Law:

Section:

Section 4 of the Income-tax Act, 1961 - Income - Diversion by overriding title-assesses was partner in firms on behalf of HUF - HUF partitioned and along with that capital accounts in firms also partitioned - Assessee to remain partner in firms - Though capital in firms' account stood in assessee's name, it belonged to HUF's members in severality - Assessee to receive shares of firm's profits and losses for and on behalf on HUF's members severally - Whether part of assessee's share income in firms was subject to overriding title in favour of other members of HUF - Held, on facts, yes - Whether entire share income from firms could be taxed in assessee's hand - Held, on facts, no FACTS The assessee was the karta of a HUF, consisting of himself, his wife and two minor sons. With the aid of HUF's funds, he was a partner, on behalf of said HUF, in two firms, B and K. On 27-8-1962, the said HUF was partitioned and the assessee's capital account in the said two firms also came to be equally divided between the HUF's members. The memorandum of partition provided (i) that though the assessee was to remain as a partner in the said two firms, the profits or losses in the firms, falling to the share of the assessee, were to be the profits or losses of the HUF's members severally in their own respective individual right and interest; (ii) that the share in the profits in firms which was to be received by the assessee shall be received for and on behalf of the members (severally) ; and (iii) that though capital in the firms would stand in the assessee's name, it would belong to the HUF's members in severality. During the assessment year 1963-64, so far as division of capital was concerned, the ITO accepted the claim of the assessee but he did not accept the claim that the income, which was to be derived from the capital that was invested, in the firms was also divided. During the assessment years 1964-65 and 1967-68 to 1970-71, again the ITO rejected the assessee's contention that income from the firms was divided between member of his erstwhile HUF and held that the entire share income would be assessable in the hands of an AOP. On appeals the AAC set aside the ITO's order…

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