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MANU/GJ/0834/2011

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD


Tax Appeal No. 53 of 2003
Decided On: 13.07.2011
Appellants: Asstt. Commissioner of Income Tax
Vs.
Respondent: Shri Sunil J. Kinariwala
Hon'ble Judges/Coram:
Akil Abdul Hamid Kureshi and S.G. Gokani, JJ.
Counsels:
For Appellant/Petitioner/Plaintiff: Manish Bhatt, Sr. Adv.
For Respondents/Defendant: Saurabh Soparkar, Sr. Adv., Monaal Davawala and Swati
Soparkar, Advs.
Case Note:
Direct Taxation - Validity of order - Section 29(1) of Indian Partnership Act,
1932 (Act) - Appeal was filed against order passed by Income Tax Appellate
Tribunal (tribunal) - Whether, on facts and in circumstances of case,
tribunal was justified in deleting addition of part of share income from firm
which had been assigned to family trust/body of individuals - Held, Apex
Court in case of Commissioner of Income-tax v. Sunil J. Kinariwala
observed that there was a clear distinction between a case where a partner
of a firm assigned his share in favour of a third person and a case where a
partner constituted a sub-partnership with his share in main partnership -
It was also observed that in view of Section 29(1) of Act, the Trust, as an
assignee, became entitled to receive assigned share in profits from firm not
as a sub-partner because no sub-partnership came into existence but as an
assignee of share of income of assignor-partner - Apex Court in case of
Commissioner of Wealth-Tax v. Lov S. Kinariwala held that creation of body
of individuals and assigning of assets was not sham and bogus - Issue in
present Appeal was squarely covered by decision of Apex Court in case of
Sunil J. Kinariwala - Subsequent decision in case of Lov S. Kinariwala
arising in Wealth Tax proceedings did not alter that situation - Under
Wealth Tax proceedings, central question was whether assignment was
sham or bogus - That was so noticed by Apex Court while drawing
distinction from view of Supreme Court in case of Sunil J. Kinariwala -
Present Court also in judgment in Tax Appeal No. 199/2005 approached the
issue similarly - Impugned decision of tribunal was quashed - Appeal
allowed
JUDGMENT
Akil Abdul Hamid Kureshi, J.
1. 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.

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(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.
2. 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 allotted 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
MANU/GJ/0089/1993 : (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 MANU/SC/1120/2002 : (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.
3. 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 MANU/SC/1128/2002 : (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 MANU/GJ/0089/1993 : (1995) 211
ITR 127(Guj), which was reversed by this Court in Civil Appeal No. 1899 of
2002 (CIT v. Sunil J. Kinariwala MANU/SC/1120/2002 : (2003) 259 ITR 10)
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

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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 under Section 27(3) of the Wealth Tax Act.
4 . 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:
6. 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
MANU/GJ/0089/1993 : (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.
7 . 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.
5. 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.
6. 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.
7. 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 MANU/SC/0153/1965 :
(1966) 60 ITR 74, wherein following observations were made:
It was then forcibly brought to our notice that the said view would be

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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
under Section 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.
8 . Counsel also relied on the decision of Bombay High Court in case of Trustees of
Late Sir R.J. Vakil v. Commissioner of Income-tax, Bombay North, Ahmedabad
reported in MANU/MH/0055/1957 : (1958) 33 ITR 517 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 beneficiaries , 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 under Section 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 under Section 18A or under Section 23B are not
to be adjusted against the claim of tax.

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9 . 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.
1 0 . 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.
11. 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.
12. With the above observation Tax Appeal is allowed. Impugned decision of the
tribunal to the extent stated above is quashed.

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