Asst. Commissioner of Income Tax vs Dilip J. Kinariwala

Akil Kureshi, J.—In this tax appeal, following substantial question of law have been framed.

(1) Whether, the Appellate Tribunal has substantially erred in law and on facts in holding that assignment of Assessee''s share in the partnership firm, in favour of body of individuals creates overriding title in favour of BOI and that the said income cannot be treated as income of the Assessee ?

(2) Whether the assignment of part of his share from the partnership firm by the Assessee in favour of body of individuals is not the real income of the Assessee but of the body of individuals and as such assessable only in the hands of BOI ?

Respondent Assessee was a partner in a firm having specified percentage of share in the profit and loss of the partnership firm. A part of share the Assessee assigned in favour of body of individuals("BOI" for short). It is the case of the Assessee that to the extent the share was assigned, the income of the partnership firm would become income of BOI and BOI would therefore, be liable to pay tax and not the Assessee. The Revenue holding belief that assignment was bogus and that in any case Assessee continued to be partner of the firm, to the extent of his share had the liability to pay the tax on entire portion of the partnership income which was alloted to him. Tribunal decided in favour of Revenue. Assessee went before High Court in Reference. High Court allowed such Reference. We may notice that identical issue judged by the High Court in case of Sunil J. Kiiariwala v. CIT reported in (1995) 211 ITR 127 was carried before the Supreme Court. The Apex Court in decision in case of Commissioner of income tax v. Sunil J. Kinariwala reported in (2003) 259 ITR 10 allowing the Revenue''s appeal observed:

It is apt to notice that there is a clear distinction between a case where a partner of a firm assigns his share in favour of a third person and a case where a partner constitutes a sub-partnership with his share in the main partnership. Whereas in the former case, in view of Section 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership except of course, to receive that part of the profits of the firm referable to the assignment and to the assets in the event of dissolution of the firm in the latter case, the sub-partnership acquires a special interest in the main partnership. The case on hand cannot be treated as one of a sub-partnership, though in view of Section 29(1) of the Indian Partnership Act, the Trust, as an assignee, becomes entitled to receive the assigned share in the profits from the firm not as a sub-partner because no sub-partnership came into existence but as an assignee of the share of income of the assignor-partner.

We may also notice that the issue regarding the validity of assignment by partners in favour of BOI was also considered in context of Wealth Tax Act. Issue also reached Supreme Court and Apex Court in decision in case of Commissioner of Wealth-Tax v. Lov S. Kinariwala reported in (2003) 259 ITR 440 (SC) dismissed the Revenue''s appeal affirming decision of High Court holding that the creation of body of individuals and assigning of assets was not sham and bogus. The decision of the Apex Court in case of Sunil J. Kinariwala(supra) was also noticed in Lov S. Kinariwala(supra). The Apex Court however, distinguished two situations making following observations:

But then the question remains whether the fact that the High Court relied upon the judgment in Sunil J. Kinariwala (1995) 211 ITR 127 (Guj), which was reversed by this Court in Civil Appeal No. 1899 of 2002 Commissioner of Income Tax Vs. Sunil J. Kinariwala, dated December 10, 2002 would make any difference to the result of this appeal. In our view, it does not as on the facts of the present case, that judgment is clearly distinguishable. The point in that case was whether there was diversion of income of the Assessee to the Trust by over-riding title created in favour of the Trust, whereas in the present case, the question is whether the body of individuals and assignment of assets to it was sham and bogus. In our view, the High Court has erroneously relied on that Judgment. Be that as it may, we have held above that on the findings recorded both by the Commissioner (Appeals) as well as by the Tribunal, the High Court was right in rejecting the application u/s 27(3) of the Wealth Tax Act.

To complete the recording of different orders, we may notice that subsequent to above two decisions of the Apex Court, a Division Bench of this Court considered identical issue in Tax Appeal No. 199/2005. By judgment dated 20.12.2005 Revenue''s appeal was allowed making following observations:

It is an accepted position between the parties that the deed of assignment is identical in all material particulars except for the change in the name, date and the percentage of the share to be assigned. In these circumstances, the ratio of the Apex Court decision applies with full vigour and the genuineness of the assignee, which is not in dispute, does not operate as a distinguishing feature. In fact, it is common ground between the parties that all along the Assessee had been pressing into service the decision of this Court reported in (1995) 211 ITR 127, and the revenue was trying to distinguish the same. The Assessee had at no point of time raised any contention to the effect that there is any distinction on facts recorded by this Court in its aforesaid decision and the facts of the present case.

In these circumstances, applying the ratio of the Apex Court decision in case of Commissioner of Income Tax v. Sunil J. Kinariwala (Supra), the question is answered in the negative. It is held that the Tribunal was not justified in deleting the addition of Rs. 1,43,768/= being 2.52 % of share income from the firm of M/s. Ramniklal Jivanlal Kinariwala & Company which had been assigned to various bodies of individuals.

