TMI Blog1981 (1) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... Ajayprakash and Brahmaprakash. The capital standing in the name of the assessee in the Khalilabad firm was Rs. 1,54,710.21 and in the Nagpur firm it was Rs. 2,96,177. There was a partition of the joint family of the assessee on August 27, 1962. At that partition the capital amount standing in the name of the assessee in the two firms also came to be equally divided between the members of the joint family of the assessee. The partition effected on August 27, 1962, was later reduced to writing and the memorandum of partition is annex. B dated September 15, 1962. The recitals of the memorandum of partition show that the profits of the " Khalilabad firm " and the firm " Kanoria Brothers ", which was the name of the reconstituted firm at Nagpur, " shall be the profits or losses of, the members of the joint family (including party No. 1) severally in their own respective individual right and interest, in the proportion stated hereinafter ". The proportion specified in the document was one-fourth share in the profits of each of the separated members of the joint family, i.e., the assessee, his wife and his two minor sons. The memorandum of partition specifically provided that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares having regard to the memorandum of partition. This contention was, however, rejected by the ITO who took the view that s. 64 of the Act was attracted to the case of the assessee. For the assessment years 1967-68 to 1970-71, the facts were identical except that additionally during those years the assessee was partner in a firm called M/s. Khare and Tarkunde and there was a similar partition between the members of the joint family of the assessee of the capital amount of Rs. 15,000 which was invested in the name of the HUF in the said firm. As in the case of the Nagpur and Khalilabad firms, there was also a partition in the year 1966, between the members of the joint family of the assessee, the terms of which are evidenced by the memorandum dated April 4, 1966, and the arrangement with regard to the profits of the firm of M/s. Khare and Tarkunde is the same, namely, each of the four persons were to have one-fourth share in the profits but the losses were to be borne by the assessee and his wife half and half. In the appeals filed by the assessee the AAC accepted the contentions raised before him and reversed the view taken by the ITO. He found that the family ceased to exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eproduced and was question No. (2). The other two questions, namely, Nos. (1) and (3), were as follows: " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the Appellate Assistant Commissioner ? (2) ...... (3) Whether the decision of the Tribunal is in accordance with the provisions of the Income-tax Act ? " In spite of the fact that these two questions were also asked to be referred and both of them appear to be wholly of a general nature, the Tribunal has thought it fit to make a reference only in respect of the question reproduced above. The learned counsel appearing on behalf of the revenue has at the outset contended that the applicability of s. 64 of the Act, is merely another aspect of the question which has been referred by the Tribunal and that the revenue was, therefore, entitled to contend that having regard to the provisions of s. 64, the income of the other members of the erstwhile joint family was includible in the income of the assessee. The learned counsel was also obviously referring to the provisions of cls. (i) and (iii) of sub-s. (1) of s. 64. The relevant clauses read as follows: "64 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and his wife. There is no ambiguity about the finding of that issue. We have, therefore, not permitted the learned counsel for the revenue to argue this reference on the footing that the order of the Tribunal would become erroneous in view of the provisions of s. 64 of the Act. Coming to the merits of the question, it was contended on behalf of the revenue that so far as the income which arises from being a partner in the firms in which the assessee continued to be a partner even after partition is concerned, that income could be only of the assessee because in a partnership firm a partner alone is entitled to the profits of the partnership. The learned counsel, therefore, contended that the profits of the partnership firms which were allocated to the share of the present assessee must be treated as his income and alternatively it was further submitted that when payments were being made to the other members of the erstwhile joint family, that was only in the nature of the application of the income of the assessee and that there was no question of any diversion consequent upon any overriding title. Reliance was placed by the learned counsel for the revenue on the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow separated and this is specifically made clear by using the word " severally " and not " jointly ". The agreement contained in this memorandum, therefore, leaves no room for the argument that the share of the profits in the partnership firms is received by the assessee on his own account either in his personal capacity or as the karta of the HUF. Those profits are received by him for and on behalf of the parties to the agreement contained in the two memoranda of partition. Though these amounts are received by him from the partnership firms, those do not belong to him in entirety, but to the extent of the share provided for in the memoranda, the ownership is of the parties to the memoranda of partition. The concept of diversion of income by an overriding charge is explained by the Supreme Court in Sitaldas' case [1961] 41 ITR 367. Laying down the test for deciding whether any particular income should be deducted from the income of the assessee on the ground that there is diversion of income at source by an overriding charge, the Supreme Court has observed as follows (p. 374): " In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test is whose income it is. If on the terms of the memoranda of partition, the assessee by virtue of the fact that he was allowed to continue in the two partnership firms was to receive the share in the profits of those firms and there was an express agreement which provided that he would receive that for and on behalf of the erstwhile members of the joint family who severally and independently had a title to a part of that income in the proportion which was specified in the memorandum of agreement, the entire share income clearly did not belong to him. The assessee had no doubt an obligation to pay a part of the income. That obligation when performed was not in the nature of an application of the income. That was an obligation which flowed from the terms of the memoranda of partition by which the title to a part of the income had already accrued in favour of the other members of the erstwhile joint family. The decision relied upon by the learned counsel for the revenue clearly distinguishable on facts. In K. A. Ramachar's case [1961] 42 ITR 25 (SC), the facts were that the assessee was a partner in a firm and he had executed three irrevocable deeds of settlement on September 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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