Assignment of income versus diversion by overriding title in partnership profit settlements remains tax critical

Settlement deeds that merely directed partnership profits to a wife and daughters, without transferring the underlying asset or source of income, were analysed as an assignment of income rather than a diversion by overriding title. The text explains that section 16(1)(c) of the Income-tax Act, 1922, distinguishes a true transfer of the source from a voluntary disposition of income, so taxability depends on the general charging provisions and the nature of the arrangement. It also notes that section 16(3) supports aggregation where a transfer of assets is involved. On the stated facts, the settled profits remained includible in the assessee's total income.

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Issues: Whether the profits settled by the assessee on his wife and daughters were liable to be included in his total income under section 16 of the Income-tax Act, 1922.

Analysis: The settlement deeds did not transfer any asset or source of income; they only dealt with the right to receive profits from the partnership. Section 16(1)(c) of the Income-tax Act, 1922, was examined as distinguishing between transfer of an asset and mere disposition of income. The Court held that the third proviso to section 16(1)(c) did not convert every voluntary disposition of income into a diversion by overriding title, and that the question whether such income escaped assessment depended on the general charging provisions and on whether the payment amounted to a true diversion or only an application of income. On the facts, the arrangement was voluntary and did not create an overriding title sufficient to exclude the income from the assessee's taxable income. In relation to the wife and unmarried daughter, section 16(3) was also held to support aggregation where a transfer of assets was involved.

Conclusion: The settled profits were correctly included in the assessee's total income, and the reference was answered against the assessee.

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