ITR/212/1995 1/39 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 212 of 1995 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA HONOURABLE MS.JUSTICE H.N.DEVANI ============================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ============================================================== COMMISSIONER OF INCOME TAX - Applicant(s) Versus JAYANTILAL D PATEL - Respondent(s) ============================================================== Appearance : MR MANISH R BHATT for Applicant(s) : 1, SERVED BY RPAD - (N) for Respondent(s) : 1, ================================================================== CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MS.JUSTICE H.N.DEVANI Date : 21/04/2006 CAV JUDGMENT (Per : HONOURABLE MS.JUSTICE H.N.DEVANI) ITR/212/1995 2/39 JUDGMENT 1. The Income-tax Appellate Tribunal, Ahmedabad Bench-A, has referred the following two questions under section 256(1) of the Income Tax Act, 1961 (the Act), at the instance of the Commissioner of Income-tax: 1. “Whether, the Appellate Tribunal is right in law and on facts in directing the ITO to exclude 50% share of profit of Biren Nandish Trust from the income of the assessee?” 2. “Whether, the Appellate Tribunal is right in law and on facts in holding that the provisions of sec.60 of the Income Tax Act cannot be invoked?” 2. The Assessment Years are 1979-80, 1980-81, 1981-82 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 & Co., as well as dividend, interest, Director’s fees etc. The assessee had 60 per cent share in the ITR/212/1995 3/39 JUDGMENT profits and loss of the business in the firm of Jayantilal & Co. 4. By a trust deed dated 13th June 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.1000/- was settled in the trust. 5. On the next day, that is, on 14th June 1978, the assessee executed a deed of assignment whereby, the assessee gifted one half of his partnership share in the said firm to the aforesaid Biren Nandish Trust. In addition to the gift of the said partnership share, the assessee also gifted a cash amount of Rs.3000/- out of the amount standing to his credit in the said firm to the Trust. ITR/212/1995 4/39 JUDGMENT 6. For the years under consideration, the assessee claimed deduction of 50 per cent out of the profits from his 60 per cent share in M/s Jayantilal & Co. on the ground that as per the deed of assignment executed on 14.6.78, the income had been diverted in favour of the “Biren Nandish Trust” and as such was not liable to be included in his total income. 7. The Assessing Officer observed that the share of profit earned by the assessee from the firm M/s Jayantilal & Co. accrued to the petitioner first and then further entries were passed to transfer 50 per cent of the profit in favour of the Trust. That, in the books of account of the firm the capital account had not been transferred from the name of the assessee to the names of the trustees of the Trust. That, the petitioner had kept control over the capital and assets of the firm. The Assessing Officer found that only 50 per cent of the share of profit had been transferred without transferring the source of the income producing assets. That, in view of the fact that the capital balance appearing in the accounts of the ITR/212/1995 5/39 JUDGMENT assessee had been carried forward in the subsequent year, the transactions evidenced by the declarations amounted only to transfer of the share in the profit of the firm and that the asset, namely, the assessee’s interest as a partner in the firm continued to remain the property of the assessee, therefore, there was no effective diversion of income before it accrued or arose to the assessee. The Assessing Officer further observed that under the law of partnership it is the partner and partner alone who is entitled to the profit. A stranger, even if he is an assignee, cannot have any direct claim to the profits. That, this was a case of application of income for the benefit of the beneficiaries of the Trust after the accrual of the income. The Assessing Officer found that none of the decisions cited by the assessee viz. C.I.T. v. M/s Chandulal C. Shah, M/s Murlidhar Himarsingka v. C.I.T., Smt. Nandiniben Narottamdas are applicable to facts of the case. 8. 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 ITR/212/1995 6/39 JUDGMENT 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. Commissioner of Income-tax (1961) 42 ITR 25, was applicable to the facts of the case. That, applying of the ratio of decision of the Supreme Court in the case of Sitaldas Tirathdas v. Commissioner of Income-tax (1961) 41 ITR 367, it cannot be said that the profits were diverted by an overriding title before the accrual to the assessee. The Assessing ITR/212/1995 7/39 JUDGMENT Officer found that this was a case of application of income and not a case of diversion of income at source and held that the assessee was liable to be taxed on the entire income derived from the said firm. 9. The Assessing Officer was also of the view that the subject matter of the gift was a future unascertained property, hence, the same would not fall within the meaning of gift as defined under section 122 of the Transfer of Property Act, 1882 (T.P. Act). Hence, the gift in question was not a valid gift, and neither was any charge created in terms of section 100 of the T.P. Act. That, by virtue of the provisions of section 124 of the T.P. Act, a gift of future property was void. 10.The Assessing Assessing Officer finally concluded in paragraph No.16 of the Assessment Order by observing : “16. In view of the above facts of the case, the present case is one in which the children of the assessee received a portion of the income of the assessee after the assessee had received the income as his own. ITR/212/1995 8/39 JUDGMENT The case is one of application of a portion of income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of another's income. The provision of section 60 of the I.T. Act are, therefore, clearly attracted and the amount in question had accrued to the assessee and it was a case of application of income after its accrual and not a case of diversion of income at source. Therefore, the assessee is not entitled to deduct it from his assessable income but the same is taxable as income in his hands. Hence, the claim for deduction is not allowed and therefore, the entire income arises to the assessee on account of his share in the profit of the firm of M/s Jayantilal & Co. is included in the total income of the assessee.” 