1994 (11) TMI 7 - HC - Income Tax

Summary

Issues:
- Validity of trust created by the assessee
- Diversion of income by overriding title
- Application of income
- Applicability of section 60 of the Income-tax Act, 1961

Validity of Trust:
The case involved a partnership where the assessee settled 75% of his share in favor of minor children through a trust deed. The Income-tax Officer initially rejected the claim of diversion of income by overriding title. The Commissioner of Income-tax (Appeals) upheld this decision. However, the Income-tax Appellate Tribunal reversed the lower authorities' decision, stating that the trust created by the assessee was valid and there was a diversion of income by overriding title. The Tribunal held that the beneficiaries had the first claim over the share of income from the partnership firm.

Diversion of Income by Overriding Title:
The court examined whether the income was diverted before reaching the assessee. It distinguished between obligations that divert income before reaching the assessee and those that require income application after receipt. Citing precedents, the court concluded that the income derived by the assessee from the partnership was his alone. Even if a trust was validly created, there was no diversion of income by overriding title; instead, it was deemed as an application of income by the assessee.

Application of Income:
The court emphasized that the nature of the obligation is crucial in determining income diversion. It highlighted that the income derived by the assessee was his own, and any trust created did not divert the income before reaching him. Therefore, it was considered an application of income by the assessee after receipt.

Applicability of Section 60:
The court reframed the question to focus on whether there was a diversion of income by overriding title and if it was not a case of application of income. It held that the Tribunal erred in setting aside the lower authorities' orders, answering the reframed question in the negative and in favor of the Revenue. No costs were awarded in the case.