Case: Commnr. Of Income Tax, Ahmedabad Vs. Sunil J. Kinariwala

entered into between the landlord the company, the Trust and the college, it was stipulated, inter alia, that in the event of failure to pay the amount to the college, it would have full right to recover the said amount by recourse to the court and that the college shall have the first charge on the property. The landlord claimed that the amount paid to the college was the income of the college as it get diverted by over-riding title and ceased to be the income of the landlord. That contention was rejected by the Tribunal as well as the High Court. On appeal to this Court, applying the principle in Sitaldas Tirathdas (supra), it was held by a Bench of three learned Judges that the stipulation in the agreement to pay Rupees ten thousand out of the annual rent directly to the college was only a mode of application of the income of the landlord, which made no difference to its liability to pay tax on the entire rent of Rupees twenty on thousand which had accrued to the landlord. The fact that the college was given the right to sue and recover Rupees ten thousand directly from the company in case of default, it was observed, did not alter the position, nor would creation of charge in favour of the college make any difference. 14. Now, we shall advert to the cases relied upon by the High Court. 15. Bhagyalakshmi (supra), two members of the Hindu Undivided Family together held ten annas share in a firm. On partition in the family, the share of the said members was divided among various members of the family. Thereafter, a fresh partnership deed was executed in which the said two persons were, however, shown as having the same proportion of share in the firm. They claimed that they were liable to pay tax only on the respective shares shown in the partnership deed. That contention was upheld by the Tribunal. Thereafter, the Commissioner cancelled the registration of the partnership firm under the Act on the ground that it did not specify the correct shares of the said two persons in the partnership. It was held by this court that the firm was entitled to be registered and that the shares given to the said two persons in the partnership deed were correct according to the terms of the deed, although they would be answerable to the divided members of the family in respect of profits pertaining to their shares. This case does not deal with the principle of diversion of income by over-riding title in his case.16. In Murlidhar Himatsingka (supra), one of the partners of the firm constituted a sub-partnership firm with his two sons and a grandson. The deed of sub-partnership provided that the profits and losses of the partner in the main firm shall belong to the sub-partnership and shall be borne and divided in accordance with the shares specified therein. The question in that case was: whether the share of the partner in the main firm, who had become a partner in the sub-partnership, could be assessed in his individual assessment. it was held that there was over-riding obligation which converted the income of the partner in the main firm into the income of the sub-partnership and, therefore, the income attributable to the share of the partner had to be included in the assessment of the sub-partnership. That was on the principle that a partner in the sub-partnership had a definite enforceable right to claim a share in the profits accrued to or received by the other partner in the main partnership, as on entering into a sub-partnership, such a partner changes his character vis-a-vis the sub-partners and the Income Tax authorities. Further, a sub-partnership creates a superior title and results in diversion of the income from the main firm to the sub-partnership before the same becomes the income of the concerned partner. In such a case, even if the partner receives the income from the main partnership, he does so not on his behalf but on behalf of the sub-partnership. Distinguishing K.A. Ramchar (supra), it was observed, "In that case it was neither urged for found that sub-partnership came into existence between the assessee who was partner in a firm and his wife, married daughter and minor daughter. It was a pure case of assignment of profits (and not losses) by the partner during the period of eight years. Further the fact that a sub-partner can have no direct claim to the profits vis-a-vis the other partners of the firm and that it is the partner alone who is entitled to profits vis-a-vis the other partners does not show that the changed character of the partner should not be taken into consideration for income-tax purposes". 17. It is apt to notice that there is a clear distinction 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. Whereas in the former case, in view of section 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership, except, of course, to receive that part of the profits of the firm referrable to the assignment and to the assets in the event of dissolution of the firm, but in the latter case, the sub-partnership acquires a special interest in the main partnership. The case on hand cannot be treated as one of a sub-partnership, though in view of Section 29(1) of the Indian Partnership Act, the Trust, as an assignee, becomes entitled to receive the assigned share in the profits from the firm not as a sub-partner because no sub-partnership came into existence but as an assignee of the share of income of the assigner-partner. 18. In this view of the matter, it is unnecessary to consider the alternative contention based on Section 60 of the Act.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]8. It may be pointed out that under the scheme of the Act, it is the total income of an assessee, computed under the provisions of the Act, that is assessable to income tax. So much of the income which an assessee is not entitled to receive by virtue of antitled created in favour of a third party would get diverted at source and the same cannot be added in computing the total income in the assesse. The principle is simple enough but more often than not, as in the instant case, the question arises as to whatis the criteria to determine, when does the income attributable to an assessee get diverted bytitle? The determinative factor, in our view, is the nature and effect of the assessees obligation in regard to the amount in question. When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay claim to receive it as his income, there would be diversion of income bytitle; but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income bytitle. The decisions of the Privy Council in Bejoy Singh Dudhuria vs. Commissioner of[(1933) 1 I.T.R. ] 135 and P.C. Mullick vs. Commissioner of[(1938) 6 I.T.R. 206] together are illustrative of the principle of diversion of income by. Bhagyalakshmi (supra), two members of the Hindu Undivided Family together held ten annas share in a firm. On partition in the family, the share of the said members was divided among various members of the family. Thereafter, a fresh partnership deed was executed in which the said two persons were, however, shown as having the same proportion of share in the firm. They claimed that they were liable to pay tax only on the respective shares shown in the partnership deed. That contention was upheld by the Tribunal. Thereafter, the Commissioner cancelled the registration of the partnership firm under the Act on the ground that it did not specify the correct shares of the said two persons in the partnership. It was held by this court that the firm was entitled to be registered and that the shares given to the said two persons in the partnership deed were correct according to the terms of the deed, although they would be answerable to the divided members of the family in respect of profits pertaining to their shares. This case does not deal with the principle of diversion of income bytitle in his case.16. In Murlidhar Himatsingka (supra), one of the partners of the firm constituted afirm with his two sons and a grandson. The deed ofprovided that the profits and losses of the partner in the main firm shall belong to theand shall be borne and divided in accordance with the shares specified therein. The question in that case was: whether the share of the partner in the main firm, who had become a partner in thecould be assessed in his individual assessment. it was held that there wasobligation which converted the income of the partner in the main firm into the income of theand, therefore, the income attributable to the share of the partner had to be included in the assessment of theThat was on the principle that a partner in thehad a definite enforceable right to claim a share in the profits accrued to or received by the other partner in the main partnership, as on entering into asuch a partner changes his characterrs and the Income Tax authorities. Further, acreates a superior title and results in diversion of the income from the main firm to theIt is apt to notice that there is a clear distinction 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 awith his share in the main partnership. Whereas in the former case, in view of section 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership, except, of course, to receive that part of the profits of the firm referrable to the assignment and to the assets in the event of dissolution of the firm, but in the latter case, theacquires a special interest in the main partnership. The case on hand cannot be treated as one of athough in view of Section 29(1) of the Indian Partnership Act, the Trust, as an assignee, becomes entitled to receive the assigned share in the profits from the firm not as aIn this view of the matter, it is unnecessary to consider the alternative contention based on Section 60 of the Act.