11.The assessee challenged the assessment orders in relation to each of the Assessment Years, by way of appeals before the Commissioner of Income-tax (Appeals). Before the Commissioner of Income-tax (Appeals), on behalf of the assessee reliance was placed upon the decision of the Supreme Court in the case of Commissioner of Income-tax v. ITR/212/1995 9/39 JUDGMENT Bhagyalakshmi & Co. (1965) 55 ITR 660, to contend that the partnership share being 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 insofar 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 ITR/212/1995 10/39 JUDGMENT books of the firm, thus, discharging his legal obligation. 12.It was further submitted that it was beyond the scope of the powers of the Assessing Officer in the course of assessment proceedings under the Income-tax Act to pronounce upon the validity of the gift. More so, in the light of the fact that the assessee had duly filed gift tax return in relation to the gift of partnership share and cash gift of Rs.3000/- and the same had been accepted as a valid gift by an order dated 8.10.82 under the Gift Tax Act, made by the very same Assessing Officer. It was pointed out that the said order had been passed on final and substantive basis. The Commissioner of Income-tax (Appeals) vide his common order dated 22nd September 1986 in respect of each of the Assessment Years, found that the issue involved in this case, stood concluded in favour of the assessee by a decision of this Court in the case of C.I.T. v. Nandini Narottamdas, (1983)140 ITR 16. That, the said decision had been accepted by the Revenue. Accordingly, in the said factual and legal background, the Commissioner of Income-tax (Appeals) held that the 50 per cent share of profit of the ITR/212/1995 11/39 JUDGMENT Trust out of the 60 per cent share of the assessee was not by way of application of income but by way of diversion of income on account of overriding title and allowed the appeals. 13.The aforesaid order of the Commissioner of Income-tax (Appeals) was challenged by the revenue before the Income-tax Appellate Tribunal. The Tribunal vide its order dated 23.4.1990 confirmed the order of the Commissioner of Income-tax (Appeals) and dismissed the appeals. The Tribunal was of the view that the crucial question in the case was as to whether the assessee’s right to the share in the partnership firm had been diverted at source. That, for this purpose, it was necessary that both the right to receive the profit and liability for loss should have been transferred and that for this purpose, the entries in the books of the firm are not relevant. That, what has to be seen is the deed of assignment. The Tribunal, upon perusal of the deed of assignment found that the assessee had gifted one half of his partnership share out of his 60 per cent share in the firm, to the Trust. That, is ITR/212/1995 12/39 JUDGMENT was clarified that the gift of partnership share includes the right to share the profits and/or losses which may result in the said partnership business. The Tribunal found that half of both the right to share 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 8.10.1982 and the income from this assignment has also been charged by the assessment order dated 22.1.1982. For the aforesaid reasons as well as in view of the decision of this Court in the case of Nandiniben Narottamdas (supra), the Tribunal dismissed the appeals. 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 ITR/212/1995 13/39 JUDGMENT 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 there was no transfer of the assets from which the income arises; that what was transferred was merely a right to share the profit and contribute to the deficit when called upon to do so. It was submitted that share in the partnership without transfer of capital cannot be said to be a transfer of assets. That the transfer in question was a transfer merely of the income generated without transferring the income generating asset hence, the provisions of section 60 of the Act were attracted. It was submitted that under the law of partnership, it is only the partner who is entitled to the income coming to his share and that a stranger, even if he were an assignee, does not have any claim to the profits of the firm. Reliance was placed upon the decision of the Supreme Court in the case of K.A. Ramachar v. Commissioner of Income-tax (supra) in support of the said proposition. ITR/212/1995 14/39 JUDGMENT 16.Mr. Bhatt submitted that section 60 of the Income Tax Act, 1961 has to be read with the provisions of section 14 and 15 of the Partnership Act. Reliance was placed upon the decision of the Supreme Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa, Air 1966 SC 1300 to submit that though during the subsistence of the partnership a partner may assign his share to another; the assignee would get only that which is permitted by section 29(1) of the Partnership Act, namely, the right to receive the share of profits of the assignor and accept the accounts of profits agreed to by the partners. That, the transfer by virtue of the deed of assignment was therefore, a restrictive transfer. That even under the provisions of section 29(1) of the Partnership Act, it cannot be said that the income-generating asset has been transferred. That the Assessee is a partner; and under the scheme of the Act we have to look at the partner alone. It was submitted that income had been generated qua the assessee’s interest in the partnership firm. That, the provisions of section 29(1) of the Partnership Act have to be read in the context of the other provisions of the said ITR/212/1995 15/39 JUDGMENT Act. It was submitted that in the facts of the present case the decision of the Supreme Court in the case of K.A. Ramachar v. Commissioner of Income-tax, Madras, (supra) would be directly applicable and as such, the income from the gifted share, in law and in fact was the income of the assessee. That what was paid to the Trust was by way of application of his income after accrual thereof, and that there was no diversion of income at source by an overriding title. 