Genuine transfer and sub-partnership: valid book entries and consistent conduct kept income out of the assessee's hands.

A transfer credited through book entries pursuant to a binding arbitral award was treated as genuine where both parties accepted the award and their subsequent conduct and assessment records consistently reflected the transaction; the resulting interest income was therefore not taxable in the assessee's hands. The same approach was applied to the sub-partnership: the deed was executed, acted upon, and supported by accounting entries and returns in the beneficiary's own assessment, showing a real profit-sharing arrangement rather than a device to divert income. On those facts, the additions based on alleged sham transfer and sham sub-partnership were unsustainable and had to be deleted.

---

---

Issues: (i) Whether the transfer of Rs. 1 lakh in favour of Smt. Chunnibai pursuant to the arbitral award was genuine and valid so as to exclude the resulting interest income from the assessee's assessment; (ii) whether the sub-partnership between Shri Chandmal Modi and Smt. Chunnibai was genuine and whether the share income arising therefrom could be included in the assessee's hands.

Issue (i): Whether the transfer of Rs. 1 lakh in favour of Smt. Chunnibai pursuant to the arbitral award was genuine and valid so as to exclude the resulting interest income from the assessee's assessment.

Analysis: The award was accepted by both parties and, in law, operated as a final and binding determination of their rights. The material on record showed that the amount was not a sham arrangement but was given effect to by book entries in the books of the HUF and a third party concern, with corresponding debit and credit entries, subsequent conduct of the parties, and consistent assessment of the amount and interest in Smt. Chunnibai's own hands. The evidence established that the amount stood credited to her and that she became a creditor in respect of the sum awarded for maintenance.

Conclusion: The transfer was valid and genuine, and the interest income arising from the credited amount was not includible in the assessee's hands.

Issue (ii): Whether the sub-partnership between Shri Chandmal Modi and Smt. Chunnibai was genuine and whether the share income arising therefrom could be included in the assessee's hands.

Analysis: The sub-partnership deed was executed, acted upon, and supported by the statements of the parties and by the subsequent accounting entries. The profit-sharing arrangement was reflected in the books, the income was regularly returned by Smt. Chunnibai, and the corresponding assessments had been completed in her hands. On the facts found, the arrangement was a real sub-partnership and not a device to divert income back to the HUF.

Conclusion: The sub-partnership was genuine, and the share income arising therefrom was not assessable in the assessee's hands.

Final Conclusion: The additions made on the footing that the transfer and sub-partnership were sham were unsustainable, and the assessments were required to be deleted to that extent.

Ratio Decidendi: A transfer effected through valid book entries pursuant to a binding arbitral award, and acted upon by the parties with consistent subsequent treatment in assessment records, constitutes a genuine transfer; a duly executed and acted-upon sub-partnership cannot have its income taxed in the hands of the parent firm or HUF merely because the beneficiary is connected to the family.

---