1993 (10) TMI 7 - HC - Income Tax

Summary

Issues Involved:
1. Whether 50% of the assessee's 10% right, title, and interest in the partnership firm belongs to the trust and the income arising therefrom belongs to the trust by overriding title.
2. Whether the sum of Rs. 20,141, being the profits referable to 50% of the assessee's right, title, and interest in the partnership firm, is not the real income of the assessee but of the trust and hence assessable only in the hands of the trust.
3. Whether the 50% share of the assessee in the partnership firm has been validly assigned to the trust under the deed of trust and whether the income arising therefrom belongs to the trust by way of overriding title.

Detailed Analysis:

1. Validity and Ownership of the 50% Share in the Partnership Firm:
The court examined whether the 50% of the assessee's 10% right, title, and interest in the partnership firm "Kinariwala R. J. K. Industries" belonged to the "Sunil Jivanlal Kinariwala Trust" and whether the income arising from this share belonged to the trust by overriding title. The court noted that the genuineness of the trust deed dated December 27, 1973, was not challenged by the Department. The trust deed effectively divided the assessee's right, title, and interest between him and the trust. The court referred to the Supreme Court's ruling in CIT v. Bagyalakshmi and Co., which stated that a partner might represent third parties in a partnership, and their rights are limited to the share in the profits of the partner-representative. The court concluded that by assigning 50% of his right, title, and interest to the trust, the income from that share belonged to the trust.

2. Real Income of the Assessee vs. Income of the Trust:
The court addressed whether the sum of Rs. 20,141, representing 50% of the profits from the assessee's share in the partnership firm, constituted the real income of the assessee or the trust. The court reviewed the principles laid down in Murlidhar Himatsingka v. CIT, where it was held that income diverted by an overriding title before reaching the assessee is not taxable as the assessee's income. The court also referred to CIT v. Nandiniben Narottamdas, which distinguished between income diverted at source and income applied after receipt. The court determined that the assessee had divested himself of the income-producing apparatus or asset by creating an overriding title in favor of the trust, and thus the income was assessable in the hands of the trust, not the assessee.

3. Valid Assignment and Overriding Title:
The court evaluated the validity of the assignment of the 50% share in the partnership firm to the trust under the trust deed. The court reiterated that the trust deed was genuine and effective, and the assessee had validly transferred his right, title, and interest to the trust. The court emphasized that the right to receive profits and contribute to losses constituted the income-producing apparatus or asset. Since this right was transferred to the trust, section 60 of the Income-tax Act, which pertains to the transfer of income without the transfer of assets, was not applicable. The court concluded that the income arising from the transferred share belonged to the trust by way of overriding title.

Conclusion:
The court answered all three questions in the affirmative, in favor of the assessee and against the Revenue. The court held that 50% of the assessee's right, title, and interest in the partnership firm belonged to the trust, the income arising therefrom was assessable in the hands of the trust, and the assignment under the trust deed was valid and effective. The reference was disposed of accordingly with no order as to costs.