TMI Blog1981 (9) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 1968-69 and 1969-70 ? " Three assessment years are involved herein, as indicated by the questions themselves. They are assessment years 1967-68, 1968-69 and 196970. The corresponding previous years are Samvat years 2022, 2023 and 2024, respectively. The assessee was a partner in two partnership firms, namely. Amrit Chemicals and Star Radio and Electric Co. In the first partnership firm, the assessee's share was one anna in a rupee; whereas in the second partnership-firm, the share was 8%. By a declaration made on December 7, 1966 (the date, December 16, 1964, has been erroneously mentioned in the statement of case, according to the parties), the assessee declared : " I being desirous of assigning the benefits 0-1-0 share in the said firm of M/s. Amrit Chemicals, Ahmedabad, donated the same for the benefit of the beneficiaries valued in the trust of Panna, Pratiksha and Mamta Trust ...... and the trustees of the said trust have accepted the said donation... " The declaration went on to state further that the assessee held 0-1-0 share in the said firm in the capacity of trustee of the said trust and not in the capacity of the owner of the same. By ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and taking into account the surrounding circumstances, the transactions have not resulted in the creation of an overriding title over the income received by way of share of profits in the partnership firms. What has been done amounts only to the application of the income after its accrual. (2) (a) Assuming that the assessee has divested herself of the income at source, since the entire income-producing asset, namely, the share in the partnership firms comprising of all the concomitant rights, is not transferred, the income is still assessable in her hands by virtue of the provision contained in s. 60 of the Act. (b) The share in a partnership confers not only the right to claim the defined proportion of the divisible income but also the right ultimately to re-claim the capital contributed and the share in the surplus assets of the firm at the proper time. The said rights having not been transferred along with the right to receive income, even if there is a partial transfer of the asset, the income is still assessable in the hands of the assessee, by virtue of the provision contained in s. 60 of the Act, as there is no transfer of the whole of the asset from which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer's income pursuant to an obligation undertaken or incurred by him, would be chargeable to tax because subsequent application of the income is of no concern to the revenue. These two classes of cases, which are distinct and separate, sometimes appear to bear a close resemblance at first sight because in both cases there is a common factor, namely, existing obligation to make a payment. The dissimilarity arises, however, because of the nature of the obligation which is really and materially different in each of them. The obligation as a result of which income is diverted at source is substantially different from the obligation in consequence of which income is applied after its accrual or receipt. The obligation of the former kind ordinarily arises out of an overriding charge existing either upon the asset or its income or is traceable to an assignment or creation of a superior title over it or springs from a division of the assets between joint owner or co-owners and requires that the income which accrues or is received from such asset should be applied to discharge the said obligation. The obligation of the latter kind is usually undertaken or incurred by the taxpayer, be it b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital account of the two firms in the name of the assessee were not transferred in favour of the beneficiaries of the Panna, Pratiksha and Mamta Trust. (3) Wealth-tax was continued to be paid by the assessee on the amounts standing to her credit in the said capital account. And (4) Interest earned by the assessee on the amounts standing in the said capital account was returned and assessed in the individual assessment of the assessee even after the transaction in question. We must first turn our attention to the two declarations. Be it noted at this stage that it is an undisputed fact that the declarations themselves do not purport to make a gift of the share in the two firms. They are merely a record of the past transactions. The first declaration in point of time relates to the assessee's share in Amrit Chemicals and the material part thereof reads as under : "That I being desirous of assigning the benefits of 0-1-0 share in the said firm of M/s. Amrit Chemicals, Ahmedabad, donated the same for the benefit of the beneficiaries valued in the trust of 'Panna, Pratiksha and Mamta Trust' executed on the 29th October, 1966, and the trustees of said trust have accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the gift was merely of profits without the liability to contribute in case of losses. A mere look at the documents is sufficient to convince that they are not the handiwork of an expert either in language or in law and that the expressions therein are not so precisely used, as in a formal conveyance, that each word signifies a technical or legal meaning. There is no warrant, therefore, to read the words " benefits of share " as equivalent to the expression " benefits of partnership " in s. 30 of the Partnership Act, 1932, and construe them accordingly. Even the collocation is different and so is the context. In the next place, in the second paragraph of the declaration pertaining to the share in Amrit Chemicals, the