Partner's firm profit share assigned to a trust: treated as mere profit assignment, not income diversion; taxed to partner under s. 29(1).

The dominant issue was whether 50% of a partner's 10% share in a firm, purportedly assigned to a trust, constituted income diverted by overriding title so as to be taxable in the trust's hands. The SC held that the arrangement was not a sub-partnership creating a special interest in the main partnership, but merely an assignment of profits; under s. 29(1) of the Partnership Act, the assignee acquires no interest in the firm and only a right to receive the assigned profits. Consequently, there was no diversion of income at source, rendering consideration of the alternative statutory provision unnecessary, and the assigned share was included in the partner's total income; the decision went in favour of the Revenue and against the assessee.

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Issues Involved:
1. Whether the assignment of 50% of the assessee's 10% share in the partnership firm to a trust creates an overriding title in favor of the trust.
2. Whether the income accruing to the trust can be treated as the income of the assessee.
3. Whether the sum of Rs. 20,141, being the profits referable to 50% of the assessee's share in the partnership firm, is not the real income of the assessee but of the trust and thus assessable only in the hands of the trust.

Detailed Analysis:

Issue 1: Overriding Title Creation
The primary question was whether the assignment of 50% of the assessee's 10% share in the partnership firm to Sunil Jivanlal Kinariwala Trust created an overriding title in favor of the trust. The High Court had held that the assignment resulted in the income being diverted to the trust by overriding title, relying on judgments in CIT v. Bagyalakshmi and Co. and Murlidhar Himatsingka v. CIT. However, the Supreme Court disagreed, emphasizing the principle that income diverted by an overriding title does not reach the assessee and is therefore not taxable in the assessee's hands. The Supreme Court noted that the determinative factor is the nature and effect of the assessee's obligation. If the obligation diverts the income before it reaches the assessee, it is considered an overriding title. In this case, the obligation did not divert the income at source; it was an application of income after it reached the assessee.

Issue 2: Income Attribution
The second issue was whether the income accruing to the trust could be treated as the income of the assessee. The Supreme Court reiterated the principle from CIT v. Sitaldas Tirathdas, which distinguishes between diversion of income by overriding title and application of income. Since the income was not diverted at source but was an obligation applied after receipt, it remained the assessee's income. The Supreme Court held that the trust, as an assignee, was entitled to receive the assigned share of profits from the firm, but this did not constitute a diversion by overriding title.

Issue 3: Assessability of Income
The third issue was whether the sum of Rs. 20,141, being the profits referable to 50% of the assessee's share, was not the real income of the assessee but of the trust. The Supreme Court concluded that the income assigned to the trust must be included in the assessee's total income. The Court emphasized that the trust, as an assignee, did not change the nature of the income being the assessee's income before its application to the trust. The obligation to pay the trust was an application of income, not a diversion at source.

Conclusion:
The Supreme Court set aside the High Court's judgment, holding that the income assigned to the trust must be included in the assessee's total income. The questions were answered in favor of the Revenue and against the assessee. The civil appeals were allowed, and the orders under appeal were set aside, with no order as to costs.

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