Case Note & Summary
Background: The appeals arose from income tax assessments of A. R. Rangachari, a partner in the firm Messrs. Chari and Ram, who held a six-anna share in profits and losses. During the pendency of proceedings in the Madras High Court, Rangachari died and his legal representatives pursued the matter. The dispute concerned whether profits settled by him on his wife and two daughters could be included in his total income for assessment years 1947-48 and 1948-49. Facts: On September 22, 1947, Rangachari executed three deeds of settlement, assigning one-fourth of his share of the profits payable to him from the firm (but not losses) to his wife, married adult daughter, and minor daughter, for a period of eight years, irrevocable. The deeds stated that the beneficiaries were entitled to receive the share of profits directly and exclusively from the firm. For the assessment year 1947-48, the profits due to Rangachari amounted to Rs. 86,491-13-0, which was credited to his account in the firm's books, and Rs. 21,622-15-3, being one-fourth, was transferred to each of the three beneficiaries' accounts. Similar treatment followed for the next year. The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal all rejected the assessee's claim that these amounts could not be included in his total income. Legal Issues: The core questions were whether inclusion of the settled profits in the assessee's total income was justified in law; whether the third proviso to Section 16(1)(c) of the Income-tax Act, 1922 excluded those profits; and whether the profits were diverted by an overriding title before they accrued to the assessee. Arguments: The assessee contended that the profits never became his income because they were diverted by an overriding title under the settlement deeds, relying on the Privy Council decision in Bijoy Singh Dudhuria v. Commissioner of Income-tax, Bengal. He also argued that the third proviso to Section 16(1)(c) excluded the amounts from his income. The Revenue submitted that the profits first accrued to Rangachari as the partner and were then applied to make payments to the beneficiaries; the deeds merely enabled the firm to obtain a valid discharge by paying the beneficiaries but did not change the character of the income. Court's Analysis: The Supreme Court examined the settlement deeds and noted that they described the assigned share as being from profits 'payable to him' as settlor. Although the deeds created a right in favour of the beneficiaries to receive amounts directly from the firm, the court held that under partnership law, only the partner is entitled to profits; a stranger or assignee cannot have a direct claim. The account books showed that the profits were first credited to Rangachari's account and then transferred under his directions to the beneficiaries. Thus, the dispositions were portions of Rangachari's income after accrual. The court relied on three recent decisions: Provat Kumar Mitter v. Commissioner of Income-tax, West Bengal; Tulsidas Kilachand v. Commissioner of Income-tax; and Commissioner of Income-tax, Bombay v. Sitaldas Tirathdas. Those cases established that the rule in Bijoy Singh Dudhuria applies only where income is diverted by an overriding title before it becomes the income of the assessee; here there was no such diversion. Accordingly, Section 16(1)(c) and its third proviso were not attracted. Decision: The Supreme Court agreed with the High Court's affirmative answer and dismissed the appeals with costs, holding that the profits settled on the wife and daughters were rightly included in the assessee's total income.
Headnote
A) Income Tax - Diversion of Income by Overriding Title - Partner's Assignment of Partnership Profits - Income-tax Act, 1922, Section 16(1)(c) - Assessee partner assigned one-fourth of his share of profits to wife and daughters, purporting to give them direct right to receive from firm; Held that under partnership law only partner entitled to profits, and profits accrued to partner before transfer; no diversion by overriding title; rule in Bijoy Singh Dudhuria not applicable (Paras 1-5). B) Income Tax - Applicability of Third Proviso to Section 16(1)(c) - Transfer of Income after Accrual vs. Transfer of Income Accruing to Transferee - Income-tax Act, 1922, Section 16(1)(c) third proviso - Assessee contended amounts excluded by third proviso because transferred to wife and daughters; Court held section 16(1)(c) did not apply because what was transferred was income which first accrued to assessee, not income accruing to transferee; therefore third proviso not attracted; Held tax payable by assessee at point of accrual (Paras 1-5). C) Income Tax - Partnership Profits and Entitlement - Rights of Assignee vs. Partner - Income-tax Act, 1922, Section 16(1)(c) read with Section 66(1) - Deeds of settlement created right in favour of disponees to receive amounts direct from firm, but under law of partnership only partner entitled to profits; assignee cannot have direct claim; amounts credited first to partner's account in firm's books and then transferred under directions; dispositions were portions of income after accrual; Held High Court's affirmative answer correct (Paras 1-5). D) Precedent - Application of Sitaldas Tirathdas and Distinction of Bijoy Singh Dudhuria - Diversion at Source vs. Application of Income - Income-tax Act, 1922, Section 16(1)(c) - Court applied decisions in Provat Kumar Mitter, Tulsidas Kilachand, and Sitaldas Tirathdas; held Bijoy Singh Dudhuria applies only where income diverted by overriding title before it becomes income of assessee; here profits accrued first and then applied; Held appeals dismissed with costs (Paras 1-5).
Issue of Consideration
Whether inclusion of profits settled by assessee on his wife and two daughters in his total income is justified in law; whether third proviso to Section 16(1)(c) of Income-tax Act, 1922 excludes such profits; whether profits were diverted by overriding title before accruing to assessee
Final Decision
Appeals dismissed with costs. High Court's affirmative answer affirmed; profits settled on wife and daughters were includible in assessee's total income.
Law Points
- Under partnership law
- only partner entitled to profits
- stranger or assignee cannot have direct claim
- profits first credited to partner's account and then transferred are income of partner at accrual
- third proviso to Section 16(1)(c) not attracted
- rule in Bijoy Singh Dudhuria applies only where income diverted by overriding title before accrual
