1994 (1) TMI 34 - HC - Income Tax

Diversion Of Income Income By Overriding Title Income Tax Act Information That Income Has Escaped Assessment Original Assessment Share In Firm

Summary

Issues:
1. Validity of reopening assessment under section 147(b) of the Act.
2. Tax liability on the entire 18 paise share income from Durga Flour Mills.
3. Determination of whether the settlement constituted a diversion by overriding title.

Analysis:

Issue 1: Validity of Reopening Assessment
The case involved a reassessment under section 147(b) where the Income-tax Officer concluded that there was no diversion by overriding title of the 6 paise share settled by the assessee. The Appellate Tribunal upheld this decision. The assessee objected to the reopening of the assessment, arguing that the audit party's opinion did not constitute valid information for reopening. The court held that the audit note highlighted facts overlooked by the Income-tax Officer, necessitating a reassessment. The Tribunal's decision to allow the reassessment was deemed valid under section 147(b).

Issue 2: Tax Liability on Entire Share Income
The dispute centered on whether the entire 18 paise share income from Durga Flour Mills should be taxed in the assessee's hands. The settlement deed indicated that the minor had a right to claim only 6 paise share from the assessee, not the firm. The court analyzed previous judgments and determined that the profits first accrued to the assessee before being applied for payment to the donee. As the donee had no direct link to the profits and the settlement did not transfer interest in the firm itself, the 6 paise share income was not diverted by overriding title. The court upheld the Tribunal's finding that the entire share income was liable to be assessed as the assessee's income.

Issue 3: Diversion by Overriding Title
The Tribunal had to determine whether the settlement constituted a diversion of income by overriding title. The court reviewed the settlement deed and relevant legal precedents. It concluded that the settlement did not transfer interest in the firm to the minor, as the profits first belonged to the assessee before being applied for the donee's benefit. The court distinguished this case from scenarios involving conversion of individual property into joint family property. Ultimately, the court affirmed the Tribunal's decision that there was no diversion of income in the 6 paise share by overriding title.

In conclusion, the court answered all questions in the affirmative against the assessee, upholding the tax liability on the entire share income and the validity of the reassessment, with costs awarded to the respondent.