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TMI Blog2007 (8) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case, can it be said that the income received from the parent firm by the appellant sub-partnership does not possess the same character of share of income and, therefore, is not entitled to the exemption ? (c) Whether, on the facts and in the circumstances of the case and when the assessed total income of the parent firm is Rs. 39,426 only, can there be an assessed income of Rs. 1,83,13,990 in the hands of the appellant sub-partnership when its sole source of profit/loss is 45 per cent. in the said parent firm ? (d) Whether, on the facts and in the circumstances of the case, the sub-partnership constituted as Messrs. Radha Krishna Jalan is liable to levy of tax ? (e) Whether, on the facts and in the circumstances of the case, the conclusion of the Tribunal that the income of the appellant is not exempt from the levy of tax, does not lead to double taxation of the same income ?" In Income-tax Appeal No. 53of 2004: "(a) Whether, on the facts and in the circumstances of the case and on interpretation of the provisions of sub-section (2A) section 10 of the Act, the Tribunal was justified in holding that the income received by the assessee is not exempt u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come was assessed at Rs. 1,83,13,990. The exemption and deduction claimed under sections 10(2A) and 80HHC have been rejected by the Assessing Officer. The appellant-firm preferred an appeal before the Commissioner of Income-tax (Appeals), Guwahati. The Commissioner of Income-tax (Appeals) allowed the appeal permitting the claim of exemption and deduction under sections 10(2A) and 8OHHC of the Act. The Revenue being aggrieved, preferred an appeal before the Income-tax Appellate Tribunal at Guwahati. The appeal was numbered as I. T. A. No. 49 (Gau)/ 2001. The learned Tribunal allowed the appeal by the consolidated order passed on September 17, 2003, reversing the order passed by the Com missioner of Income-tax (Appeals) and restoring that of the Assessing Officer. On this background, the appellant-firm is on appeal before this court. 5 It is considered worth to place on record that the income of the parent firm, namely M/s. Rock International is mainly from export business which is exempt under section 80HHC of the Act. The gross income of the parent firm for the assessment year was Rs. 4,07,07,008 and after exemption under section 80HHC, the balance income of Rs. 19,583 which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible for deduction under section 80HHC even when it reaches the hands of the sub-partnership, i.e., the appellant. Mr. Agarwalla further argued that the issues to be answered in this appeal require interpretation of the principles of diversion of income at source by superior or overriding title from the hands of the representative partner to the sub-partnership. 8. According to Mr. U. Bhuyan, learned counsel for the Revenue, the prerequisite for the income of a person to come within the ambit of section 10(2A) is that the person concerned must be a partner of the firm which is separately assessed to tax. According to Mr. Bhuyan, the parent firm (M/s. Rock International) is a firm which is separately assessed to tax and the appellant-firm (M/s. Radha Krishna Jalan) is not a partner of the parent firm. Therefore, a to Mr. Bhuyan, the appellant-assessee not being a partner of M/s. Rock International is not entitled to the benefit of exemption as provided under section 10(2A). According to Mr. Bhuyan, the provisions of section 10(2A) is required to be interpreted in its literal sense since the taxing statute is to be construed having regard to the letter of law. Mr. Bhuyan contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the questions involved in this case were not under consideration of the apex court in the judgments relied upon by the Revenue and, therefore, the issues raised in this appeal will have to be answered in the facts and circumstances peculiar to the case at hand. The decision in CIT v. Sun Engineering Works P. Ltd. [1992] 198 ITR 297 (SC) has been cited in support of this contention. 12 We have considered the decision in Sun Engineering Works P. Ltd. [1992]198 ITR 297 (SC). The Supreme Court provided that it is neither desirable nor permissible to pick out a word or a sentence from the judgment, divorced from the context of the issues under consideration and treat it to be the complete law declared by the Supreme Court. The hon'ble Supreme Court held that while applying the decision of the court to a later case, the courts must carefully try to ascertain the true principle enunciated to support their reasoning. It is in this context, we would now like to examine the proposition canvassed by Shri Agarwalla which are summarised below (i) Whether for the limited purpose of assessment by income-tax authorities in the case of income diverted by overriding title to the sub- p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case, the admitted position is that M/s. Rock International and M/s. Radha Krishna Jalan are firms assessed as firms under section 184. It may be mentioned here that in the case of firms which are assessed as firms, payment of interest, salary, bonus, commission or remuneration paid to the partners have been allowed to be deducted in the hands of the firm requiring the firm to pay tax on its total income as a distinct entity as provided in section 167A. The share of income of an individual partner is not to be included in computing his total income, but the interest, salary, bonus, commission or remuneration received by a partner from the firm is assessable in his hands as income from business or profession. It is, there fore, clear that with effect from April 1, 1993, there is no scope for double taxation in the case of a firm assessed as firm under section 184. On the other hand, as provided in section 185, in force with effect from April 1, 1993, to March 31, 2004, a firm is required to be assessed as an association of persons and the provisions of sections 67A, 167B and 86 are applicable to such firm. That a share, of income of an individual partner is not required to be inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and the proviso did not stand in his way In CIT v Strawboard Manufacturing Co Ltd [1989] 177 ITR 431 (SC) it was held that the law providing for concession for tax purposes to encourage industrial activity should be liberally construed The question before the court was whether straw- board could be said to fall within the expression 'paper and pulp' mentioned in the Schedule relevant to the respective assessment years. The court held that since the words 'paper and pulp' were mentioned in the Schedule, the intention was to refer to the paper and pulp industry and since the strawboard industry could be described as forming part of the paper and pulp industry, it was entitled to the benefit." 