TMI Blog2006 (4) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... and 1982-83 and the corresponding accounting periods are samvat years 2034, 2035, 2036 and 2037, respectively. 3 The assessee is an individual, deriving income from property, partnership share in various firms, including partnership share from M/s. Jayantilal and Co., as well as dividend, interest, director's fees, etc. The assessee had 60 per cent share in the profits and loss of the business in the firm of Jayantilal and Co. 4 By a trust deed dated June 13, 1978, the assessee created a trust known as "Biren Nandish Trust." The beneficiaries of the said trust were (i) Biren S/o Indumati Shantilal Gandhi, his wife, if married and his child or children, if any, (ii) Nandish S/o Indumati Shantilal Gandhi his wife, if married and his child or children, if any (iii) Aditi d/o Indumati Shantilal Gandhi. The trustees of the said trust were the assessee and Indumati Shantilal Gandhi. In the deed of settlement it was mentioned that the trust was created out of love and affection for Biren, Nandish and Aditi. A sum of Rs. 1,000 was settled in the trust. 5 On the next day, that is, on June 14, 1978, the assessee executed a deed of assignment whereby the assessee gifted one-half o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer further found that the assignment deed by virtue of which the minor beneficiaries would have to share losses in the firm was not in accordance with law. The Assessing Officer was of the view that the share in the firm consists of the entire bundle of rights of a partner and not merely a portion thereof and that unless the entire bundle of rights is transferred, there is no transfer of assets within the meaning of section 60 of the Act. That as the entire income producing asset, namely, the share in the partnership firm, comprising of all the concomitant rights had not been transferred, by virtue of the provisions of section 60 of the Act, the whole of the income was assessable in the hands of the assessee. The Assessing Officer observed that 60 per cent. profit arising to the assessee's share was credited to his account and it was thereafter that 50 per cent. share was credited to the account of the trust. The Assessing Officer found that the decision of the Supreme Court in the case of K. A. Ramachar v. CIT [1961] 42 ITR 25, was applicable to the facts of the case. That, applying of the ratio of the decision of the Supreme Court in the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a "property" is capable of being transferred by way of gift, settlement, sale, assignment, etc. That in terms of the assignment deed, the assignor, namely, the assessee, had gifted away 50 per cent. out of his 60 per cent. share in the partnership firm and that the assignee had signed the deed of assignment in acceptance of the gift. That, thereupon, the assessee ceased to have any right, title or interest in the gifted property and the trust is the sole beneficiary thereof. That the trust had a definite enforceable right to claim share in the profit of the assignor. That, the share in the firm was effectively transferred to the assignee and that it was not merely the right to receive the income that was transferred. That in so far as the partnership firm is concerned, it only recognizes the assignor as a partner, hence, the entire share was credited to the account of the assessee. However, in view of the fact that 50 per cent. of the amount credited to the credit of the assessee belongs to the trust, the same was paid over to the trust on the same day by passing an entry to that effect in the books of the firm, thus, discharging his legal obligation. 12. It was further sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the profits and the liability to share the losses was diverted. The Tribunal was of the view that the entries in the books would be relevant only in case where there was any ambiguity in the deed of assignment, which was not so in the present case. The Tribunal also took note of the fact that the gift of the partnership share had been charged to gift-tax as shown in the assessment order dated October 8, 1982, and the income from this assignment has also been charged by the assessment order dated January 22, 1982. For the aforesaid reasons as well as in view of the decision of this court in the case of Nandiniben Narottamdas [1983] 140 ITR 16, the Tribunal dismissed the appeal. 14 Heard, Mr. M. R. Bhatt, learned senior standing counsel for the applicant-Revenue. Though served, there is no appearance on behalf of the respondent-assessee. 15 Mr. Bhatt assailed the order of the Tribunal contending that the Tribunal had erred in holding that by virtue of assignment of 50 per cent. of the assessee's share in the partnership firm, an overriding title was created in favour of the trust whereas the same was merely an application of the assessee's income. It was submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application of his income after accrual thereof, and that there was no diversion of income at source by an overriding title. 17 Learned counsel fairly submitted that the facts of the present case are similar to the facts involved in the case of CIT v. Nandiniben Narottamdas [1983] 140 ITR 16 (Guj), wherein this court had decided a similar issue in favour of the assessee. However, he hastened to add that, in view of the decision of the Supreme Court in the case of CIT v. Sunil J. Kinariwala [2003] 259 ITR 10, the said decision would no longer hold the field. That the controversy in issue stands concluded in favour of the Revenue by the said decision of the Supreme Court wherein the court had distinguished 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. That in case of assignment of share the assignee gets no right or interest in the main partnership, except to receive that part of the profits of the firm referable to the assignment and to the assets in the case of dissolution of the firm, whereas a sub-partnership acquires a spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed a return under the Gift-tax Act in relation to the gift made vide the aforesaid deed of assignment and had borne charge under the Gift-tax Act under order dated October 8, 1982. That the income from the assignment had been charged to tax, by assessment order dated January 22, 1982. 20 In the context of the aforesaid factual matrix, the principal issue that arises for consideration is whether the assignment deed dated June 14, 1978, has succeeded in diverting the income from the assessee's share in M/s. Jayantilal Co. to the Biren Nandish Trust. In other words whether the interest of the trust in the profits received from the partnership is of such a nature as diverts the income from the original partner to the trust. 