I settled half of my share in the firm on a family trust by a deed. The firm credits the trust directly. Is that half still taxed as my income?
Yes. The Supreme Court held that a partner's assignment of part of his share in a firm to a trust is an application of his income, not a diversion by overriding title, so the assigned share stays in his total income. The reason is what an assignment of a partnership share actually transfers. Under section 29(1) of the Indian Partnership Act the assignee gets no right or interest in the main partnership - only the right to receive that part of the profits referable to the assignment, and a share of the assets on dissolution. The trust here took as an assignee of the assigning partner's share of income and not as a sub-partner, because no sub-partnership came into existence. The income therefore reached the partner first and was passed on afterwards.
Decided by the Supreme Court (Supreme Court of India - Syed Shah Mohammed Quadri and K.G. Balakrishnan, JJ. (judgment by Quadri, J.), Civil Appeal No. 1899 of 2002) on 2002-12-10, reported as (2003) 259 ITR 10; AIR 2003 SC 126; Civil Appeal No. 1899 of 2002. It bears on section 60, section 29 of the Indian Partnership Act, 1932 of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
Family settlements of a share in a firm are drafted on the assumption that routing the money to the trust takes it out of the partner's hands, and this is the decision that says it does not. The point to take from it is structural rather than evidentiary. It is no answer that the deed is genuine, registered, irrevocable and acted upon, or that the firm credits the trust directly; what defeats the claim is that an assignee of a partnership share has no claim against the firm at all, so the profits can only reach him through the partner. That reasoning carries beyond partnership to any arrangement where the third party's only right is against the assessee rather than against the source. It also tells you what to build if the object really is to shift the income: a sub-partnership, where the assignee acquires an interest in the main partnership, is the structure the Court itself contrasts.
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The assessee was a partner with a ten per cent share in the firm M/s. Kinariwala R.J.K. Industries, Ahmedabad. On 27 December 1973 he created a trust named the Sunil Jivanlal Kinariwala Trust by a deed of settlement, assigning fifty per cent out of his ten per cent right, title and interest in the firm, excluding capital. For the assessment year 1974-75 he claimed that the share of income so transferred, a sum of Rs. 20,141, was not his. The Income Tax Officer rejected the claim on the view that it was a case of application of income and not diversion of income at source, and also held that section 60 of the Act was attracted because only income without a transfer of the asset had been settled. The Appellate Assistant Commissioner allowed the assessee's appeal and directed that the Rs. 20,141 be excluded from his total income. On the Revenue's appeal the Tribunal reversed that order. On a reference, a Division Bench of the High Court of Gujarat in Income Tax Reference No. 191 of 1980, by judgment dated 29 October 1993 reported at (1995) 211 ITR 127, answered the questions in favour of the assessee, holding that the assignment created an overriding title in favour of the trust. Two questions were before the Supreme Court: whether the assignment under the deed of trust created an overriding title in favour of the trust so that the income accruing to the trust could not be treated as the assessee's; and whether the Rs. 20,141 was not the real income of the assessee but of the trust and assessable only in the trust's hands.
The civil appeal was allowed, with no order as to costs in view of the peculiar facts in which the appeal came to be filed. The order under challenge could not be sustained and was set aside; the share of the income of the assessee assigned in favour of the trust has to be included in the total income of the assessee; both questions were answered in favour of the Revenue and against the assessee. The assignment was an application of the assessee's income and not a diversion of income by overriding title. The trust, as an assignee, became 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 assigning partner. Having decided the case on that footing, the Court said it was unnecessary to consider the alternative contention based on section 60 of the Act.