17 In CIT v. Podar Cement P. Ltd. [1997] 226 ITR 625, the hon'ble Supreme Court held as follows (page 653) "We are conscious of the settled position that under the common law, 'owner' means a person who has got valid title legally conveyed to him after complying with the requirement of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of section 22 of the Income-tax Act, having regard to the ground realities and further having regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Act, 1922. It has also been held that sub-partnership creates a superior title and diverts the income before it becomes the income of the partner. The partner in the main firm receives the income not only on his behalf but on behalf of the partners in the sub-partnership. This view is crystallised in the judgment of the hon'ble Supreme Court in Murlidhar Himatsingka [1966]62 ITR 323, the apex court held that in the case of a sub-partnership, the sub-partnership creates a superior title and diverts the income before it becomes the income of the partners. This otherwise means that the partner in the main firm receives the income not only in his behalf but on behalf of the partners in the sub-partnership. In CIT v. Sunil J. Kinariwala reported in [2003] 259 ITR 10, the Supreme Court held that when a third person becomes entitled to receive the amount under obligation of an assessee even before he could lay a claim to receive the income, there would be a diversion of income by overriding title. Referring to the decision of P. C. Mullick v. CIT [1938] 6 ITR 206 (PC), the Supreme Court had observed in CIT v. Sunil J. Kinariwala reported in [2003] 259 ITR 10, as follows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership though its character changes vis-a-vis the sub-partnership and the income-tax authorities. (2) The superior title of the sub-partnership diverts at source the share income of the concerned partner in the main partnership before it becomes the income of the partners. (3) Assessment of a share of income of a partnership in the hands of a partner has to be apportioned as per the provisions of the Income-tax Act and, thereafter, the income tax authorities ate required to determine whether it would be assessed in the hands of that partner or in the hands of the sub-partnership. (4) The diversion of the income of a partner in the main partnership at source to the sub-partnership by overriding obligation created by the sub-partnership converts the income of a partner into the income of the sub-partnership, thus, vesting an enforceable right upon the sub-partner ship to claim a share in the profits accrued to or received by the partner. (5) The right to receive profits and pay losses become the asset of the sub-partnership. 22 It would appear from the above principles that diversion of income by overriding title to sub-partnership confers upon it the attributes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therein For the purpose of the Partnership Act his position in the firm is that of a partner and his share is not assessed in his hands but in the hands of the Hindu undivided family. (2) A trust cannot be a partner in a firm whereas a trustee may be. The share of income pertaining to such trustee is assessed in the hands of the trust. 24 In support of the above proposition, we may refer to the decisions of the hon'ble Supreme Court in CIT v. Kalu Babu Lal Chand [1960] 37 ITR 123; Charandas Haridas v. CIT [1960] 39 ITR 202 and CIT v. A. Abdul Rahim and Co. [1965] 55 ITR 651. The decision rendered therein are relevant for the purpose at hand are quoted below: Kalu Babu Lal Chand [1959] 37 ITR 123 (SC) (at pages 127 and 130): "It is now well-settled that a Hindu undivided family cannot as such enter into a contract of partnership with another person or per sons. The karta of the Hindu undivided family, however, may and frequently does enter into partnership with outsiders on behalf and for the benefit of his joint family. But when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. They cannot interfere in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... divided family into the partnership, the division of the family does not change the position of the partner vis-a-vis the other partner or partners. The income-tax law before the partition takes note, factually, of the position of the karta, and assesses not him qua partner but as representing the Hindu undivided family. In doing so, the income-tax law looks not to the provisions of the Partnership Act, but to the pro visions of Hindu law. When once the family has disrupted, the position under the partnership continues as before, but the position under the Hindu law changes. There is then no Hindu undivided family as a unit of assessment in point of fact, and the income which accrues cannot be said to be a Hindu undivided family. There is nothing in the Indian income-tax law or the law of partnership which prevents the members of a Hindu joint family from dividing any asset Such division must, of course, be effective so as to bind the members, but Hindu law does not further require that the property must in every case be partitioned by metes and bounds, if separate enjoyment can otherwise be secured according to the shares of the members For an asset of this kind there was no other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship is subject to tax in the hands of the firm. The share of an individual partner has been exempted under sub-section (2A) of section 10. If the benefit of section 10(2A) is denied in case of diversion, it would completely nullify the basic scheme of the Act since the income of the partner once taxed in the hands of the partnership would be again exigible to tax in the hands of sub-partnership. This would be contrary to the legislative scheme in force with effect from April 1, 1993, relating to assessment of partnership firm. The learned Tribunal negated the contention of the appellant firm relying upon a decision of the Rajasthan High Court in CIT v. Alisher Contractors [1986] 159 ITR 534. But in that case, the assessment year in question was 1973-74, i.e., prior to April 1, 1993, when the scheme of the Act was different and the burden of tax was on the partner and not the partnership firm. The provision for exemption under section 10(2A) came into force with effect from April 1, 1993, and, therefore, the said decision could not be relied upon by the Tribunal in deciding the case at hand. 27 The Income-tax Act provides for levy of tax on the total income of an assessee af ..... X X X X Extracts X X X X X X X X Extracts X X X X
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