1966 (11) TMI 9 - HC - Income Tax

Diversion of income - share income - only 1/3rd of it was includible in the assessment of the assessee

Summary

Issues:
1. Whether the entire share income of the assessee from the Bareilly firm or only 1/3rd of it was includible in the assessment of the assessee?

Detailed Analysis:
The case involved a question under section 66(1) of the Indian Income-tax Act regarding the inclusion of the share income of the assessee from the Bareilly firm in the assessment. The assessee, Mahesh Prasad, was a partner in both the Farrukhabad firm and the Bareilly firm. The contention was that only 1/3rd of the share income from the Bareilly firm should be assessed due to a sub-partnership with the Farrukhabad firm. The Income-tax Officer included the entire sum in the assessment, considering it as a diversion of income by the assessee after it had been earned.

Upon appeal, the Appellate Assistant Commissioner reduced the assessment by a certain amount but confirmed the inclusion of the share income. The Tribunal relied on a previous decision and dismissed the appeal. The matter was further analyzed in light of the Supreme Court decision in Fatehchand Murlidhar v. Commissioner of Income-tax, which approved the Bombay High Court's decision in Ratilal B. Daftari v. Commissioner of Income-tax and overruled the Calcutta High Court's decision in Mahaliram Santhalia v. Commissioner of Income-tax.

The Court concluded that the sub-partnership agreement created an overriding obligation on the assessee to share the income with the other partners of the Farrukhabad firm. The investment of capital by the assessee in the Bareilly firm was from the Farrukhabad firm, indicating a shared interest. As the loss from the Bareilly firm was agreed to be shared by all partners of the Farrukhabad firm, it was held that only 1/3rd of the income from the Bareilly firm should be assessed in the hands of the assessee.

In the final judgment, the Court answered that only one-third of the income from the Bareilly firm was includible in the assessment of the assessee. The department was directed to pay the costs of the assessee, assessed at Rs. 250, along with counsel's fee of Rs. 250.