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TMI Blog1993 (8) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent. in the profits and losses of the firm. On October 14, 1970, she gifted 40 per cent. share out of 50 per cent. share in the firm to her brother-in-law, Shankerlal's seven grandsons and his daughter-in-law, Kusumben Bharatkumar. It appears that Shankerlal had four sons, viz., Pushpavadan, Ramesh, Suresh and Bharat, and to each branch the assessee wanted to gift 10 per cent. share. Therefore, by the gift deed of that date, she gifted her 40 per cent. share in their favour as under : --------------------------------------------------------------------------------------------------------------------------------------------- Share from profit Gift amount Sl. No. Name of the donor's from the 50% share capital Rs. ---------------------------------------------------------------------------------------------------------------------------------------------- 1. Minor Darshan Pushpavadan 0.05 10,000 2. Minor Satish Pushpavadan 0.05 10,000 3. Minor Naynesh Rameshbhai 0.05 10,000 4. Minor Prakash Prakashbhai 0.05 10,000 5. Minor Sujyot Sureshbhai 0.03 6,000 6. Minor Mrudul Sureshbhai 0.03 6,000 7. Minor Nilesh Sureshbhai 0.04 8,000 8. Smt. Kusumben Bharatkumar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he property of) each of the donees as each of their (private) personal separate independent and free property and the donor shall have no interest, right, title or share of any kind in the same..." It is also stated therein that : "So long as the other partner, Shri Shankerbhai Kashibhai Patel, of the aforesaid partnership does not give his assent to change the partnership deed and admit donees in the partnership aforesaid each of donees shall be considered as co-owners of the share in the name of the donor and each of them shall be considered proprietor and co-owner to the extent of their respective individual shares in the amount of profit or loss which may come to the share of the donor." After considering these provisions in the gift deed, the Tribunal held that there was nothing in the gift deed to show that the interest of the donor in the firm was transferred as "transfer of the capital". The Tribunal held that the transfer of capital of the partner and the transfer of the right to receive a share in the profits of the partnership by themselves do not amount to a transfer by a partner of his interest in the firm. The Tribunal then referred to the books of account of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee from which the income arose, The assessee transferred her right to receive part of her share in the profits of the firm, Even if we proceed on the basis that the capital contributed by the assessee was to be regarded as the asset and the profits as the income arising from that asset, the asset was in fact transferred by the assessee, as 40 per cent. out of 50 per cent. of the capital was also transferred by the assessee in favour of the donees by the very same gift deed. It is, therefore, difficult to appreciate how the Tribunal was able to persuade itself to come to the conclusion that there was no transfer of asset and for that reason in view of section 60 of the Act even though the income of 40 per cent. was transferred, that income had to be included in the total income of the assessee. The question which now remains to be decided is whether it is a case of application of income, or whether the income of the assessee was diverted before it could become income in her hands by an overriding title created in favour of the donees. We have already referred to the two relevant clauses of the gift deed which reflect the intention of the donor and also the change whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the share of the assessee in the profits of the partnership firm became the income of the assessee and the distribution of the part of that income to the donees amounted to application of her income. In our opinion, the aspects which we have pointed out together with the correct position of law go to show that an overriding title was created in favour of the donees and, therefore, even though the assessee alone continued as a partner and even though 50 per cent. share in the profit was credited in her name, the whole of that amount did not become income in her hands as the same got distributed amongst the assessee and the donees to the extent specified in the gift deed. In Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135, the Privy Council held that even though section 3 of the 1922 Act subjected to charge "all income" of an individual, it is what reaches the individual as income which it is intended to charge. In that case, as a result of the decree passed by the court in favour of the assessee's step-mother in a suit for maintenance, a charge was created on the ancestral estate in the hands of the assessee. The Privy Council held that as a result of that charge, the payment w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neither urged nor found that a sub-partnership had come into existence between the assessee, who was a partner in a firm and his wife, married daughter and minor daughter. The Supreme Court distinguished that decision by pointing out that it was a pure case of assignment of profits (and not losses) by the partner during the period of eight years. The Supreme Court observed that even though a sub-partner can have no direct claim to the profits vis-a-vis the other partners of the firm and that it is the partner alone who is entitled to profits vis-a-vis the other partners, it does not follow that the changed character of the partner should not be taken into consideration for income-tax purposes. The Supreme Court then pointed out that under the law of partnership, it is the benamidar who would be entitled to receive the profits from the other partners but for income-tax purposes it does not mean that it is the benamidar alone who can be assessed in respect of the income received by him. Therefore, if any change is brought about in the character of the partner or his right to receive the profits, then that change has to be taken into consideration for income-tax purposes. As what ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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