Real income doctrine limits taxation where a genuine sub-partnership diverts firm share income at source.

Where a genuine sub-partnership or similar arrangement makes others co-owners of a registered firm's share, the income from that share is taxed only to the extent it is the assessee's real income. On the assumed validity of the later deed, the named persons owned the 47.25 pies share itself, so the income was first earned by them in the proportions stated in the deed. The matter was treated as diversion of income at source, not a mere application of the assessee's own income. Accordingly, only the assessee's proportionate share was assessable, and the full amount was not includible in his total income.

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Issues: Whether, on the facts and on the assumption that the later partnership deed was genuine, the assessee's entire 47.25 pies share in the registered firm was includible in his total income or only his real share therein.

Analysis: The relevant assessment was governed by the Income-tax Act, 1922. On the assumed genuineness of the later deed, the persons named therein were the owners of the 47.25 pies share itself, so the income from that share was first earned by all of them in the proportions stated in the deed. The case therefore involved diversion of income at source, not merely an arrangement by which the assessee applied his own income in a particular manner. The principle of real income applied, and the authorities treating every registered-firm share as necessarily the assessee's income were not accepted on these facts.

Conclusion: The entire sum of Rs. 1,34,944 was not includible in the assessee's total income; only his proportionate share of that income was taxable, in favour of the assessee.

Ratio Decidendi: Where a genuine sub-partnership or similar arrangement makes others co-owners of the share itself in a registered firm, the income from that share is taxable only to the extent it represents the assessee's real income and is not fully assessable in his hands merely because the share stands in his name.

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