1981 (1) TMI 23 - HC - Income Tax

Summary

Issues Involved:
1. Recognition of partial partition for tax purposes.
2. Division of income derived from the capital invested in partnership firms.
3. Applicability of Section 64 of the Income Tax Act, 1961.
4. Concept of diversion of income by overriding title.

Detailed Analysis:

1. Recognition of Partial Partition for Tax Purposes:

The assessee, Murlidhar, applied for recognition of a partial partition of the joint family for the year 1963-64. The ITO recognized the division of capital but did not accept that the income derived from the capital was divided. The AAC, however, accepted the assessee's contention and found that the family ceased to exist concerning the capital, creating an overriding charge on the capital and interest of the karta. The Tribunal upheld this view, confirming that the income belonged to the individual members due to the overriding title created by the partition memorandum.

2. Division of Income Derived from the Capital Invested in Partnership Firms:

The assessee was a partner in multiple firms, and the capital invested in these firms was divided among the family members upon partition. The memorandum of partition specified that the profits or losses from the partnerships were to be shared among the family members in their individual capacities. The Tribunal found that the right to share profits could be divided, and the income was diverted by overriding title to the individual members, not just the assessee.

3. Applicability of Section 64 of the Income Tax Act, 1961:

The revenue contended that Section 64, which includes the income of a spouse or minor child from a partnership in the individual's total income, should apply. However, the Tribunal found that the partition did not create a partnership between the assessee and his wife, and thus, Section 64 was not applicable. The Court agreed, stating that the question referred had no connection with Section 64 and the Tribunal's finding that the memorandum did not create a partnership was clear and unambiguous.

4. Concept of Diversion of Income by Overriding Title:

The Court examined whether the income was diverted by an overriding title, meaning it never reached the assessee as his income. The Supreme Court's tests in Sitaldas' case and Travancore Sugars' case were applied. The Court found that the income was received by the assessee on behalf of the family members, not as his own income. The partition created an obligation that the income was to be shared according to the memorandum, thus constituting a diversion at source by overriding title. The decision in K. A. Ramachar's case was distinguished on facts, as there was no partition of assets in that case, unlike the present case where the capital was divided among family members.

Conclusion:

The Court answered the referred question in the affirmative, holding that the share income of Murlidhar in the profits of the partnership firms was subject to an overriding title in favor of other members of the HUF in proportion to the shares allotted to them in the partial partition deed, and thus, could not be taxed in the hands of Murlidhar. The assessee was awarded the costs of the reference.