Overriding title and diversion of income: later dissolution could not shift already accrued partnership profits

Income accrued and received by a partnership remains taxable in the firm's hands where there was no prior diversion by an overriding title. The partners' agreement did not transfer title in the assets or income to an existing society, and the society came into existence only later. A subsequent dissolution deed and retrospective dissolution could not alter the tax incidence on income that had already accrued during the accounting year. The later payment to the society was only an application of income after accrual, so the income was assessable in the assessee-firm's hands and not in the hands of the proposed society.

---

---

Issues: Whether the income for the year ending 30 April 1960 was assessable in the hands of the assessee-firm, or stood diverted to a proposed society by reason of the partners' agreement and the later dissolution deed.

Analysis: The partnership carried on the business on its own account throughout the accounting year. The agreement of 25 April 1960 did not effect any divestiture of title in the assets or income in favour of an existing society, nor did it show that the business or its income was being held for a society already in existence. The society came into existence only later, and the transfer of funds to it was effected much after the relevant accounting period. The later dissolution deed and the attempt at retrospective dissolution could not alter the tax incidence on income that had already accrued to and been received by the firm. On the facts, the later payment to the society was only an application of income after accrual.

Conclusion: The income was assessable in the hands of the assessee-firm and not in the hands of the proposed society.

Final Conclusion: The reference was answered against the assessee, holding that the profits of the accounting year remained taxable as the firm's income despite the subsequent dissolution arrangement and transfer to the society.

Ratio Decidendi: Income that has accrued to and been received by an assessee cannot be shifted out of tax liability by a later retrospective dissolution or by a subsequent direction to apply it to another body, unless there was a prior diversion of the income by an overriding title before accrual or receipt.

---