COMMISSIONER OF INCOME TAX Vs. PRASHANT J KINARIWALA

JUDGEMENT

(1.) THE Tribunal, Ahmedabad Bench 'A', has referred the following question of law for the opinion of this Court under S. 256(1) of the IT Act, 1961;

(2.) THE reference arises in the background of the following facts : The assessee is assessed in the status of 'individual'. He was a partner in a firm of M/s Ramniklal J. Kinariwala & Co., under a deed of partnership dt. 24th Jan., 1972. He had a share of 15% in the profits of the firm and a share of 19% in the losses. The accounts of the partnership firm were closed on 31st Dec., 1972. In the meantime, by a deed of settlement dt. 22nd Dec., 1972, the assessee created a trust known as 'Prashant Jivanlal Trust' for the benefit of sister in law, nephew and niece. By the said deed, the assessee settled in trust 40% of the right, title and interest out of his 15% share in the profits and 19% share in the losses of the aforesaid partnership. He also settled a sum of Rs. 6,000 by way of transfer entry from his capital account in the books of the firm to the account of the Trust. At the time when the accounts of the firm were closed, there was profit and 15% of the profit was determined at Rs. 85,277 which was credited to the capital account of the assessee. At the stage of the assessment, the assessee took up a stand that 40% of his income by way of share in the firm was not includible in his total income as it was diverted by a superior title to the trust. The ITO rejected this claim of the assessee. The AAC, however, accepted the claim of the assessee in an appeal filed by him. On an appeal of the Revenue before the Tribunal, two learned Members who heard the appeal first had difference of opinion on the point at issue and the matter was referred to the President under S. 25 of the Act. The Vice President of the Tribunal considered the relevant facts and circumstances and came to the conclusion that by virtue of the settlement the income by way of share in the firm was diverted by a superior title and therefore, the income in question was not includible in the total income of the assessee.

(3.) AT the time of hearing of this matter, the learned counsel for the assessee submitted that, on identical facts, similar question is answered by this Court in favour of the assessee, who was also a partner of a firm of M/s Ramniklal Jivanlal Kinariwala Industries, in ITR No. 191 of 1980, decided on 29th Oct., 1993. It is admitted by the learned counsel for the Revenue that the facts in the present reference and the facts in ITR No. 191 of 1980 are identical. In ITR No. 191 of 1980, we referred to the decision of the Supreme Court in the case of CIT vs. Bhagya Laxmi & Co. (1965) 55 ITR 660 (SC) and held that a partner of the firm is entitled to enter into a sub partnership or he can transfer his share of capital by executing a trust deed. We also referred to the decision of the Supreme Court in the Case of Murlidhar Himatsinghka vs. CIT (1966) 62 ITR 323 (SC), and held that when a sub partnership is entered into, the partner changes his character vis a vis the sub partners and the income tax authorities. In a case of sub partnership the sub partnership creates a superior title and diverts the income before it becomes the income of the partner. In other words, the partner in the main firm receives the income not only on his behalf but on behalf of the partners in the sub partnership. We have also referred the decision of this Court in the case of CIT vs. Nandiniben Narottamdas (1982) 26 CTR (Guj) 200 : (1983) 140 ITR 16 (Guj), and finally held as under :