The Court took the settled test as its starting point and then asked what an assignment of a partnership share actually does. On the test, where a third person becomes entitled to receive the amount under an obligation of the assessee even before the assessee could lay a claim to receive it as his income, there is a diversion of income by overriding title; where, after the income has been received by the assessee, it is passed on to a third person in discharge of his obligation, it is an application of income. Which side a case falls on depends on the nature and effect of the obligation, and the Court set out the Sitaldas test in full for that purpose. The work in this judgment is done by the partnership law that sits underneath the deed. The Court drew a clear distinction between a partner assigning his share in favour of a third person and a partner constituting a sub-partnership with his share in the main partnership. In the first case, because of section 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership - only the right to receive that part of the profits of the firm referable to the assignment, and the assets in the event of dissolution. In the second, the sub-partnership acquires a special interest in the main partnership, and even where the partner receives the income from the main partnership he does so not on his own behalf but on behalf of the sub-partnership. That is why Murlidhar Himatsingka, a sub-partnership case, produced an overriding obligation, and why K.A. Ramachar, where a partner had settled portions of his share, did not - what was paid there was in law a portion of his own income. On these facts no sub-partnership came into existence. The trust took as an assignee of the assigning partner's share of income, and on the law of partnership it was the partner alone who was entitled to the profits; a stranger, even an assignee, did not have and could not have any direct claim to them. The income accordingly reached the assessee as his own and the deed operated on it afterwards, which is application. Bhagyalakshmi & Co. was put aside as not dealing with the principle of diversion of income by overriding title at all.
When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay a claim to receive it as his income, there would be diversion of income by over riding title; but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by over-riding title.
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that a partner's assignment of part of his share in a firm to a trust is an application of his income, not a diversion by overriding title, so the assigned share stays in his total income. The reason is what an assignment of a partnership share actually transfers. Under section 29(1) of the Indian Partnership Act the assignee gets no right or interest in the main partnership - only the right to receive that part of the profits referable to the assignment, and a share of the assets on dissolution. The trust here took as an assignee of the assigning partner's share of income and not as a sub-partner, because no sub-partnership came into existence. The income therefore reached the partner first and was passed on afterwards. This was decided by the Supreme Court (Supreme Court of India - Syed Shah Mohammed Quadri and K.G. Balakrishnan, JJ. (judgment by Quadri, J.), Civil Appeal No. 1899 of 2002) and bears on section 60, section 29 of the Indian Partnership Act, 1932 of the Income Tax Act 1961. It is reported as (2003) 259 ITR 10; AIR 2003 SC 126; Civil Appeal No. 1899 of 2002. Family settlements of a share in a firm are drafted on the assumption that routing the money to the trust takes it out of the partner's hands, and this is the decision that says it does not. The point to take from it is structural rather than evidentiary. It is no answer that the deed is genuine, registered, irrevocable and acted upon, or that the firm credits the trust directly; what defeats the claim is that an assignee of a partnership share has no claim against the firm at all, so the profits can only reach him through the partner. That reasoning carries beyond partnership to any arrangement where the third party's only right is against the assessee rather than against the source. It also tells you what to build if the object really is to shift the income: a sub-partnership, where the assignee acquires an interest in the main partnership, is the structure the Court itself contrasts. If it applies to you, the first step is this: Read the deed for what it creates, not for what it recites. A settlement that assigns a share of profits creates an assignee's right against the partner; it does not make the assignee a partner and it does not touch the firm's obligation to the partner.
