Provisions of section 60 are contained in Chapter - V of the Act, which deals with “Income of other persons, included in assessee’s total income.” A bare perusal of section 60 would show that the section will come into operation if:
(i) There
is generation of income;
(ii) such income is transferred by overriding title, by the owner of
the asset yielding such income;
(iii) the owner keeps the title in the assets unto himself.
Thus, Section 60, has
its application only to a case where income accrues to the transferee but the
income earning asset or source of income remains with the transferor.
FOR
EXAMPLE:
Mr.
‘A’ has transferred, through a duly registered document, the income arising
from a godown to his son, without transferring the godown.
Section
60 expressly states that where there is transfer of income from an asset
without transfer of the asset itself, such income shall be included in the
total income of the transferor. Hence, the rental income derived from the
godown shall be clubbed in the hands of Mr. ‘A’.
Text
of Section 60
60. All income arising to any person
by virtue of a transfer whether revocable or not and whether effected before or
after the commencement of this Act shall, where there is no transfer of the
assets from which the income arises, be chargeable to income-tax as the income
of the transferor and shall be included in his total income.
Nature Of Transaction
Transfer
of Income without transfer of Assets.
Clubbed in the Hands of
Transferor
who transfers the income.
Conditions
Section
60 is applicable if the following conditions are satisfied:
(b) The
ownership of asset is not transferred by him.
(c) The
income from the asset is transferred to any person under a settlement, or
agreement.
Assessee had written off its investments on account of capital reduction carried out by TGSPL, its group company, and consequently, TGSPL converted FCDs held by another group company SARL into equity shares, since there was no nexus between both transactions and reduction in share capital had wiped out equity shares held by assessee, said reduction could not result in transfer of profit by assessee to SARL and thus, no additions could be made by invoking section 60
Assessee invested in equity shares of its group company TGSPL. During relevant assessment year, assessee had written off its investments on account of capital reduction carried out by TGSPL. After reduction in share capital, TGSPL converted FCDs held by another group company SARL into equity shares of Rs. 10 each, having FMV of Rs. 148 per share. Assessing Officer invoked section 60 on ground that reduction in share capital of shares allotted to assessee had resulted in benefit to another group company. He, thus, made additions in income of assessee by applying FMV of converted shares to written off shares of assessee. It was noted that FCDs were issued to SARL much prior to reduction in share capital. With reduction in share capital and share premium, equity shares held by assessee had been wiped out and thus, said reduction could not result in transfer of profit by assessee to SARL. Since there was no nexus between both transactions and there was no generation of income that could be transferred, Assessing Officer erred in invoking section 60 and additions were to be deleted. [In favour of assessee] (Related Assessment year : 2016-17) – [Teleperformance BPO Holdings (P) Ltd. v. National Faceless Appeal Centre, Delhi (2023) 200 ITD 60 : 147 taxmann.com 507 (ITAT Mumbai)]
When a person becomes entitled to receive an 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 overriding title, but
when after receipt of income by assessee, same is passed to a third person in
discharge of obligation of assessee, it will be a case of application of income
by assessee and not of diversion of income by overriding title - Assessee was a
partner of a firm having 10 per cent share therein - By a settlement, he
created a trust assigning 50 per cent out of his 10 per cent right, title and
interest (excluding capital) as a partner and a sum of Rs. 5,000 out of his
capital in firm in favour of said trust - It was only share of income of
assessee which was assigned in favour of trust and, therefore, such share of
income had to be included in total income of assessee
The assessee, partner of a firm, was having 10 per
cent share therein. He created a trust by a deed of settlement assigning 50 per
cent out of his 10 per cent right, title and interest (excluding capital), as a
partner in the firm, and a sum of Rs. 5,000 out of his capital in the firm in
favour of the said trust. The assessee claimed that 50 per cent of the income
attributable to his share from the firm stood transferred to the trust
resulting in diversion of income at source and the same could not be included
in his total income for the purpose of his assessment. The ITO rejected the
assessee's claim holding that it was a case of application of income and not
diversion of income at source. The AAC allowed the assessee’s appeal and
directed that sum transferred to the trust be excluded from the assessee's
total income. On revenue's appeal, the Tribunal, however, reversed the order of
the AAC. On reference, the High Court reversed the order of the Tribunal. On
appeal:
Held : Under
the scheme of the Act, it is the total income of an assessee, computed under
the provisions of the Act, that is assessable to income-tax. So much of the
income which an assessee is not entitled to receive by virtue of an overriding
title created in favour of a third party would get diverted at source and the
same cannot be added in computing the total income of the assessee. The
principle is simple enough but more often than not, as in the instant case, the
question arises as to what was the criteria to determine, when does the income
attributable to the assessee get diverted by over- riding title? The
determinative factor is the nature and effect of the assessee's obligation in
regard to the amount in question. 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
overriding 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 overriding title.
