whether, on the facts and in the circumstances of the case, 50 per cent out of the assessee s ten per cent, right, title and interest in the partnership firm of Messrs. Kinariwala R.J.K. Industries belongs to Sunil Jivanlal Kinariwala Trust and the income arising therefrom belongs to the said trust by overriding title?

(2) Whether, on the facts and in the circumstances of the case, the sum of Rs. 20,141 being the profits referable to 50 per cent, out of the assessee s right, title and interest of ten per cent, in the partnership firm of Messrs. Kinariwala R.J.K. Industries is not the real income of the assessee, but of Sunil Jivanlal Kinariwala Trust and as such assessable only in the hands of the trust?

(3) Whether, on the facts and in the circumstances of the case, fifty per cent, out of the assessee s ten per cent, share in the firm of Messrs. Kinariwala R.J.K. Industries has been validly assigned to Sunil Jivanlal Kinariwala Trust under the deed of trust dated December, 27, 1973, and whether the income arising therefrom belongs to the said trust by way of overriding title?"

3. The facts which gave rise to these questions may be noticed here.

4. The assessee, a partner in the partnership firm, known as M/s. Kinariwala R.J.K. Industries , Ahmedabad, (for short, the firm ) was having ten per cent share therein. On December 27, 1973, he created a Trust named "Sunil Jivanlal Kinariwala Trust" by a deed of settlement assigning fifty percent out of his ten per cent right, title and interest (excluding capital), as a partner in the firm, and a sum of Rupees five thousand out of his capital in the firm in favour of the said Trust. There are three beneficiaries of the Trust - the assessee s brother s wife, assessee s niece and the assessee s mother. In the Assessment Year 1974-75, he claimed that as fifty per cent of the income attributable to his share from the firm, stood transferred to the Trust resulting in diversion of income at source, the same could not be included in his total income for the purpose of his assessment. The Income Tax Officer rejected the claim on the view that it was a case of application of income and not diversion of income at source; he also found that Section 60 of the Act was attracted as only income without transfer of asset was settled. Against the order of assessment, the assessee appealed before the Appellate Assistant Commissioner of Income Tax who allowed the appeal directing that a sum of Rs. 20,141/- which stood transferred to the trust under the settlement, be excluded from the total income of the assessee. However, on appeal by the Revenue, the Tribunal reversed the order of the Appellate Assistant Commissioner. Thus, the afore-mentioned questions of law came to be referred to the High Court by the Tribunal.

5. The High Court, relying on the judgements of this Court in Commissioner of Income-tax, Madras vs. Bhagyalakshmi & Co. [(1965) 55 I.T.R. 660] and Murlidhar Himatsingka & Anr. vs. Commissioner of Income-tax, Calcutta [(1966) 62 I.T.R. 323], held, inter alia, that on assignment of fifty per cent share of the assessee in the firm, it became the income of the Trust by over-riding title and it could not be added in the total income of the assessee. In that view of the matter, the afore-mentioned Question Nos. (1) to (3) were answered in the affirmative, in favour of the assessee and against the Rev

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2002 Supreme(SC) 1212

IMPORTANT POINTIn the facts and circumstances of the case income accruing to the Trust from the assignment by assessee of the 50% out of assessee s 10% share in a partnership firm can be treated as the income of the assessee.

Cases Referred (5)

IMPORTANT POINT
In the facts and circumstances of the case income accruing to the Trust from the assignment by assessee of the 50% out of assessee s 10% share in a partnership firm can be treated as the income of the assessee.