Association of persons needs unity of purpose, while a family arrangement can divert partnership income by overriding title.

A partial partition of a Hindu undivided family's interest in a partnership, by itself, did not create an association of persons because unity of purpose for a common venture was absent; the partition was duly recorded in the family books and accepted under section 171(3). The family arrangement also operated to allocate the firm income directly to family members in specified shares, so the income was not first received by the assessee and then applied away. On that basis, no association of persons arose, and the income was held to be diverted by overriding title in favour of the family members.

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Issues: (i) Whether the members of the erstwhile Hindu undivided family formed an association of persons after the partial partition of the family interest in the firm. (ii) Whether the share income from the firm stood diverted by overriding title in favour of the family members.

Issue (i): Whether the members of the erstwhile Hindu undivided family formed an association of persons after the partial partition of the family interest in the firm.

Analysis: Mere partition of the family interest in the partnership business did not, by itself, create an association of persons. The essential requirement was unity of purpose for a common venture. The agreement providing for continuation of the karta as partner and internal apportionment of profits and losses in the family accounts did not indicate any such common volition. Non-intimation of the partition to the firm was also held to be an insufficient circumstance, particularly when the partition was duly recorded in the family books and had been accepted under section 171(3) of the Income-tax Act, 1961.

Conclusion: The answer was in the negative and in favour of the assessee; no association of persons was formed.

Issue (ii): Whether the share income from the firm stood diverted by overriding title in favour of the family members.

Analysis: On the terms of the partial partition and the manner in which the family arrangement operated, the income was treated as belonging to the family members in specified shares, and the factual matrix did not support the conclusion that the income accrued to the assessee first and was thereafter applied away. The arrangement was recognised as effecting the allocation of the income itself rather than a mere application of income after accrual.

Conclusion: The answer was in the affirmative and in favour of the assessee; the income was diverted by overriding title.

Final Conclusion: The reference was answered entirely in favour of the assessee, with both substantive questions decided against the Revenue.

Ratio Decidendi: An association of persons cannot be inferred from a mere partition of family interests in a business absent unity of purpose for a common venture, and a recognised family arrangement may operate to divert income by overriding title where the income is allocated before accrual to the assessee.

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