Sub-partnership and overriding title prevent partner's share from being taxed as personal income where income is diverted before receipt.

A valid sub-partnership in respect of a partner's share in a main firm can divest the profit stream by an overriding title before it reaches the partner, so the diverted amount is not his personal income. Section 23(5)(a) of the Indian Income-tax Act, 1922 is only a machinery provision for apportionment in a registered firm and does not determine the ultimate ownership of the income. After apportionment, the assessing authority must still identify the real recipient. On that basis, income attributable to the sub-partnership remained assessable in the hands of the entity truly entitled to it, not as the partner's individual income.

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Issues: (i) Whether the agreement dated 21 December 1949 created a sub-partnership so that the income from the partner's share in the main firm was diverted before it reached him and could not be treated as his personal income. (ii) Whether section 23(5)(a) of the Indian Income-tax Act, 1922 prevented the same income from being treated as the income of the sub-partnership after it had been apportioned in the registered firm.

Issue (i): Whether the agreement dated 21 December 1949 created a sub-partnership so that the income from the partner's share in the main firm was diverted before it reached him and could not be treated as his personal income.

Analysis: The agreement was treated as a sub-partnership in respect of the partner's share in the main firm. Under that arrangement, the right to receive profits and bear losses became an asset of the sub-partnership. The governing test is whether the amount ever reached the assessee as his income or was diverted before reaching him. A sub-partnership creates enforceable rights among the parties to it and changes the character in which the partner receives the income for tax purposes.

Conclusion: The income was diverted by an overriding title before it became the partner's personal income and was not assessable as his individual income.

Issue (ii): Whether section 23(5)(a) of the Indian Income-tax Act, 1922 prevented the same income from being treated as the income of the sub-partnership after it had been apportioned in the registered firm.

Analysis: Section 23(5)(a) is a machinery provision for apportioning income among partners of a registered firm. It does not conclude the ultimate question whether the apportioned amount is really the income of the partner or of another person who is entitled to it by reason of a prior diversion. After apportionment, the assessing authority must still determine the real owner of the income. There is nothing in the provision that bars recognition of the income as belonging to the sub-partnership.

Conclusion: Section 23(5)(a) did not preclude assessment of the income in the hands of the sub-partnership.

Final Conclusion: The assessments could not stand in the form adopted by the revenue, because the income was attributable to the sub-partnership and the machinery of section 23(5)(a) did not defeat that substantive position.

Ratio Decidendi: Where a valid sub-partnership diverts a partner's share of profits before it reaches him, the diverted amount is not his real income, and a machinery provision for apportioning income in a registered firm does not prevent assessment of that income in the hands of the person or entity truly entitled to it.

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