1981 (1) TMI 7 - HC - Income Tax

Summary

Issues Involved:
1. Application of Sections 60 to 63 of the I.T. Act, 1961.
2. Diversion of income by overriding title.
3. Impact of registration under Section 185 on the application of Sections 60 or 61.

Detailed Analysis:

1. Application of Sections 60 to 63 of the I.T. Act, 1961:

The primary issue was whether the Income Tax Officer (ITO) was justified in resorting to Sections 60 to 63 of the I.T. Act, 1961. The Revenue contended that since the Municipal Corporation did not transfer the contract to the partnership firm, the income should be treated as that of the individual assessee. The Tribunal, however, found that the asset (the contract) was transferred to the partnership firm, and thus, Section 60, which deals with the transfer of income without transferring the asset, did not apply. The Tribunal's finding that the construction work was carried out by the partnership firm and not by the individual was crucial. Therefore, the income derived from the construction was the income of the partnership firm, not the individual. The High Court upheld this view, stating that the income received by the assessee from the Corporation was for and on behalf of the partnership firm, and thus, Sections 60 to 63 were not applicable.

2. Diversion of income by overriding title:

The second issue was whether there was a diversion of income by overriding title. The Tribunal found that the income was not diverted by overriding title but was the income of the partnership firm from the outset. The High Court agreed with this finding, emphasizing that the partnership was genuine and the work was carried out by the firm. The mere fact that the Corporation recognized the assessee as the contractor did not change the nature of the income. Thus, there was no diversion of income by overriding title.

3. Impact of registration under Section 185 on the application of Sections 60 or 61:

The third issue was whether the registration of the firm under Section 185 precluded the application of Sections 60 or 61. The High Court noted that Section 185 involves both procedural and substantive elements. Once the ITO registers a firm under Section 185, it confers substantive rights on the firm regarding assessment under Section 182. The High Court reframed the question to clarify that the registration under Section 185 precludes the application of Sections 60 or 61 for making an assessment under Section 143(3). The Court concluded that since the partnership was genuine and the income was that of the firm, Sections 60 and 61 were irrelevant.

Conclusion:

The High Court answered the questions as follows:
- Question No. 1: In the negative and against the Revenue.
- Question No. 2: In the negative and against the Revenue.
- Question No. 3: In the affirmative and against the Revenue.

The Revenue was ordered to pay the costs of the reference.