Valid partnership and overriding title principles governed the HUF profit claim, and revision for lack of inquiry was upheld.

A valid partnership requires an agreement between distinct legal persons; where no fresh deed existed after the original partner's death and the HUF could not contract with the same individual in two capacities, the alleged partnership failed. Income was not diverted by overriding title unless a legally enforceable obligation transferred it before it reached the assessee; the deceased partner's capital balance did not create such a diversion, so the claimed exclusion of half the profits from the HUF's income was disallowed. Because the return had been accepted without proper inquiry into an untenable claim, the assessment was erroneous and prejudicial to revenue, making revision under section 263 sustainable.

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Issues: (i) Whether the assessee could claim that the business was carried on through a valid partnership between the HUF and the same individual in his individual capacity after the death of the original partner. (ii) Whether 50 per cent of the business income was diverted by overriding title in favour of the individual so as to be excluded from the HUF's taxable income. (iii) Whether the Commissioner was justified in invoking revisionary jurisdiction under section 263 of the Income-tax Act, 1961.

Issue (i): Whether the assessee could claim that the business was carried on through a valid partnership between the HUF and the same individual in his individual capacity after the death of the original partner.

Analysis: A partnership requires an agreement between distinct legal persons. The facts disclosed no fresh partnership deed after the death of the original partner and no valid contract between the assessee HUF and the same individual in two capacities. The authorities relied upon by the assessee were distinguishable because they involved executed partnership deeds and multiple partners, whereas the present arrangement lacked the essential element of agreement. A person cannot, in the circumstances shown, validly contract with himself as karta and as individual in a two-party partnership.

Conclusion: The alleged partnership was not valid, and the assessee's contention on this issue failed.

Issue (ii): Whether 50 per cent of the business income was diverted by overriding title in favour of the individual so as to be excluded from the HUF's taxable income.

Analysis: Overriding title arises only where income is diverted before it reaches the assessee by a legally enforceable obligation created by act of parties or by operation of law. No such agreement or legal charge existed here. The deceased partner's capital balance did not, by itself, create an overriding title over future profits. At best, the amount retained in the business could be treated as a deposit or give rise to a claim for reasonable interest, but not as prior diversion of income.

Conclusion: No overriding title was established, and the claimed exclusion of 50 per cent of the income was not allowable.

Issue (iii): Whether the Commissioner was justified in invoking revisionary jurisdiction under section 263 of the Income-tax Act, 1961.

Analysis: The assessments under section 143(1) had accepted the returned income without examining the sustainability of the claimed deduction. Since the income had been understated on an untenable legal basis, the assessment orders were erroneous and prejudicial to the interests of the Revenue. The Commissioner was therefore entitled to set aside the assessments and direct fresh assessments according to law.

Conclusion: The invocation of section 263 was justified and the revisional orders were sustained.

Final Conclusion: The assessee's appeals failed in entirety, and the revisional orders directing fresh assessment were upheld.

Ratio Decidendi: A claimed share of business profits is not excluded from taxable income unless there is a legally enforceable diversion by overriding title or a valid underlying arrangement creating distinct rights; absent a valid partnership or such diversion, revision under section 263 is sustainable where the assessment accepted the claim without proper inquiry.

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