Having heard learned Counsels for either sides and having perused the documents on record, we are of the opinion that issue in the present group of appeals is squarely covered by the Apex Court inc case of Sunil J. Kinariwala(supra). The subsequent decision in case of Lov S. Kinariwala(supra) arising in Wealth Tax proceedings would not alter this situation. As rightly pointed out by the counsel for the Revenue under Wealth Tax proceedings, central question was whether assignment was sham or bogus. This was so noticed by the Apex Court while drawing distinction from the view of Supreme Court in case of Sunil J. Kinariwala(supra). Division Bench of this Court also in judgment of 20.12.2005 in Tax Appeal No. 199/2005 approached the issue similarly.

We may also add that all along Assessees were relying on previous decision of the tribunal along the same line which decisions were approved by the High Court, but reversed by the Apex Court in Sunil J. Kinariwala(supra). In that view of the matter all appeals are required to be allowed. Decisions of tribunal are required to be reversed by answering the question in favour of Revenue.

Counsel for the Respondent Assessee however, submitted that in all cases issue is revenue neutral. Tax was assessed in hands of present Respondents on substantive basis and on protractive basis in hands of the assignee. That tax is already paid by the assignee. Revenue cannot tax the same income twice. In support of the contention, counsel relied on decision of the Apex Court in case of Income Tax Officer, "A" Ward Lucknow v. Bachu Lal Kapoor reported in (1966) 60 ITR 74, wherein following observations were made:

It was then forcibly brought to our notice that the said view would be subversive of the doctrine of "double taxation". It was said that as the orders of assessment on the individual members of the said family had become final, if the income tax Officer was permitted to assess the Hindu undivided family for the same assessment year, tax would be imposed on the same income twice over. It is true that the Act does not envisage taxation of the same income twice over "on one passage of money in the form of one sort of income". It is equally true that Section 14(1) of the Act expressly debars the imposition of tax on any part of the income of a Hindu undivided family received by its members. The fact that there is no provision in the Act dealing with a converse position does not affect the question, for the existence of such a converse position is legally impossible under the Act. So long as the Hindu undivided family exists, the individuals thereof cannot separately be assessed in respect of its income. None the less, if, under some mistake, such income was assessed to tax in the hands of the individual members, which should not have been done, when a proper assessment was made on the Hindu undivided family in respect of that income, the Revenue had to make appropriate adjustments; otherwise, the assessment made in respect of that income on the Hindu undivided family would be contrary to the provisions of the Act, particularly Section 14(1) of the Act. We, therefore, hold that if the assessment proceedings initiated u/s 34 of the Act culminates in the assessment of the Hindu undivided family, appropriate adjustments have to be made by the income tax Officer in respect of the tax realised by the Revenue in respect of that part of the income of the family assessed on the individuals of the said family. To do so is not to reopen the final orders of assessment, but in reality to arrive at the correct figure of tax payable by the Hindu undivided family.

Counsel also relied on the decision of Bombay High Court in case of Trustees of Late R.J. Vakil Vs. Commissioner of Income Tax, Bombay North, Ahmedabad, in which following observations have been made:

We are surprised that responsible officers of the income tax Department should take up so unreasonable an attitude in matters of taxation. What is sought to be taxed in the hands of the trustees is the income which the trustees received on behalf of the beneficiaries, and the Department apparently wants to recover the full tax both from the trustees as well as from the beenficiaries, or, in any event, to recover the full tax from the trustees and retain all advance payments made on behalf of the beneficiaries. The position in law appears to us to be absolutely and entirely clear, that tax shall be levied upon the trustees u/s 41(I) to quote only the relevant part of the Sub-section)

...in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable...

These words cannot leave any doubt in the mind of any reasonably minded person that although the tax may be recovered from the trustees, it is on the income which the trustees receive on behalf of the beneficiaries that the tax is to be imposed "in the like manner and to the same amount as it would be leviable upon" the beneficiaries themselves. Mr. Joshi, appearing for the Department, has found himself entirely unable to support the stand taken up by the Department and has not attempted to argue that payments made u/s 18A or u/s 23B are not to be adjusted against the claim of tax.

Counsel also relied on Board''s circular dated 7/3/1984 wherein under certain circumstances adjustment of tax and liability to pay interest in case of individuals and trust and when one is taxed on substantial basis and other on protractive basis has been provided for.

Counsel also relied on judgment of tribunal in case of Kirtikumar Vinodray, Sanjaykumar Vinodrai & Sandip Ashwinkumar Trust v. income tax Officer and Minor Pahlad Ugardas Patel Oral Specific Deferred Family Trust v. Inspecting Assistant Commissioner. Counsel therefore, submitted that the Assessing Officer should be directed to give effect to above circulars and decisions.

We are of the opinion that such issues do not arise in the present appeals. Facts necessary to judge these contentions are not available. However, we are of the opinion that the Assessing Officer while giving effect of this judgment in all Tax appeals shall be cognizant of relevant circulars and if any circular holding field is pointed out and any other authority is cited, we are sure the Assessing Officer shall take a proper view and shall not drive Assessees to unnecessary litigations.

With the above observations, Tax Appeal is allowed. Impugned decision of the tribunal to the extent stated above is quashed.