The assessee was a partner with a ten per cent share in the firm M/s. Kinariwala R.J.K. Industries, Ahmedabad. On 27 December 1973 he created a trust named the Sunil Jivanlal Kinariwala Trust by a deed of settlement, assigning fifty per cent out of his ten per cent right, title and interest in the firm, excluding capital. For the assessment year 1974-75 he claimed that the share of income so transferred, a sum of Rs. 20,141, was not his. The Income Tax Officer rejected the claim on the view that it was a case of application of income and not diversion of income at source, and also held that section 60 of the Act was attracted because only income without a transfer of the asset had been settled. The Appellate Assistant Commissioner allowed the assessee's appeal and directed that the Rs. 20,141 be excluded from his total income. On the Revenue's appeal the Tribunal reversed that order. On a reference, a Division Bench of the High Court of Gujarat in Income Tax Reference No. 191 of 1980, by judgment dated 29 October 1993 reported at (1995) 211 ITR 127, answered the questions in favour of the assessee, holding that the assignment created an overriding title in favour of the trust. Two questions were before the Supreme Court: whether the assignment under the deed of trust created an overriding title in favour of the trust so that the income accruing to the trust could not be treated as the assessee's; and whether the Rs. 20,141 was not the real income of the assessee but of the trust and assessable only in the trust's hands. The matter was decided on 2002-12-10 by the Supreme Court (Supreme Court of India - Syed Shah Mohammed Quadri and K.G. Balakrishnan, JJ. (judgment by Quadri, J.), Civil Appeal No. 1899 of 2002). On those facts the Supreme Court held as follows. The civil appeal was allowed, with no order as to costs in view of the peculiar facts in which the appeal came to be filed. The order under challenge could not be sustained and was set aside; the share of the income of the assessee assigned in favour of the trust has to be included in the total income of the assessee; both questions were answered in favour of the Revenue and against the assessee. The assignment was an application of the assessee's income and not a diversion of income by overriding title. The trust, as an assignee, became 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 assigning partner. Having decided the case on that footing, the Court said it was unnecessary to consider the alternative contention based on section 60 of the Act.
The Court took the settled test as its starting point and then asked what an assignment of a partnership share actually does. On the test, where a third person becomes entitled to receive the amount under an obligation of the assessee even before the assessee could lay a claim to receive it as his income, there is a diversion of income by overriding title; where, after the income has been received by the assessee, it is passed on to a third person in discharge of his obligation, it is an application of income. Which side a case falls on depends on the nature and effect of the obligation, and the Court set out the Sitaldas test in full for that purpose. The work in this judgment is done by the partnership law that sits underneath the deed. The Court drew a clear distinction between a partner assigning his share in favour of a third person and a partner constituting a sub-partnership with his share in the main partnership. In the first case, because of section 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership - only the right to receive that part of the profits of the firm referable to the assignment, and the assets in the event of dissolution. In the second, the sub-partnership acquires a special interest in the main partnership, and even where the partner receives the income from the main partnership he does so not on his own behalf but on behalf of the sub-partnership. That is why Murlidhar Himatsingka, a sub-partnership case, produced an overriding obligation, and why K.A. Ramachar, where a partner had settled portions of his share, did not - what was paid there was in law a portion of his own income. On these facts no sub-partnership came into existence. The trust took as an assignee of the assigning partner's share of income, and on the law of partnership it was the partner alone who was entitled to the profits; a stranger, even an assignee, did not have and could not have any direct claim to them. The income accordingly reached the assessee as his own and the deed operated on it afterwards, which is application. Bhagyalakshmi & Co. was put aside as not dealing with the principle of diversion of income by overriding title at all. In the words reproduced by the source cited on this page: "When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay a claim to receive it as his income, there would be diversion of income by over riding title; but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by over-riding title." The decision followed or applied Commissioner of Income Tax, Bombay City-II v. Sitaldas Tirathdas (1961) 41 ITR 367 - applied; its test set out in full; K.A. Ramachar v. Commissioner of Income Tax (1961) 42 ITR 25 - applied; a partner's settlement of portions of his share was in law a portion of his own income; Murlidhar Himatsingka v. Commissioner of Income Tax, Calcutta (1966) 62 ITR 323 - distinguished as a sub-partnership case in which an overriding obligation arose; Commissioner of Income Tax, Madras v. Bhagyalakshmi & Co. (1965) 55 ITR 660 - held not to deal with the principle of diversion of income by overriding title; Moti Lal Chhadami Lal Jain v. Commissioner of Income Tax (1991) 190 ITR 1 - considered; Raja Bejoy Singh Dudhuria v. Commissioner of Income Tax (1933) 1 ITR 135 and P.C. Mullick v. Commissioner of Income Tax (1938) 6 ITR 206 - the two Privy Council decisions that mark the boundary, considered; Sunil J. Kinariwala v. Commissioner of Income Tax (1995) 211 ITR 127 (Gujarat High Court, 29 October 1993) - the judgment under appeal, set aside.
