SUNIL J KINARIWALA Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a partner in a partnership firm known as 'Kinarivala R.J.K. Industries', Ahmedabad. The assessee was having 10% share in the said partnership firm. On 27th Dec., 1973, he created a trust called 'Sunil Jivanlal Kinarivala Trust' by executing the trust deed. As per the trust deed, beneficiaries were Smt. Daksha Sharadbhai Kinariwala, who is assessee's brother's wife, minor Avani Bharatbhai Kinariwala, who is assessee's niece and Smt. Indumatiben Kinariwala, who is assessee's mother. By the said trust deed, the assessee has settled in trust, 50% (fifty) right, title and interest out of his 10% right, title and interest in the partnership firm 'M/s Kinarivala R.J.K. Industries', and also Rs. 5,000 out of his capital in the said firm. In the trust deed, the expression 'trust fund' is given, inter alia, the following meaning :

(2.) THE assessee submitted his IT return for the asst. year 1974 75. The ITO took the view that this was not the case of diversion of income at source but it was merely a case of an application of income. He, therefore, held that income earned by the assessee could not be said to have been diverted at source. He further held that in view of S. 60 of the IT Act it was a transfer of income without a transfer of assets from which income arose and, therefore, the entire income earned by the assessee from the partnership firm is required to be included in his income. He, therefore, added Rs. 20,141 to the income of the assessee, which the assessee contended that it represents the income of the trust. Against the order of the ITO, the assessee preferred an appeal before the AAC. After referring to the decision of the Supreme Court in the case of CIT vs. Bhagya Laxmi & Co. (1965) 55 ITR 660 (SC) and the decision of the Bombay High Court in the case of CIT vs. C.N. Patuck (1969) 71 ITR 713 (Bom) the AAC held that there was no application of income in the present case, but it was a case of diversion of income at source. He, therefore, allowed the appeal and directed the ITO to exclude the addition of Rs. 20,141. Being aggrieved by that order, the Department filed an appeal before the Tribunal. The Tribunal held that, in a partnership firm partly income arises to the partner from the assets of the partnership which include the capital brought by a partner and it would not be correct for the assessee to contend that the right, title and interest of a partner are the assets from which the income arises. It further held that a partner gets a right and share in partnership because he contributes the capital as agreed upon. Therefore, it cannot be said that the partner gets a share in the profits of partnership because he has right, title and interest in the partnership assets. The Tribunal further held that the capital contributed by a partner does not cease to be the asset of a partner simply because it is not immediately payable or because it might not be available to a partner if on dissolution it transpires that the capital so contributed had to be utilised to wipe out the liabilities of the firm; that a partner agrees to contribute capital to a firm in order to enable the firm to make profit or more profits; and hence in the present case as capital was not transferred provision of S. 60 was applicable as it was a case of transfer of income without transfer of assets from which income arises.

(3.) AT the outset, we should note that genuineness of the trust deed dt. 27th Dec., 1973 is not challenged or doubted by the Department nor it is contended that the said settlement is not genuine. By the said trust deed the assessee has transferred his 50% right, title and interest excluding the capital in the partnership firm. He has further settled Rs. 5,000 out of his capital in the partnership firm as 'trust fund'. The settlement deed is fully effective and on the basis of the said deed, the right, title and interest of the assessee in the partnership firm is divided between him and 'Sunil Jivanlal Kinarivala Trust'. No doubt, this trust deed would have no effect with regard to the contract of partnership between the assessee and other partners of M/s Kinariwala R.J.K. Industries. At the same time, there is nothing in the Partnership Act which prevents its partner from dividing his partnership assets.