17.The learned Counsel fairly submitted that the facts of the present case are similar to the facts involved in the case of Commissioner of Income-tax, Gujarat v. Nandiniben Narottamdas (supra), 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 Commissioner of Income- tax 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 ITR/212/1995 16/39 JUDGMENT 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 case of dissolution of the firm, whereas a sub-partnership acquires a special interest in the main partnership. That the income from the share of the assessee, which had been assigned in favour of the Trust had to be included in the total income of the assessee. It was submitted that insofar as applicability of the ratio of the decision of the Supreme Court rendered in the case of Murlidhar Himatsingka v. Commissioner of Income-tax, Calcutta, (1966) 62 ITR 323, to the facts of the present case is concerned, no finding had been recorded that any sub- partnership had come into existence. That in view of the decision of the Supreme Court in the case of Commissioner of Income-tax v. Sunil J. Kinariwala (supra), since no sub- partnership had come into existence, it cannot be said that there is any diversion of income at source; that the present case is, therefore, one of application of income, hence, the impugned order of the Tribunal is ITR/212/1995 17/39 JUDGMENT not in consonance with the principles laid down by the aforesaid decisions and calls for intervention at the hands of this Court. 18.Reliance was also placed upon a decision of the Bombay High Court in the case of Commissioner of Income-tax v. Shri & Smt. Ganesh G.K. Azrekar (1996) 217 ITR 148, to submit that in the said case where the assessee had settled 75 per cent of his 80 per cent share in the profits of the partnership in favour of minor children of his brother, by virtue of a Trust deed, the Court had held that the income derived by the assessee by virtue of his 80 per cent share in the profits of business carried on by the said partnership was his income alone, and that, there was no diversion of his income by overriding title. That, the facts of the present case are similar to the said case, and as such no overriding title has been created in favour of the assignee trust, consequently, the income from the whole of the assessee’s 60 per cent share in the partnership firm was liable to be taxed in his hands. 19.The undisputed facts of the present case are: ITR/212/1995 18/39 JUDGMENT - The assessee had 60 per cent share in the profits and loss of the business in the firm of Jayantilal & Co. - The Biren Nandish Trust (Trust) was created by the assessee by virtue of a trust deed dated 13th June, 1978. - That by a deed of assignment dated 14th June 1978, the assessee gifted one half of his partnership share in the said firm as well as Rs.3000/- out of the amount standing to his credit in the firm to the aforesaid Trust. - That the assessee had filed 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 8.10.1982. - That the income from the assignment had been charged to tax, by assessment order dated 22.1.1982. 20.In the context of the aforesaid factual matrix, the principal issue that arises for ITR/212/1995 19/39 JUDGMENT consideration is whether the assignment deed dated 14th June, 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, insofar as the same is relevant for the purpose of the present case, reads as under: “XXXXXXXX WHEREAS Shri Jayantilal Dahyabhai Patel, party of the first part gifted away one-half of his partnership share out of the said 60 % share above referred to in the said partnership of M/s Jayantilal & Co to Biren Nandish Trust constituted under the Deed of Trust dated 13th June, 1978. The said Shri Jayantilal in addition to the gift of the said partnership share has also gifted on that day to the said Trust a cash amount of ITR/212/1995 20/39 JUDGMENT Rs.3,000/- out of the amount standing to his credit in the said partnership firm and delivery of the said gift has been given by him to the Trustees, WHEREAS 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 i.e. 30% as also to share in the assets of the said partnership firm on dissolution in the same proportion. WHEREAS the Accounting year of the said partnership is not yet over, the profits and/or losses which may result in the said partnership business as on Aso Vad Amas of S.Y. 2034 will belong to the said Trust to the extent of 30% out of the 60% share which the said Jayantilal in the said partnership prior to the aforesaid gift. Now this witnesseth as under: 1. That the said gift of the said partnership share alongwith the said cash amount of Rs.3,000/- has been accepted and delivery taken by the Trustees of the said Trust comprising of parties of the second part and that ITR/212/1995 21/39 JUDGMENT in token of the said acceptance and delivery they have joined as a party of these presents. 2. That on and from the said date when the said Jayantilal gifted away the said partnership share to the extent of 30% out of his share of 60% in the said partnership and the cash amount of Rs.3,000/- he had no right, title and