assessee declared that she held the said " share ...... in the capacity of the trustee of the said trust and not in the capacity of the owner of the same " and in the declaration relating to the share in Star Radio and Electric Co she declared that she held the said "share ... in the capacity of the trustee of the said trust and not in the capacity of the partner of the same". The word " partner" in the latter part of the declaration relating to the assessee's sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o uphold the contention urged on behalf of the Revenue that what the declarations evidence is a transaction whereunder only the share of profits in each of the firms was gifted to Panna, Pratiksha and Mamta Trust. Fortunately, for the assessee, the declarations are not the only evidence of the disputed transactions and there are other circumstances which lend support to the view which we are inclined to take on a proper reading of those declarations. The most important circumstance which furnishes true guide to the intention of the parties is an action which was taken shortly after the declaration in relation to the gift of the assessee's share in Star Radio and Electric Co. It appears that the said firm had sufferred a loss in the year 1968 and that the loss was apportioned amongst the partners. Since the assessee continued to be a partner of the firm, notwithstanding the transaction in question, in view of the provisions of the Partnership Act, her share of the loss was apportioned to her. In her own books of account, the loss was debited in the account maintained in the name of the trust and in the books of the trust, a corresponding credit was given in the account maintained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red, the right to receive profits and pay losses became an asset of the sub-partnership firm, that there was an overriding obligation and the income of the assessee from the main partnership firm did not remain his income and that, therefore, his share of income from the main partnership firm had to be included in the assessment of the sub-partnership firm and not in his personal assessment. In reaching the conclusion that the sub-partnership had succeeded in diverting the income of the assessee before it reached him, the Supreme Court attached importance to the circumstances that losses were also to be shared by the partners in the sub-partnership. What became the asset of the sub-partnership firm was the right to receive profits and pay losses. The facts in the case before the Supreme Court and those in the case before us bear a close resemblance. In the present case, as in the case before the Supreme Court, what has been diverted by the assessee is his right to receive profits and pay losses in both the firms. The further common factor in both the cases is that the amounts standing in the capital account of the firms continued to belong to the assessee and that the sub-partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject of this section is to overtake or circumvent the tendency on the part of the tax payers 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 where by 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 such transfer is revocable or not and whether it is effected before or after the commencement of the Act. Be it noted, however, that the section is attracted only when there is a valid and effective transfer in favour of a third party as a result of which the income ceases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nexus with the production of income has been transferred and that once it is established that the right to receive profits coupled with the liability to contribute to the losses has been transferred, there is a transfer of asset within the meaning of s. 60. The question is as to which out of the two contentions, must prevail. Now, we must, at the outset, point out that the problem was not posed before the Tribunal in the manner in which it is presented to us. The question as to what is the asset from which the income arises in a given case and whether such asset is transferred or not is not a pure question of law. Unless the Tribunal is invited to find the essential facts bearing on the question, it would not be possible to answer the question by applying any legal formula. In the context of a transaction involving the gift of the right to receive profits coupled with liability to contribute to the losses, the question may arise in diverse situations, depending upon factors such as the terms of the partnership agreement, the absence or presence of capital contribution, etc. For example, if reliance is to be placed upon the fact that the capital contributed to the firm is to con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly urged that the decision in Murlidhar's case [1966] 62 ITR 323 (SC), did not notice the provisions of s. 16(1)(c) of the Indian I.T. 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 s. 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, even though those provisions, in terms, might not have been referred to in the judgment. In other words, it would be legitimate to presume, may, we are duty bound to presume, that the decision in Murlidhar's case was rendered after considering implicitly, if not expressly, the parallel provisions of s. 16(1)(c). Under such circumstances, in our opinion, it is not open to the Revenue to urge that we should take a different view of the matter. As a result of the foregoing discussion, we come to the conclusion that in the instant case, there was not only a val ..... X X X X Extracts X X X X X X X X Extracts X X X X
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