1993 (8) TMI 17 - HC - Income Tax

A Firm, A Partner, Diversion Of Income, Income By Overriding Title, Income Tax Act, Interest In Property, Transfer Of Property

Summary

Issues Involved:
1. Validity of the gift of part of the share of profits and losses.
2. Existence of an overriding title in favor of the donees under the gift deed.

Detailed Analysis:

1. Validity of the Gift of Part of the Share of Profits and Losses:

The Tribunal held that the gift of part of the share of profits and losses by the assessee was not valid in law. The assessee, a partner in Navjivan Trimming Factory, gifted 40% of her 50% share in the firm to her brother-in-law's family. During the assessment for the year 1971-72, the assessee contended that the income gifted to the donees should not be regarded as her income. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal all held that this was a case of application of income by the assessee, not a diversion of income at source. The Tribunal concluded that the transfer of capital and the right to receive profits did not amount to a transfer of the partner's interest in the firm. The Tribunal also referred to the firm's account books, noting that the income was credited to the assessee's name, indicating it was applied after accruing to her.

The Tribunal's view was that the gift did not create a charge in favor of the donees on the donor's share of profits, thus there was no diversion of income due to an overriding title. It also mentioned that the gift was not valid under section 122 of the Transfer of Property Act, which defines a gift as a transfer of existing movable or immovable property without consideration. The Tribunal's interpretation was that a gift must transfer all rights in the property, which was not the case here.

2. Existence of an Overriding Title in Favor of the Donees:

The Tribunal held that there was no overriding title in favor of the donees under the gift deed. The assessee's counsel argued that the Tribunal misinterpreted the gift deed and the concept of diversion of income due to an overriding title. The gift deed stated that the shares given to the donees would be their separate property, and the donor would have no interest in them. It also mentioned that if the other partner did not assent to change the partnership deed, the donees would be considered co-owners of the donor's share.

The Tribunal's conclusion was that the right to receive the property remained with the assessee, as evidenced by the account books where the income was credited to her name. Thus, the income was applied by the assessee after it accrued to her. The Tribunal also referenced section 60 of the Income-tax Act, stating that since there was no transfer of the asset from which the income arose, the gifted shares of profits had to be included in the assessee's total income.

The court, however, disagreed with the Tribunal's findings. It held that the assessee had completely divested herself of any right, title, or interest in the 40% share in the partnership firm, transferring it absolutely to the donees. The gift deed's clauses indicated that the donees were to be regarded as co-owners of the share, and this change in the character of the assessee's partnership interest had to be considered for income-tax purposes. The court cited precedents like Raja Bejoy Singh Dudhuria v. CIT and CIT v. Sitaldas Tirathdas, which established that income diverted by an overriding title before reaching the assessee could not be taxed as the assessee's income.

The court concluded that 40% of the profits received by the assessee were diverted by an overriding title to the donees and could not be regarded as her income. Thus, the Tribunal's view was incorrect.

Conclusion:

The court answered both questions in the negative, ruling in favor of the assessee and against the Revenue. The gift of part of the share of profits and losses was valid, and there was an overriding title in favor of the donees under the gift deed. No order as to costs was made.