SULOCHANA DEVI NATHANI VS COMMISSIONER OF INCOME-TAX
1997 P T D 706
[213 I T R 393]
[Patna High Court (India)]
Before K. S. Paripoornan, C. J. and A. K. Ganguly, J
Smt. SULOCHANA DEVI NATHANI
Versus
COMMISSIONER OF INCOME TAX.
Taxation Case No.26 of 1979, decided on 07/04/1994.
Income-tax---
----Income---Firm---Diversion of income by overriding title ---Sub -partnership in respect of a partner's share---Sub-partnership formed in November, 1971---Share allotted to sub-partner not assessable in hands of partner after November, 1971.
The assessee was a partner in a firm with a two annas share. She executed a trust deed, dated March 23, 1971, settling Rs.4,01,000 out of her capital standing in the firm on trust. In the year, 1971, it was decided that there should be a sub-partnership between the assessee and the trust by which the two annas share in the firm was to be shared by herself and the trust, The Income-tax Officer included the entire profit from the two annas share of the firm in the assessment of the assessee. The assessee claimed that only 50 per cent of the share should be included in her hands and the other 50 per cent was the income of the trust. This plea was rejected. In appeal, the Appellate Assistant Commissioner held that the sub-partnership was in existence in November, 1971, though the partnership deed was executed on December 31, 1971. It was further found that after the said date half of the share was diverted at source and belonged to the trust. He directed that the profit arising after the end of November, 1971, should be governed by the sub partnership, and the profit prior to that was properly assessable in the hands of the assessee. The Tribunal affirmed this decision. On a reference:
Held, that the Tribunal was justified in holding that the income of the assessee would be governed by the sub-partnership, which came into existence at the end of November, 1971, and there was no diversion of 50 per cent share income of the said firm at source from the beginning of the year 1971.
Ramesh Kumar Agrawal for the Assessee
K.K. Vidyarthi and S.K. Sharan for the Commissioner.
JUDGMENT
At the instance of the assessed, the Income-tax Appellate Tribunal, "A" Bench, Patna, has referred the following questions of law for decision of this Court:
"(1) Whether, on the facts and under the circumstances of the case, the Tribunal was right in holding that there was no diversion of the 50 per cent. of the share income at source from the beginning of 1971?
(2) Whether, on the facts and under the circumstances of the case, the Tribunal was correct in holding that the share income was to be excluded to the extent of one anna only after November, 1971 and not from the beginning of the year?"
The respondent is the Revenue. We are concerned with the assessment year 1972-73. The accounting period ended on December 31, 1971. The assessee was a two annas partner in the firm, West Bengal Mining Company. She executed a trust deed, dated March 23, 1971, settling Rs.4,01,000 out of her capital standing in the firm on the trust. In the year 1971, it was decided that there should be a sub-partnership between Smt. Sulochana. Devi Nathani and the trust by which two annas share in the firm was to be shared by herself and the trust.
The Income-tax Officer included the entire two annas profit of West Bengal Mining Company in the assessment of Smt. Sulochana Devi Nathani. The assessee claimed that only 50 per cent of the share should be included in her hand and the other 50 per cent. was the income of the trust. This plea was rejected.
In appeal, the Appellate Assistant Commissioner held that the sub -partnership was in existence in November, 1971, though the partnership deed, was executed on December 31, 1971. It was further found that after the said date half of the share was diverted at source and belonged to the trust. He directed that the profit arising after the end of November, 1971, should be governed by the sub-partnership, and the profit prior to that was properly assessable in the hands of Smt. Sulochana Devi Nathani. He also directed that the income arising after the end of November, 1971, was to be included only to the extent of 50 per cent. in the hands of the assessee and the balance was, therefore, excluded. In appeal, the Income-tax Appellate Tribunal affirmed this decision. It is thereafter at the instance of the assessee that the questions of law formulated hereinabove have been referred to this Court for decision.