21 For the purpose of determining the controversy in issue it would be necessary to advert to the terms of the deed of assignment to find out the actual nature of the assignment. The deed of assignment, in so far as the same is relevant for the purpose of the present case, reads as under : "Whereas Shri Jayantilal Dahyabhai Patel, party of the first part gifted away one-half of his partnership share out of the said 60 per cent. share abovereferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said gift has been given by him to the trustees; the said gift of partnership share includes the right to share in the profit and losses arising from the business of the said partnership firm to the extent of one-half of the assessee's 60 per cent. share, i.e., 30 per cent. as also to share in the assets of the said partnership firm on dissolution in the same proportion. That the assessee ceased to have any right, title and interest in the said properties gifted away by him and that the trust is the sole beneficial owner thereof. 23 Though learned counsel for the applicant-Revenue has strenuously contended that the issue requires to be answered in favour of the Revenue by following and applying the aforesaid decision in the case of CIT v. Sunil J. Kinariwala [2003] 259 ITR 10 (SC), it is not possible to accept the submission for the reasons that follow hereinafter. 24 In the present case, the Tribunal has specifically held that the provisions of section 60 of the Act cannot be invoked and thus directed the Assessing Officer to exclude 50 per cent. share of profits of the Biren Nandish Trust from the income of the assessee. In so far as the second question is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to income-tax as the income of the transferor and shall be included in his total income.' Section 63, which, inter alia, defines the word 'transfer' occurring in section 60, provides that 'transfer' includes any settlement, trust, covenant, agreement or arrangement. The object of this section is to overtake or circumvent the tendency on the part of the taxpayers to avoid or reduce tax liability by a device which consists of the disposal by the taxpayer of a part of his property in such a way that the income would no longer be received by him, while at the same time, he retains certain powers over, or interest in, the property. The section, therefore, provides that in all cases whereby virtue of a 'transfer' (including any settlement, trust, covenant, agreement or arrangement) income arises to any person and there is no transfer of the assets from which the income arises, the income may be regarded as the income of the transferor and it should be assessed as such. The fiction operates in cases where the asset which produces the income still remains the property of the transferor but the income lawfully belongs to the transferee. Furthermore, it operates, irrespective of whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his share in the main partnership firm did not belong to him, it is difficult to understand how a different conclusion can be arrived at in the present case. It was sought to be faintly urged that the decision of in Murlidhar's case [1966] 62 ITR 323 (SC), did not notice the provisions of section 16(1) (c) of the Indian income-tax Act, 1922, and that when we are called upon.. . to examine the contention in the present case in the light of the analogous provisions of section 60, different considerations must weigh. It is difficult to appreciate, much less to accept the submission. The law declared by the Supreme Court in such clear terms in analogous fact situation governed by similar provisions of law is binding on this court. The Supreme Court is presumed to have applied its mind to the relevant provisions of law then existing, he ever though those provisions, in terms, might not have been referred to in the judgment. In other words, it would be legitimate to presume, nay, we are duty bound to presume, that the decision in Murlidhar's of case [1966] 62 ITR 323 (SC) was rendered after considering implicitly,if not expressly, the parallel provisions of section 16(1)(c). Und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the contribution of capital and right to receive profits. However, even if such a contention could be raised by the Revenue the same stands answered as noted hereinbefore by the decision of this court in the case of CIT v. Nandiniben Narottamdas [1983] 140 ITR 16. 27 Therefore, on this count the apex court decision in the case of CIT v. Sunil J. Kinariwala [2003] 259 ITR 10 cannot carry the case of the Revenue any further because at page No. 18 of the reports [2003] 259 ITR 10, the Supreme Court has specifically recorded that "it is unnecessary to consider the alternative contention based on section 60 of the Act." 28 Examining the issue from a slightly different angle a Full Bench of this High Court in the case of Chhotalal and Co. v. CIT [1984] 150 ITR 276 has after referring to various decisions of the apex court laid down that under the income tax law the Revenue is required to bear in mind the distinction qua, a registered partnership firm and the assessment of the partners of the firm because both of them are separate legal entities for the purpose of the Act. It has been stated (pages 283, 285) "The position, therefore, is well-settled that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily which is ultimately to be assessed. . . The Revenue is not precluded from looking into the real character the of the partner and the capacity in which he represents himself in the partnership firm." (emphasis supplied) 29 Once this distinction is borne in mind, viz., that while assessing the partnership firm the requirements prescribed in law for the assessment of the partnership only have to be looked at, and while assessing the partners individually, the status of the partner, the capacity of the partner and the obligation of the partner have to be borne in mind, independent of the partner's status and relations vis-a-vis other partners of the firm, and then the confusion that repeatedly occurs can be avoided. The present is a classic case of such a mixed up approach while framing assessment of the partner in his individual capacity. Whatever may be the obligations of the partner qua the other partners of the firm or against third parties as a partner of the firm under the general law of partnership, when he is required to be assessed as an assessee simpliciter the Revenue is required only to look at the income which lawfully accrues to him and is taxable in his hands. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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