Law: Income Tax Act, 1961

Section: 256(1),60

Law: Partnership Act, 1932

Section: 29(1)

Section 4, read with section 60, of the Income-tax Act, 1961 - Income - Diversion of, by overriding title or application of income - Assessment year 1974-75 - Whether when a person becomes entitled to receive an 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 overriding title, but when after receipt of income by assessee, same is passed to a third person in discharge of obligation of assessee, it will be a case of application of income by assessee and not of diversion of income by overriding title - Held, yes - Assessee was a partner of a firm having 10 per cent share therein - By a settlement, he created a trust assigning 50 per cent out of his 10 per cent right, title and interest (excluding capital) as a partner and a sum of Rs. 5,000 out of his capital in firm in favour of said trust - Whether it was only share of income of assessee which was assigned in favour of trust and, therefore, such share of income had to be included in total income of assessee - Held, yes FACTS The assessee, partner of a firm, was having 10 per cent share therein. He created a trust by a deed of settlement assigning 50 per cent out of his 10 per cent right, title and interest (excluding capital), as a partner in the firm, and a sum of Rs. 5,000 out of his capital in the firm in favour of the said trust. The assessee claimed that 50 per cent of the income attributable to his share from the firm stood transferred to the trust resulting in diversion of income at source and the same could not be included in his total income for the purpose of his assessment. The ITO rejected the assessee's claim holding that it was a case of application of income and not diversion of income at source. The AAC allowed the assessee's appeal and directed that sum transferred to the trust be excluded from the assessee's total income. On revenue's appeal, the Tribunal, however, reversed the order of the AAC. On reference, the High Court reversed the order of the Tribunal. On appeal: HELD Under the scheme of the Act, it is the total income of an assessee, computed under the provisions of the Act, that is assessable…

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