It was decided by the Supreme Court on 2002-12-10 and is reported as (2003) 259 ITR 10; AIR 2003 SC 126; Civil Appeal No. 1899 of 2002. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 60, section 29 of the Indian Partnership Act, 1932, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The civil appeal was allowed, with no order as to costs in view of the peculiar facts in which the appeal came to be filed. The order under challenge could not be sustained and was set aside; the share of the income of the assessee assigned in favour of the trust has to be included in the total income of the assessee; both questions were answered in favour of the Revenue and against the assessee. The assignment was an application of the assessee's income and not a diversion of income by overriding title. The trust, as an assignee, became 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 assigning partner. Having decided the case on that footing, the Court said it was unnecessary to consider the alternative contention based on section 60 of the Act. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 60, section 29 of the Indian Partnership Act, 1932 of the Income Tax Act 1961, and was decided by Supreme Court of India - Syed Shah Mohammed Quadri and K.G. Balakrishnan, JJ. (judgment by Quadri, J.), Civil Appeal No. 1899 of 2002. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the intention is genuinely to put the income outside the partner's hands, look at a sub-partnership rather than an assignment. The Court drew the line there: a sub-partner acquires a special interest in the main partnership and the partner then receives on the sub-partnership's behalf, which is why Murlidhar Himatsingka went the other way. Do not rely on the firm paying the trust directly. Direct payment by the payer was not enough here and the amount still went into the partner's total income. Expect section 60 to be raised as well. The assessing officer had also held section 60 attracted, because income was settled without transferring the asset; the Court decided the case without reaching it, so the point is open and should be answered on its own terms. Where the argument is about the doctrine itself rather than about partnership, go to the library's page 'Diversion at source, or application after the event' and to CIT v Sitaldas Tirathdas, which carry the test. This case is the partnership application of it. Check what the trust has returned. The judgment puts the income in the partner's hands and says nothing about the trust's assessment, so a double declaration has to be sorted out separately.
Still good law. Nothing was found that overrules, doubts or narrows this decision, and no citator service was consulted. How far it closes the question is worth stating precisely. In CIT v Jayantilal D. Patel, decided 21 April 2006, the Gujarat High Court - the same court whose judgment was set aside here - was pressed by the Revenue with this decision and declined to apply it, holding that it could not carry the Revenue's case any further because the Supreme Court had expressly recorded, at page 18 of the report at (2003) 259 ITR 10, that it was unnecessary to consider the alternative contention based on section 60. Both questions in that reference were answered in favour of the assessee. The lesson is that this judgment settles the diversion point and does not settle a case that turns on section 60. The case is reported as a 2003 decision and was decided on 10 December 2002; both the date and the report year appear in circulation and they refer to the same judgment. What limits its reach is the reasoning itself rather than any later qualification. The result follows from section 29(1) of the Indian Partnership Act, 1932, which gives an assignee no right or interest in the main partnership. Where the instrument creates a sub-partnership instead, the Court's own contrast with Murlidhar Himatsingka points the other way, and the same is true of any arrangement in which the third party acquires a right against the source rather than against the assessee. The Court also left section 60 of the Income-tax Act undecided, saying it was unnecessary to consider the alternative contention, so the decision is authority on diversion and not on that section. On the years still governed by the Act. The Income-tax Act, 1961 was repealed on 1 April 2026 by section 536(1) of the Income-tax Act, 2025, and section 536(2)(c) continues it for proceedings pending, and proceedings initiated on or after that date, in respect of any tax year beginning before 1 April 2026. Assessments turning on a settlement of partnership income for those years are still decided on this reasoning. No corresponding provision of the 2025 Act is offered here, because the correspondence for section 60 has not been established on the departmental material and a guessed mapping would be worse than none. