COMMISSIONER OF INCOME TAX versus SUNIL J. KINARIWALA

Citation: [2002] SUPP. 4 S.C.R. 650 · Decided: 10-12-2002 · Supreme Court of India · Bench: S.S.M. QUADRI, K.G. BALAKRISHNAN · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
B 
c 
!J 
2 
F 
G 
H 
COMMISSIONER OF INCOME TAX 
v. 
SUNIL J. KINARIWALA 
DECEMBER I 0, 2002 
[SYED SHAH MOHAMMED QUADRI AND K.G. 
BALAKRISHNAN, JJ.] 
Income Tax Act, 1961; Sections 60 and 256(2): 
Assessee, a partner in a firm assigned part of his share income to a 
Trust-Tribunal held the income so assigned to Trust would be included in the 
total income of the assessee for the purpose qf assessment-High Court 
reversing the same-On appeal held, since Trust receives share of income of 
the assigner partner as assignee and not as a sub-partner it is a case of 
application of income by the assessee and not diversion qf income by. over 
riding title-Such share of income of assessee of the firm could be included 
in total income for the purpose of assessment-!ndia11 Partnership Act-Section 
29(1). 
Assessee-appellant, a partner in a firm, created a Trust and assigned 
part of his share/income to Trust and claimed it as diversion of income at 
source, thus not included in his total income for the purpose of assessment. 
Income Tax Officer rejected the claim considering it a case of application 
of income and not diversion of income at source. Appellate Authority 
reversed the order. On appeal by Revenue, Tribunal reversed the order 
of appellate authority. Tribunal formulated questions for the opinion oi 
High Court on the issues: Whether any income from share oftht>.assessee 
in the partnership firm was validly assigned and belongs to the Trust by 
overriding title and assessable only in the hands of Trust. High Court · 
answered the questions in affirmative and the ruling was followed in 
several pending cases on the same issue. Hence this appeal by the Revenue 
and other connected appeals. 
If was contended for the Revenue that since assessee assigned right 
to receive part of profits from his share in the firm, there was no 
overriding title in the Trust to divert income at source, such income liable 
to be included in the total income of the assessee for the purpose of 
650 
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II 
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C.l.T. v. S.J. KINARIWALA 
651 
assessment. On behalf of the assessee, it was submitted that since the Trust A 
was entitled to receive share of the income of the assessee under the 
settlement deed, the Trust n·as getting such incorrie by virtue of overriding 
title. 
Allowing the appeals, the Court 
B 
HELD: I.I. Under the scheme of the Income tax Act, it is the total 
income of an assessee, computed under the provisions of the Act, that is 
assessable to income tax. So much of the income which an assessee is not 
entitled to receive by virtue of an over-riding title created in favour of a 
third party would get diverted at source and the same cannot be added in C 
computing the total income of the assessee. The nature and effect of the 
assessee's obligation is the determinative factor in regard to the income 
attributable to an assessee when it gets diverted by over-riding title. When 
a third person becomes entitled to receive the amount under an obligation 
of an assessee even before he could lay a claim to receive it as his income, 
there would be diversion of income by over-riding title; but when after D 
receipt of the income by the assessee, the same is passed on to a third 
person in discharge of ihe obligation of the assessee, it will be a case of 
application of income by the assessee and not of diversion of income by 
over-riding title. 1655-E-GI 
K.A. Ramachar and Anr. v. Com1nissioner of Income Tax, Madras, E 
(1961) 42 l.T.R. 25 and Moti Lal Chhadami Lal Jain v. Commissioner of 
Income Tax, (1991) 190 ITRI, relied on 
Bejoy Singh Dudhuria v. Commissioner of Income-tax, 119331 I l.T.R. 
135; P.C. Mullick v. Commissioner of Income-tax (1938) 6 l.T.R. 206 and 
Commissioner of Income Tax. Bombay City-II v. Sita/das Tirathdas, (1961) 
41 l.T.R. 367, referred to. 
1.2. It is apt to notice that there is a clear distinction between a case 
where a partner of a firm assigns his share in favour of a third person 
F 
and a case where a partner constitutes a sub-partnership with his share G 
in thll' main partnership. In the former case, in view of Section 29(1) of 
the Indian Partnership Act, the assignee gets no right or interest in the 
main partnership, except, of course, to receive that part of the profits of 
the firm referable to the assignment and to the assets in the event of 
dissolution of the firm, but in the later case, the sub-partnership acquires 
a special interest in the main partnership. f659-H; 660-A, Bi 

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