1973 (3) TMI 12 - HC - Income Tax

Diversion by Overriding Title - Partnership conducting educational institutions - agreement to dissolve the firm and transfer all the assets and liabilities to a society to be registered for carrying on the institution - income was received by the assessee-firm during the accounting year and it was not diverted before it reached the assessee. If that position is reached, then even if the amount had been given to the society later, it amounts to only an application of the income earned and does not affect the liability to tax in the hands of the assessee

Issues Involved:
1. Whether the partnership firm was dissolved with retrospective effect from May 1, 1959.
2. Whether the income for the year ending April 30, 1960, was assessable in the hands of the partnership firm or the intended society.
3. Whether the income was diverted before it reached the partnership firm.

Issue-wise Detailed Analysis:

1. Dissolution of Partnership Firm with Retrospective Effect:
The partnership firm, constituted under a deed dated August 1, 1948, claimed to have dissolved retrospectively from May 1, 1959, as per an agreement dated April 25, 1960. The agreement stated that the partners decided to dissolve the partnership and register the Indian Institute of Engineering Technology as a society, entrusting its management to a governing body. However, the actual deed of dissolution was executed on December 12, 1960, stating the firm was deemed dissolved from May 1, 1959. The court noted conflicting intentions in the documents, as the agreement mentioned dissolution from April 25, 1960, while the deed stated May 1, 1959. The court found no definite intention to dissolve the partnership during the accounting year, evidenced by the firm's actions, such as filing a return and applying for renewal of registration as a continuing partnership firm.

2. Assessability of Income for the Year Ending April 30, 1960:
The assessee contended that the income accrued up to April 25, 1960, should be assessed in the hands of the intended society, not the partnership firm, as the firm was dissolved retrospectively. The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal held that the partnership firm continued to run the institute's affairs throughout the accounting year, and the society did not exist during this period. The court agreed, stating there was no evidence of forming a society or making the partnership accountable to such a society before April 25, 1960. The business was carried out by the partnership on its own account, deriving profits and gains. The court rejected the analogy with the Bijli Cotton Mills Ltd. case, where promoters carried on business for a company to be floated, as the partnership firm did not act on behalf of the society.

3. Diversion of Income Before Reaching the Partnership Firm:
The assessee argued that the income was held in trust for the intended society due to the dissolution agreement. The court found no divestiture of title to the partnership's assets and properties in the agreement dated April 25, 1960. The agreement indicated an intention to form a society and give the income earned by the firm to it, but there was no immediate divestiture. The bank account remained in the partnership's name throughout the accounting year, and the transfer of funds to the society occurred only on December 27, 1960. The court noted that the partners continued drawing substantial income as salary and drawings until the transfer. The court concluded that the income accrued to the partnership during the accounting year and was not diverted before reaching the firm. Any later transfer to the society was an application of income earned, not affecting the tax liability.

Conclusion:
The court held that the income for the year ending April 30, 1960, was assessable in the hands of the partnership firm. The retrospective dissolution could not affect the operation of the Income-tax Act, and the income was not diverted before reaching the partnership firm. The reference was answered in the affirmative and against the assessee, with costs awarded to the revenue.

← Previous Next →