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This record is written to stand beside the library's existing pages on the doctrine, not to repeat them. The test itself - whether the obligation fastens on the source or on income already earned - is on the concept page 'Diversion at source, or application after the event' and in the record for CIT v Sitaldas Tirathdas, whose validity note already carries this decision. What this case adds is the partnership layer: the reason an assignment fails is section 29(1) of the Indian Partnership Act, 1932, under which the assignee acquires no right or interest in the main partnership and can therefore reach the profits only through the partner. A reader arguing the general doctrine should start on the concept page; a reader holding a deed of settlement over a partnership share should start here. On the report. The judgment is not divided into numbered paragraphs, so the quotation is located by its place in the reasoning. The judgment of the Court was delivered by Syed Shah Mohammed Quadri, J., sitting with K.G. Balakrishnan, J., in Civil Appeal No. 1899 of 2002, on 10 December 2002. The judgment under appeal is that of a Division Bench of the High Court of Gujarat in Income Tax Reference No. 191 of 1980, dated 29 October 1993, reported at (1995) 211 ITR 127. The gap between those two dates explains the order on costs: the Court allowed the appeal but made no order as to costs in view of the peculiar facts in which the appeal came to be filed. Two points of use. First, the direct credit is a red herring and should not be led with. The firm crediting the trust does not change who is entitled to the profits, and the Court put the matter on entitlement under the partnership law. Second, the section 60 point was live below - the Income Tax Officer held it attracted because income had been settled without transferring the asset - and it survives this judgment untouched. A department relying on section 60 in a similar case cannot say the question is concluded by this decision, and an assessee cannot say it was rejected. The assessee's name appears as Sunil J. Kinariwala and the trust as the Sunil Jivanlal Kinariwala Trust; the firm is M/s. Kinariwala R.J.K. Industries, Ahmedabad. The share assigned was fifty per cent out of a ten per cent interest, excluding capital, and the amount in dispute was Rs. 20,141 for assessment year 1974-75. The Court decided the diversion question and stopped. It says in terms that it is unnecessary to consider the alternative contention based on section 60, so the judgment is no authority on that section, on what a transfer of income without a transfer of the asset requires, or on how section 60 interacts with a trust settlement. It says nothing about how the trust or the assignee is to be assessed once the income has been included in the partner's total income, and nothing about relief where both have returned the same amount. It does not decide what would follow from an assignment that also carried the capital, this deed having excluded capital in terms. It does not lay down what a sub-partnership has to contain to be one; the contrast with Murlidhar Himatsingka is drawn but the requirements are not spelt out. And it does not address the position where the firm's own deed, rather than a separate settlement by the partner, provides for a share to be paid to a third party. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The civil appeal was allowed, with no order as to costs in view of the peculiar facts in which the appeal came to be filed. The order under challenge could not be sustained and was set aside; the share of the income of the assessee assigned in favour of the trust has to be included in the total income of the assessee; both questions were answered in favour of the Revenue and against the assessee. The assignment was an application of the assessee's income and not a diversion of income by overriding title. The trust, as an assignee, became 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 assigning partner. Having decided the case on that footing, the Court said it was unnecessary to consider the alternative contention based on section 60 of the Act.
TaxSphere, “CIT v Sunil J. Kinariwala”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-sunil-j-kinariwala-assignment-of-partnership-share-to-a-trust/ (validity last checked 2026-09-23)
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A partner has assigned part of his share of firm profits to his wife and daughters by deed, and they draw the money straight from the firm. Is that his income or theirs?
I assigned the dividends on my shares to my wife for her life but kept the shares. Is that dividend still my income?
The department accepted your position for years and has now reversed it. Can it?
The gift deed says nothing about taking anything back, so surely the transfer is irrevocable and ss.61 to 63 cannot apply?
