1961 (1) TMI 8 - SC - Income Tax

Inclusion of partnership profits in deceased partner's income upheld by Supreme Court

The Supreme Court affirmed the High Court's decision that the profits settled on the deceased partner's wife and daughters were to be included in his ... Whether the inclusion in the assessee's total income of the profits settled by him on his wife and two daughters is justified in law ? Held that:- By the deeds in question, the assessee merely allowed a payment to his wife and daughters to constitute a valid discharge in favour of the firm ; but what was paid was, in law, a portion of his profits, or, in other words, his income. A glance at the account books of, the firm, Messrs. Chari and Ram, clearly shows that the amounts were first credited in the khata of Rangachari and then under his directions were transferred from his khata to those of his wife and daughters. The dispositions, therefore, were, in law and in fact, portions of the income of Rangachari, after the income had accrued to him and tax was payable by him at the point of accrual. Thus it cannot be said that the profits were diverted by an overriding title before they accrued to Rangachari. Appeals dismissed. Issues:1. Inclusion of profits settled on wife and daughters in assessee's total income.2. Applicability of section 16(1)(c) of the Income-tax Act.3. Interpretation of deeds of settlement and diversion of income.Analysis:Issue 1:The case involved appeals by the legal representatives of a deceased individual regarding the inclusion of profits settled on his wife and daughters in his total income. The High Court had answered in the affirmative, leading to the appeals before the Supreme Court. The deceased partner had executed deeds of settlement assigning a portion of his profits to his wife and daughters for a specified period. The contention was that these amounts should not be included in the total income for assessment purposes.Issue 2:The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal had rejected the assessee's contentions. They held that the income had already accrued to the assessee, as the deeds were executed after the close of the account year. The transfer to the minor daughter was considered under section 16(3) due to lack of adequate consideration. The application of section 16(1)(c) was also discussed, with the authorities concluding that the income had first accrued to the assessee before being transferred, thus not falling under the section.Issue 3:The Supreme Court analyzed the deeds of settlement and the nature of the transactions. It was observed that the profits were first to accrue to the deceased partner and were then applied for payments to his wife and daughters. The court emphasized that under the law of partnership, only the partner is entitled to the profits. The amounts were initially credited to the partner's account and then transferred to his wife and daughters, constituting portions of his income. The court referred to previous cases to establish that the profits were not diverted before accruing to the partner, thus dismissing the appeals and upholding the High Court's decision.In conclusion, the Supreme Court affirmed the High Court's decision, stating that the profits settled on the deceased partner's wife and daughters were to be included in his total income for assessment purposes. The court's analysis focused on the legal principles of partnership income and the nature of the settlements, ultimately rejecting the appeals and upholding the tax authorities' assessments.