Bombay High Court
Commissioner Of Income-Tax vs Shri And Smt. Ganesh G.K. Azrenkar on 11 November, 1994
Equivalent citations: [1996]217ITR148(BOM)
JUDGMENT
S.M. Jhunjhunuwala J.
1. This reference has been made under section 256(1) of the Income-tax Act, 1961. By this reference, the following question has, at the instance of the Revenue, been referred to this court for opinion :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the trust created by the assessee was valid in law, that there was diversion of income by overriding title, that this is not a case of application of income and that section 60 is also not attracted to the facts of this case?"
2. The assessee was a partner in the firm of Venkatesh G. C. Azrenkar and Co., Margao, Goa. On April 1, 1975, the said firm was reconstituted by a fresh deep of partnership with the assessee and his mother as partnership therein. The assessee had an 80 per cent. share and his mother had a 20 per cent, share in the profits and losses of the partnership. Seventy-five percent. of the 80 per cent. share which the assessee had in the profits of the partnership was settled by the assessee in favour of the minor children of the brother of the assessee and a trust was brought into existence in respect thereof on April 1, 1975. The assessee claimed deduction of the amount paid to the beneficiaries under the said trust because of the existence of the trust deed dated April 1, 1975, and also the said deed of partnerships dated April 1, 1975. The Income-tax Officer turned down the claim of the assessee holding that there was no diversion of income by overriding title and included his 80 per cent. share of income from the said partnership firm as the income of the assessee. Against the order of the Income-tax Officer, the assessee went in appeal before the Commissioner of Income-tax (Appeal) and contended that there was an overriding titled created because of the said trust deed and that the beneficiaries thereunder had the right to receive income in their own hands first and that on their behalf only the assessee received their income from the said partnership firm. The Commissioner of Income-tax (Appeals) upheld the order of the Income-tax Officer and dismissed the assessee's appeal. On further appeal to the Income-tax Appellate Tribunal (in short, "the Tribunal"), the assessee contended that by reason of the creation of the said trust a charge was validly created on the income of the assessee and, as such, it never reached the hands of the assessee. The Tribunal held that an overriding title was created in favour of the beneficiaries by reason of the said trust deed and that the income from the said partnership-firm did not reach the hands of the assessee and that the beneficiaries under the said trust deed had the first claim over the share of income of the assessee from the partnership firm. The Tribunal set aside the orders of the authorities below and held that the assessee had validly created the trust and that there was diversion of income by overriding title and that it was not a case of application of income. The Tribunal also held that section 60 of the Income-tax Act, 1961, was not attracted.
3. In the facts of the case, admittedly, the assessee was a partner in the said partnership-firm. "Partnership" is the relation between partners who have agreed to share the profits of a business carried on by all or any of them acting for all. An agreement to share the profits of a business is an essential element in the constitution of partnership. Under the law of partnership, a partner alone is entitled to the profits of a business carried on in partnership. In this connection, it is relevant to note that under the said deed of partnership, there were only two partners during the relevant period, viz., the assessee and his mother. The profits of the business carried on in the said partnership accrued to the said partners as soon as the accounts of the partnership firm we re made up and the profits so accrued were divided between the partners therein as per the shares allocated under the said deed of partnership. A stranger to the partnership had no claim to the profits derived from the business carried on in partnership. In this view of the matter, though the assessee had created a trust as a result whereof 75 per cent. of his 80 per cent. share in the profits of the business carried on in the partnership was to go to the benefit of the beneficiaries under the said trust, the income derived by the assessee by reason of his 80 per cent. share in the profits of the business carried on in partnership was the income of the assessee alone.
4. For the purpose of finding out as to whether there was diversion of the assessee's income by overriding title by reason of the said trust deed executed by the assessee on April 1, 1975, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. It is the nature of the obligation which is the decisive factor. There is difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first type of obligation which diverts income by reason of the overriding title and not the second. The second type of obligation is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. This view of ours is supported by the observations of the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 and the judgment of the Division Bench of this court of which one of us (Dr. B. P. Saraf J.) was a member in the case of CIT v. V. G. Bhuta [1993] 203 ITR 249.
5. In view of the admitted fact that the assessee was a partner in the said partnership firm during the relevant period and further considering the provisions contained in the said deed of partnership, we hold that the income derived by the assessee by reason of his 80 per cent. share in the profits of the business carried on in the said partnership was his income alone and even assuming there was valid trust created by the assessee as per the said trust deed dated April 1, 1975, there was no diversion of his income by overriding title. We further hold that it was a case of application of income by the assessee after he derived it by reason of his share in the profits of the business carried on in partnership. In the facts of the case, it is not necessary for us to decide as to whether the said trust was validly created. It is equally not necessary to decide about the applicability of section 60 of the Income-tax Act, 1961. We, therefore, reframe the question referred to us, as under :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that there was diversion of income by overriding title and that this is not a case of application of income?"
6. Accordingly, we hold that the Tribunal was not right in setting aside the orders passed by the Income-tax Officer and the Commissioner of Income-tax (Appeals). We answer the reframed question in the negative and in favour of the Revenue.
7. In facts of the case, there shall, however, be no order as to cost