Smt. Indira Devi vs Commissioner of Income Tax

Rangarajan, J.—The facts, as stated by the Tribunal in this case, are as follows : The assessee was an individual and being a partner in

Messrs Durga Flour Mills, Calcutta, was having a share of 18 paise. On October 15, 1971, she executed a deed of settlement by which she

settled a 6 paise share, out of the 18 paise share, in favour of a minor, Navin Kumar, son of her brother-in-law, Shri Pawankumar. The assessee

filed a return for the assessment years 1972-73 to 1975-76, claiming that the income attributable to 6 paise share had been diverted by overriding

title to a minor Navin, and should, therefore, be excluded from the estimated total income It is stated that she had also filed the settlement deed

along with the returns. The Income Tax Officer, in the original assessment, excluded the share of the minor from the total income of the assessee

for all the three assessment years. Subsequently, the internal audit party of the Income Tax Department gave a note, which is as follows :

Seen settlement deed dated October 15, 1971, and referred to Income Tax Officer''s note dated August 31, 1972, above. There has been

transfer of income or ''application of assessee''s income'' every year from 1972-73 onwards and as the donee is not a partner in Durga Flour Mills

and as the assessee is an individual, the share income relating to the donee deducted in arriving at the total income from the assessment years

1972-73 to 1975-76 is not correct and the same is assessable to total income. There has been no transfer of capital or corpus. Hence, the income

has escaped assessment for the assessment years 1972-73 to 1975-76.

Thereupon, the Income Tax Officer made a reassessment u/s 147(b) by which he concluded that there was no diversion by overriding title of the

6 paise share, out of the 18 paise share of the assessee, and completed the assessment including the entire 18 paise share of the assessee. This

action was confirmed both by the Appellate Assistant Commissioner and the Appellate Tribunal. The assessee had objected to the reopening of

the assessment on the ground that the audit party has given a legal opinion, which it was not entitled to do and, therefore, it did not constitute

information within the meaning of section 147(b) to grant jurisdiction to the Income Tax Officer to reopen the assessment. On the merits also, the

assessee had objected that the settlement amounted to a transfer of title with regard to 6 paise share in the firm. The Appellate Tribunal rejected

both the objections. This has led to the reference of the following questions :

(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that the reopening of the assessment u/s

147(b) of the Act is valid in law ?

(2) Whether the Tribunal is justified in holding that the entire 18 paise share income from Durga Flour Mills is liable to be assessed and charged to

tax in the appellant''s hands as her own income ?

(3) Whether the Tribunal is right in holding that what has been given by the assessee to the donee is only an application of income and not one of

diversion by overriding title ?

Before us it was contended on behalf of the assessee that the Appellate Tribunal had relied on the decision of the Supreme Court in the case of

R.K. Malhotra, ITO, Group Circle II(1), Ahmedabad Vs. Kasturbhai Lalbhai (Huf), , which had been subsequently reversed by a decision of the

Supreme Court in Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, , which had held that the

expression of an opinion on a question of law by an audit party would not amount to information within the meaning of section 147 of the Act. It

was submitted that the audit note, extracted above amounted only to an expression of opinion, since the Income Tax Officer had already drawn an

inference by looking into the settlement deed produced before him that there was a transfer of title of the 6 paise share to the minor. In respect of

the merits also, it was submitted that there was an assignment of the share of the 6 paise in the partnership, since an interest in the partnership was

like any other property amenable to assignment.

On the other hand, it was contended on behalf of the Revenue that the decision of the Supreme Court in Indian and Eastern Newspaper

Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, has been explained subsequently by the Supreme Court itself in A.L.A. Firm

Vs. Commissioner of Income Tax, Madras, , where it was held that if the audit party brings to the notice of the Income Tax Officer certain facts

overlooked by him, he could change his opinion on the basis of those facts. Our attention has also been invited to the decisions in United India Fire

and General Insurance Co, Ltd. v. CIT [1983] 153 ITR 81; Teekoy Rubbers (India) Ltd. Vs. Commissioner of Income Tax, and Bharat Plywood

and Timber Products Ltd. Vs. Commissioner of Income Tax, . On the merits also, it was submitted that there was an assignment of only the profit

after it was earned by the assessee, as held by the Supreme Court in K.A. Ramachar and Another Vs. Commissioner of Income Tax, Madras, .

In reply, learned counsel for the assessee drew our attention to the decision in Commissioner of Income Tax Tamil Nadu-V Vs. S. Sivaprakasa

Mudaliar, , and submitted that since an interest in the firm could be converted into joint family property even without the consent of the firm, on the

same analogy, an assignment of a share also should be accepted as transferring the interest in the firm itself and not only the income.

We have considered the submissions made on both sides and applied our mind to the impact of the audit note. It is clear that the audit note only

brings to the attention of the Income Tax Officer two vital facts, namely, the donee did not become a partner of the firm and there was no transfer

of capital. Actually, the question whether the interest in the firm had been transferred by the assessee to the minor is a question of fact, which itself

is based on other primary facts. Obviously, the Income Tax Officer had not applied his mind to all the relevant facts and the production of the

settlement deed alone was insufficient to make a proper assessment. The Appellate Tribunal has pointed out that the partnership deed itself

contains a clause prohibiting the assignment of the share in the firm without the consent of the partners and it is not in dispute that the consent of the

other partners had not been taken. Since the Income Tax Officer had not applied his mind at all to the relevant facts, the audit party had only

brought to his notice those facts, which had escaped his attention. Consequently, in the revision, the Income Tax Officer had to apply his mind to

those facts and come to a proper finding as to whether the share in the firm had been effectively transferred. In our opinion, therefore, the

Appellate Tribunal is right in holding that the Income Tax Officer had ample jurisdiction u/s 147(b) to initiate the reassessment proceedings.

This takes us on to the merits of the case. The settlement deed itself provides that the minor will have a right to claim a 6 paise share only from

the assessee and not from the firm. As pointed out by the Supreme Court in K.A. Ramachar and Another Vs. Commissioner of Income Tax,

Madras, , the tenor of the deed of settlement shows that the profits were first to accrue to the assessee and then applied for payment to the donee.

It is only the partner, who is entitled to the profits and the donee, as an assessee (? ) did not have and could not have any direct link to the profits.

It follows that there was no transfer of the interest in the firm itself and hence the 6 paise share of income of the assessee was not diverted by

overriding title. The case of conversion of individual property into joint family property is distinguishable as it is not considered to be a transfer as

such. The facts of this case are on all fours with the decision of the Supreme Court, cited above, and hence the finding of the Appellate Tribunal

that there was no diversion of income of the assessee in the 6 paise share in the firm by overriding title to the minor is correct.

In the result, we answer all the questions in the affirmative and against the assessee with costs of Rs. 500 (one set).