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

4. The assessee, a partner in the partnership firm, known as M/s. Kinariwala R.J.K. Industries. Ahmedabad, (for short, the firm) was having ten per cent share therein. On December 27, 1973, he created a Trust named "Sunil Jivanlal Kinariwala Trust" by a deed of settlement assigning fifty percent out of his ten per cent right, title and interest (excluding capital), as a partner in the firm, and a sum of Rupees five thousand out of his capital in the firm in favour of the said Trust. There are three beneficiaries of the Trustthe assessees brothers wife, assessees niece and the assessees mother. In the Assessment Yearhe claimed that as fifty per cent of the income attributable to his share from the firm, stood transferred to the Trust resulting in diversion of income at source, the same could not be included in his total income for the purpose of his assessment. The Income Tax Officer rejected the claim on the view that it was a case of application of income and not diversion of income at source; he also found that Section 60 of the Act was attracted as only income without transfer of asset was settled. /Against the order of assessment, the assessee appealed before the Appellate Assistant Commissioner of Income Tax who allowed the appeal directing that a sum of Rs. 20.141/which stood transferred to the trust under the settlement, be excluded from the total income of the assessee. However, on appeal by the Revenue, the Tribunal reversed the order of the Appellate Assistant Commissioner. Thus, thequestions of law came to be referred to the High Court by the Tribunal.5. The High Court, relying on the judgment of this court in Commissioner of Incometax, Madras vs. Bhayalakshmi & Co. [(1965) 55 I.T.R. 660] and Murlidhar Himatsingka & Anr. vs. Commissioner of Incometax, Calcutta [(1966) 62 I.T.R. 323], held, inter alia, that on assignment of fifty per cent share of the assessee in the firm, it became the income of the Trust bytitle and it could not be added in the total income of the assessee. In that view of the matter, theQuestion Nos. (1) to (3) were answered in the affirmative, in favour of the assessee and against the Revenue.6. It appears that for a considerable time no steps to file an appeal were taken against the impugned judgment of the High Court. On the assumption that it was accepted by the Revenue, various matters were disposed of by the High Court, following the said judgment. In some of those cases, special leave petitions were filed but they were dismissed on the ground that the main judgment of the High Court was allowed to become final. Thereafter, the Revenue woke up and challenged the said judgment by by filing the present appeal. That is how, the appeal came to be filed and is before us.

Reasoning: 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.