TMI Blog1993 (10) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... er alia, the following meaning : "(i) Fifty per cent. of the right, title and interest excluding capital out of the settlor's ten per cent. right, title and interest in the partnership of Messrs. Kinariwala R. J. K. Industries carrying on business at Ahmedabad or any conversion thereof ; (ii) The sum of Rs. 5,000 out of the settlor's capital in the said firm of Messrs. Kinariwala R. J. K. Industries settled in trust as above. " The assessee submitted his income-tax return for the assessment year 1974-75. The Income-tax Officer took the view that this was not a case of diversion of income at source but it was merely a case of an application of income. He, therefore, held that the income earned by the assessee could not be said to have been diverted at source. He further held that in view of section 60 of the Income-tax Act, it was a transfer of income without a transfer of assets from which the income arose and, therefore, the entire income earned by the assessee from the partnership firm is required to be included in his income. He, therefore, added Rs. 20,141 to the income of the assessee, while the assessee contended that it represents the income of the trust. Against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il 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, 50 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 ?" At the outset, we should note that the genuineness of the trust deed dated December 27, 1973, is not challenged or doubted by the Department nor is it contended that the said settlement is not genuine. By the said trust deed, the assessee has transferred his 50 per cent. right, title and interest excluding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partners nor the other partners can do so against the said third parties. Their right is only to a share in the profits of their partner-repre sentative in accordance with law or in accordance with the terms of the agreement. . . ." (emphasis supplied). Hence, it will be difficult to hold that because the capital held by the assessee is not divided or partitioned between the assessee and the trust, the income received by the assessee from the partnership firm would be his income. Once it is held that by a genuine trust deed an assessee has assigned 50 per cent. of his right, title and interest in favour of a trust, then the consequences would be that 50 per cent. of his income from the partnership firm would be that of the assessee and 50 per cent. of the income would be that of the trust. Similar questions with regard to a sub-partnership by a partner are dealt with by the Supreme Court in the case of Murlidhar Himatsingka v. CIT [1966] 62 ITR 323. In that case, the Supreme Court considered whether the income of the assessee--Murlidhar Himatsingka--from the firm of Messrs. Basantlal Ghanshyamdas, in which he was a partner, should be included in his personal assessment or in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his character vis-a-vis the sub-partners and the income-tax authorities, although the other partners in the original partnership are not affected by the changes that may have taken place ; that in the case of a sub-partnership the sub-partnership creates a superior title and diverts the income before it becomes the income of the partner. In other words, the partner in the main firm receives the income not only on his behalf but on behalf of the partners in the sub-partnership. The Supreme Court thereafter finally upheld the contention of the assessee and reversed the finding of the High Court. Further, this court had an occasion to deal with similar contentions in the case of CIT v. Nandiniben Narottamdas [1983] 140 ITR 16. In that case, the assessee-Nandiniben was a partner in two partnership firms, namely, Amrit Chemicals, and Star Radio and Electric Co. In Amrit Chemicals her share was one anna in the rupee, whereas in Star Radio and Electric Co., her share was eight per cent. By a declaration dated December 7, 1966, she assigned all benefits of her one anna share in Amrit Chemicals in favour of Panna, Pratiksha and Mamta Trust. By a subsequent declaration made on May 4, 1967, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired to be diverted even before it reaches him as a result of an overriding obligation, there would be neither accrual nor receipt of income which can be brought to tax in his hands. The income, in such a case, is taken away from him even before its accrual since it is already allocated for a particular purpose prior to its receipt, in his hands. The taxpayer, even if he collects it, does so, not as a part of his income, but for and on behalf of the person to whom it is payable and such income is not subject to tax in his hands. A case falling in this class must, however, be distinguished from a case falling in another distinct class, though both cases might sometimes appear deceivably similar, namely, where a portion of the taxpayer's income is applied after its accrual or receipt in a particular manner to meet an obligation. The payment in the latter case, which is really made out of the taxpayer's income pursuant to an obligation undertaken or incurred by him, would be chargeable to tax because a subsequent application of the income is of no concern to the Revenue." The court further observed that, in the former case, there would be diversion of income in such a way that it n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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