We heard counsel. The plea of the assessee was that the Tribunal was in error in holding that there was no diversion of 50 per cent of the share income at source from the beginning of the year 1971. In other words, the plea was that the Tribunal erred in holding that the share income after the end of November, 1971, would belong to the trust and the assessee equally and not from the beginning of the year. The deed of trust, dated December 31, 1971, between Smt. Sulochana Devi Nathani and the trust specifies that the document came into effect from January 1, 1971. But it is further seen that practically the trust had come into existence in November, 1971, but the partnership deed was actually executed in December, 1971.
Counsel for the assessee argued that the income of the sub -partnership consisting of Smt. Sulochana Devi Nathani, the assessee, and the trust having come into existence admittedly in November, 1971, the profit, which accrued to the firm by the end of the year, 1971, should be shared equally between the assessee and the trust, and so the income from the beginning of the year so divisible on the date when the balance was struck, should be deemed to be that of the assessee and the trust, respectively. In other words, though the trust came into existence in November, 1971, the income that was divided in December, 1971, between the trust and the assessee was obtained from the firm for the entire period, i.e. from the beginning of 1971. There is difficulty in accepting this plea. In the order of the Appellate Assistant Commissioner of Income-tax, dated September 30, 1975, available at page 7 of the printed-paper book, the matter has been dealt with thus:
"The point, however, to be seen is that when the sub-partnership came into existence and what is the point of time when the superior title is created in its favour. This point has been examined in detail while considering the case of registration of sub-partnership, namely Sulochana Nathani and Krishna Sulochana Nathani Charitable Trust. In my appellate order of date passed in Appeal No.73-B/75-76 in this case, I have held that the firm actually came into existence on November 26, 1971, and that for nearly 11 months of the accounting period, there was no sub-partnership in existence. On the basis of the findings given in the aforesaid appellate order, it has to be held that the appellant was a full-fledged owner of her share in the firm up to November 26, 1971, and that question of diversion of her share income in the hands of the sub-partnership arises only subsequent to November. 26, 1971. Thus, till this date, i.e., November 26, 1971, what all income was earned by her in the firm was earned in her individual capacity and if she relinquished her rights to the extent of 50 per cent in it that would amount to application of income and the total income earned till this date is liable to be taxed in her hands.- After this date, the income receivable by Mrs. Nathani from the firm becomes the income of the sub-partnership and she is liable to be assessed only on her share of income from the sub-partnership."
The Appellate Assistant Commissioner has found in the assessment relating to the firm and the registration thereof that Smt. Sulochana Devi Nathani was the full-fledged owner of her share in the firm up to November 26, 1971, and till November 26, 1971, whatever be the income earned, was earned in her individual capacity and if she relinquished her rights to the extent of 50 per cent in it, that would amount to application of income and the total income earned till that date was liable to be taxed in her hand. After the said date, the income receivable by Smt. Sulochana Devi Nathani from the firm became the income of the sub-partnership and she was liable to be assessed only on her share income from the sub-partnership. This finding in the case of the assessment of the firm categorically shows that two annas share in West Bengal Mining Company accrued to Sulochana Devi Nathanai and was receivable by her for the period up to November, 1971. It is only subsequent to the said period that the trust became entitled to the income of the West Bengal Mining Company and the total income earned till November, 1971, from the said firm accrued to only Smt. Sulochana Devi Nathani. It is only after that date that the income receivable from the West Bengal Mining Company becomes the income of the sub-partnership and Smt. Nathani would be assessed only on the share income of the said partnership. In the light of the above finding, it is not open to one of the partners of the firm Smt. Sulochana Devi Nathani to contend at this later stage that 50 per cent. was the share income received from the firm which arose from any date antecedent to November, 1971. The Income-tax Appellate Tribunal was justified in holding that the income of Smt. Sulochana Devi Nathani would be governed by the sub-partnership, which came into existence at the end of November, 1971, and there was no diversion of 50 per cent. share income of the said firm at source from the beginning of the year, 1971. We answer question No.1, referred to this Court, in the affirmative, against the assessee and in favour of the revenue. We answer question No.2, referred to this Court, also in the affirmative against the assessee and in favour of the revenue . The reference is answered as above.
A copy of this judgment shall be forwarded to the Income-tax Appellate Tribunal, "A" Bench, Patna, under the signature of the Registrar and the seal of this Court.
A.A./1181/FCOrder accordingly.