1993 (12) TMI 18 - HC - Income Tax

Summary

Issues:
1. Inclusion of 40% of income by way of share in a partnership firm in the total income of the assessee.
2. Application of section 60 of the Income-tax Act, 1961 in the case.

Analysis:
The High Court of Gujarat was presented with the issue of whether the amount of Rs. 26,405, being 40% of the income by way of share in a partnership firm, should be included in the total income of the assessee. The assessee, an individual partner in a firm, had settled 40% of his share in the firm to a trust. The Income-tax Officer initially rejected the claim that this income should not be included in the total income of the assessee. However, the Appellate Assistant Commissioner accepted the claim, leading to an appeal by the Revenue before the Tribunal.

The Tribunal, after a difference of opinion among its members, concluded that the income by way of share in the firm was diverted by a superior title due to the settlement with the trust. The Revenue then applied to the Tribunal to refer a question of law arising from the order, which was agreed upon, leading to the reference to the High Court for opinion.

During the hearing, it was noted that a similar question had been answered in favor of the assessee in a previous case with identical facts. The High Court referred to previous decisions, including the Supreme Court's rulings in CIT v. Bagyalakshmi and Co. and Murlidhar Himatsingka v. CIT, to support the conclusion that when a sub-partnership is created, the income is diverted before becoming the income of the partner. The Court emphasized that the right to receive profits and contribute to losses constitutes the income-producing asset, and once transferred, section 60 of the Income-tax Act cannot be invoked.

Based on the precedent and reasoning from the earlier case, the High Court held that the amount in question was not includible in the total income of the assessee. The Court answered the referred question in favor of the assessee and against the Revenue, disposing of the reference accordingly.

In conclusion, the judgment clarified the application of section 60 of the Income-tax Act in cases where a partner diverts their share of income in a partnership firm to a trust, emphasizing the creation of a superior title and the non-applicability of section 60 in such circumstances.