Commissioner Of Income Tax v. Sunil J. Kinariwala

COMMISSIONER OF INCOME TAX v. SUNIL J. KINARIWALA DECEMBER I 0, 2002 [SYED SHAH MOHAMMED QUADRI AND K.G. BALAKRISHNAN, JJ.] Income Tax Act, 1961; Sections 60 and 256(2): Assessee, a partner in a firm assigned part of his share income to a Trust-Tribunal held the income so assigned to Trust would be included in the total income of the assessee for the purpose qf assessment-High Court reversing the same-On appeal held, since Trust receives share of income of the assigner partner as assignee and not as a sub-partner it is a case of application of income by the assessee and not diversion qf income by. over riding title-Such share of income of assessee of the firm could be included in total income for the purpose of assessment-!ndia11 Partnership Act-Section 29(1). Assessee-appellant, a partner in a firm, created a Trust and assigned 2 part of his share/income to Trust and claimed it as diversion of income at source, thus not included in his total income for the purpose of assessment. Income Tax Officer rejected the claim considering it a case of application of income and not diversion of income at source. Appellate Authority reversed the order. On appeal by Revenue, Tribunal reversed the order of appellate authority. Tribunal formulated questions for the opinion oi F High Court on the issues: Whether any income from share oftht>.assessee in the partnership firm was validly assigned and belongs to the Trust by overriding title and assessable only in the hands of Trust. High Court · answered the questions in affirmative and the ruling was followed in several pending cases on the same issue. Hence this appeal by the Revenue G and other connected appeals. If was contended for the Revenue that since assessee assigned right to receive part of profits from his share in the firm, there was no overriding title in the Trust to divert income at source, such income liable to be included in the total income of the assessee for the purpose of 650 assessment. On behalf of the assessee, it was submitted that since the Trust A was entitled to receive share of the income of the assessee under the settlement deed, the Trust n·as getting such incorrie by virtue of overriding title. Allowing the appeals, the Court HELD: I.I. Under the scheme of the Income tax Act, it is the total income of an assessee, computed under the provisions of the Act, that is assessable to income tax. So much of the income which an assessee is not entitled to receive by virtue of an over-riding title created in favour of a third party would get diverted at source and the same cannot be added in C computing the total income of the assessee. The nature and effect of the assessee's obligation is the determinative factor in regard to the income attributable to an assessee when it gets diverted by over-riding title. When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay a claim to receive it as his income, there would be diversion of income by over-riding title; but when after D receipt of the income by the assessee, the same is passed on to a third person in discharge of ihe obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by over-riding title. 1655-E-GI K.A. Ramachar and Anr. v. Com1nissioner of Income Tax, Madras, E (1961) 42 l.T.R. 25 and Moti Lal Chhadami Lal Jain v. Commissioner of Income Tax, (1991) 190 ITRI, relied on Bejoy Singh Dudhuria v. Commissioner of Income-tax, 119331 I l.T.R. 135; P.C. Mullick v. Commissioner of Income-tax (1938) 6 l.T.R. 206 and F Commissioner of Income Tax. Bombay City-II v. Sita/das Tirathdas, (1961) 41 l.T.R. 367, referred to. 1.2. It is apt to notice that there is a clear distinction between a case