Commission income cannot be diverted to an unlicensed firm when the underlying insurance agency business is legally prohibited.

Commission income from insurance agency business could not be validly assigned for tax purposes to a firm that lacked the statutory licence required to carry on that business. Because the firm was legally incapable of undertaking the agency activity under the Insurance Act, the arrangement was treated as a mere tax-reduction device and did not change the true character of the income. The commission therefore remained taxable in the assessee's hands, and the contrary contention was rejected.

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Issues: Whether commission income earned by an insurance agent could be treated as income of a firm under an arrangement when the firm had no insurance agent licence.

Analysis: The assessee earned commission from insurance agency business but sought to assign that income to a firm composed of his wife and mother. Under section 42(7) and section 42(8) of the Insurance Act, 1938, carrying on insurance agency business without a licence is prohibited. Since the firm admittedly had no licence and could not lawfully carry on that business, the arrangement was only a device to reduce the assessee's tax burden and did not alter the true character of the income.

Conclusion: The commission remained taxable in the assessee's hands and the contention that he could not be taxed on that income was rejected.

Final Conclusion: The questions referred were answered against the assessee and the Revenue's position was upheld.

Ratio Decidendi: Income earned by an assessee cannot be diverted for tax purposes to an entity that is legally incapable of carrying on the underlying business, and such an arrangement does not prevent taxation of the income in the assessee's hands.

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