1996 (7) TMI 163 - SC - Income Tax

Whether the income of Murlidhar Himatsingka for his share in the firm of Messrs. Basantal Ghanshyamdas for the assessment years 1952-53 and 1953-54 was rightly excluded from the income of the applicant firm ? Whether the income of Murlidhar Himatsingka for his share in the firm of Messrs. Basantlal Ghanshyamdas for the assessment year 1955-56 was rightly included in his personal assessment for that year? Held that - The High Court was in error in holding that there was no question of an overriding obligation in this case and that the income remained the income of Murlidhar Himatsingka in spite of the sub-partnership created by him under the agreement dated December 21, 1949. In conclusion we hold that there is nothing in section 23(5)(a) that prevents the income from the firm, Basantlal Ghanshyamdas, being treated as the income of M/s. Fatehchand Murlidhar and section 23(5)(a) being applied again. In the result we accept the appeals, set aside the judgment of the High Court and answer the questions in the negative.

Issues Involved:
1. Whether the income of Murlidhar Himatsingka from his share in the firm of Messrs. Basantlal Ghanshyamdas should be included in his personal assessment or in the assessment of the firm of Fatehchand Murlidhar.
2. Whether the agreement dated December 21, 1949, constituted a valid sub-partnership that diverted the income before it reached Murlidhar Himatsingka.
3. The applicability of section 23(5)(a) of the Indian Income-tax Act, 1922, in assessing the income of Murlidhar Himatsingka and the firm of Fatehchand Murlidhar.

Detailed Analysis:

Issue 1: Inclusion of Income in Personal Assessment or Firm's Assessment
The primary question was whether the income of Murlidhar Himatsingka from his share in the firm of Messrs. Basantlal Ghanshyamdas should be included in his personal assessment or in the assessment of the firm of Fatehchand Murlidhar. The Income-tax Officer included the income in Murlidhar's personal assessment, which was upheld by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The High Court also held that it was a case of diversion of income by Murlidhar after it had accrued to him and not a diversion at the source by any overriding interest.

Issue 2: Validity of Sub-Partnership Agreement
The agreement dated December 21, 1949, was scrutinized to determine if it constituted a valid sub-partnership that diverted the income before it reached Murlidhar. The Supreme Court held that the agreement did create a sub-partnership in respect of Murlidhar's share in M/s. Basantlal Ghanshyamdas. The Court emphasized that losses were also to be shared, and the right to receive profits and pay losses became an asset of the firm, Fatehchand Murlidhar. The Court referred to the test laid down in Commissioner of Income-tax v. Sitaldas Tirathdas, which states that income diverted before it reaches the assessee is deductible, whereas income applied to discharge an obligation after it reaches the assessee is not.

Issue 3: Applicability of Section 23(5)(a)
The High Court's view that the income remained the income of Murlidhar Himatsingka despite the sub-partnership was challenged. The Supreme Court disagreed, stating that the sub-partnership created a superior title and diverted the income before it became Murlidhar's income. The Court also addressed the contention that section 23(5)(a) could not be applied twice. It held that the object of section 23(5)(a) is to apportion the income among the various partners, and after apportionment, the Income-tax Officer must determine whether the income is the real income of the partner or another entity. The Court concluded that there is nothing in section 23(5)(a) that prevents the income from being treated as the income of M/s. Fatehchand Murlidhar and section 23(5)(a) being applied again.

Conclusion:
The Supreme Court set aside the judgment of the High Court and answered the questions in the negative, holding that the income from Murlidhar's share in M/s. Basantlal Ghanshyamdas should be included in the assessment of M/s. Fatehchand Murlidhar. The appeals were allowed, and the appellants were entitled to costs here and in the High Court.

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