COMMISSIONER OF INCOME-TAX Vs. RAJA RAM JAISWAL

JUDGEMENT

(1.) Under Section 256(2) of the Income-tax Act, 1961, the Tribunal stated the following two questions :

(2.) It may be noticed that the said agreements between the assessee and the said lenders were practically in the nature of a sub-partnership. It was not a case where the assessee could at any time pay up the loans and discharge/terminate the agreements. Evidently, the said lenders were prepared to lend the amount only on the condition that they were given a share in the share interest of the assessee. The amount thus payable to the said lenders cannot be said to have come into the hands of the assessee and applied by him towards the payment of interest or other liabilities. It was a case where the said lenders were deriving the said income on the basis and by virtue of their own title and interest, created no doubt by the agreements aforesaid. It has been held that an amount diverted by virtue of a partnership agreement or sub-partnership agreement is tantamount to diversion by overriding title. While it is not necessary to refer to all the decisions in this behalf, it would be sufficient if we refer to the decision of the Madras High Court in CIT v. Arumugham Pillai (S.) [1969] 73 ITR 382. The assessee in that case was a partner in a firm 'S' He was also a partner in firm 'J'. 'J' had advanced money to 'S' as and when required. The amount of advance was treated in the books of 'S' as the capital of the assessee. Under a written agreement between the assessee and the other two partners of 'J', it was agreed that the income of the assessee from 'S' as partner was to be shared by the assessee and the said two other partners of 'J'. The question was whether the amount paid to the said two other partners of 'J' was a case of application of income by the assessee or a case of diversion of income by overriding title. It was held that it fell in the latter category. To the same effect is the decision of the Delhi High Court in L. Hans Raj Gupta v. CIT [1969] 73 ITR 765. The principle, of course, is set out in the decision of the Supreme Court in Murlidhar Himatsingka v. CIT [1966] 62 ITR 323.

(3.) For the above reasons, question No. 1 is answered in the following words :