Overriding title in gifted partnership income prevents taxation in the donor's hands where valid transfer is complete.

A valid gift of a partner's share can divest the donor of rights in partnership profits and losses even if the donees are not yet admitted as partners, so long as the deed shows absolute relinquishment of the transferred share. On that basis, the gifted portion is treated as passing to the donees as co-owners, and the income attributable to that share is diverted at source by an overriding title before it accrues to the donor. Mere credit of the full share in the donor's name in partnership accounts does not determine taxability. The gifted portion was therefore not assessable in the donor's hands.

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Issues: (i) Whether the gift deed created a valid transfer of the assessee's share in the partnership profits and losses; (ii) Whether the income so gifted was diverted at source by an overriding title in favour of the donees, or merely applied by the assessee after accrual.

Issue (i): Whether the gift deed created a valid transfer of the assessee's share in the partnership profits and losses.

Analysis: The gift deed stated that the transferred share would belong to the donees as their separate and independent property and that the donor would have no interest, right, title, or share in it. It also provided that, until the donees were admitted as partners, they would be treated as co-owners to the extent of their respective shares in the profit or loss attributable to the donor's share. These recitals showed an absolute divestment of the donor's 40 per cent share in the partnership capital and profits. Section 122 of the Transfer of Property Act does not require that every right in the property must be transferred for a gift to be valid.

Conclusion: The gift was valid in law and the assessee had effectively transferred her share to the donees.

Issue (ii): Whether the income so gifted was diverted at source by an overriding title in favour of the donees, or merely applied by the assessee after accrual.

Analysis: The decisive question was what amount truly reached the assessee as her income. The gift deed and the surrounding arrangement showed that the assessee had completely relinquished the gifted portion of the share and that, to that extent, the donees were entitled as co-owners. The mere fact that the partnership accounts credited the whole share in the assessee's name did not determine taxability. Once the right in the gifted portion stood transferred, the 40 per cent share was diverted by an overriding title before it could become the assessee's income. Section 60 of the Income-tax Act, 1961 could not apply because there was a real transfer of the source of income to the extent of the gifted share.

Conclusion: The gifted portion was diverted by overriding title and was not assessable as the assessee's income.

Final Conclusion: The reference was answered in favour of the assessee and against the Revenue, holding that the gifted share of profits was not includible in the assessee's taxable income.

Ratio Decidendi: Income is taxable only to the extent it truly reaches the assessee as income; where a valid transfer creates an overriding title in favour of another before accrual, the amount is diverted at source and is not assessable in the transferor's hands.

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