Following various decisions of the Privy Council, the Supreme Court and also of various High Courts, it was to be held that the order under challenge could not be sustained. It was, accordingly, set aside. Consequently, the share of the income of the assessee assigned in favour of the trust had to be included in the total income of the assessee. Assessment year 1974-75 - [CIT v. Sunil J. Kinariwala (2003) 259 ITR 10 : 179 CTR 15 : 126 Taxman 161 (SC)]
Where, assessee-owner of factory
had, by an agreement dated 24.07.1962, agreed to sell same to ‘M’ and agreement
provided that profit from factories from 30.09.1962 would be for benefit of
transferee on completion of sale transaction, though actual transfer of factory
had taken place on 30.09.1964, income pertaining to period 01.10.1962 to 30.09.1964
could not be assessed in the assessee’s hands by applying section 60
Assessee, owner of factory situated in Pakistan, by
an agreement dated 24.07.1962 agreed to sell same to ‘M’. Agreement provided
that profit from factories from 30.09.1962 would be for benefit of transferee
on completion of sale transaction. Actual transfer of factory had taken place
on 30.09.1964. Income pertaining to period 01.10.1962 to 30.09.1964 was
included in assessee’s hands by Assessing Officer. High Court held that even if
there was an agreement for diversion of profits prior to 30.09.1964, still
profits would be taxable in assessee’s hands.
The law seems to be well-settled by a long catena
of cases to the effect that in the event of there being a diversion of income
by overriding title, the question of the income being assessed in the hands of
the assessee does not and cannot arise.
At no stage of the proceeding up to the High Court,
there was any dispute as regards the assessee's contention of diversion by
overriding title. The finding of the High Court that issue of overriding title
on the basis of an event which was yet to take place, being not available in
the facts of the matter under consideration, could not be said to be a correct
appreciation of law, since on the date of assessment, the event had already
taken place and an overriding title had in fact been created by operation of
law and there was no escape from it.
Section 60 has its application only to a case where
income accrues to the transferee but the income earning asset or source of
income remains with the transferor. As a matter of fact, the finding of the
High Court that income accrued to the transferor stood contradicted by the
finding that section 60 had its due application in the facts of the matter
under consideration. Incidentally, section 63 contains a rather special
definition of ‘transfer’ for the purposes of sections 60 to 62 and, inter
alia, includes an ‘agreement’ and in this case the very existence of the
agreement to transfer dated 24.07.1962 ruled out and totally excluded the
application of section 60.
Since assessee could not retain profits in its own
hands after sale agreement, question of assessing profit in assessee’s hand did
not and could not arise and since on date of assessment sale had already taken
place and an overriding title had in fact been created by operation of law
income in question could not be assessed in assessee’s hand. In view of facts
stated under heading ‘Income - Diversion of, by overriding title’, section 60
was not applicable. Accordingly, the appeal was allowed. [In favour of
assessee] (Related Assessment years : 1964-65 and 1965-66) – [Dalmia
Cement Ltd. v. CIT (1999) 237 ITR 617 : 153 CTR 401 : 104 Taxman
97 (SC)]
Section 60 does not apply if corpus
itself is transferred - Assessee by a declaration, gifted one-fourth of his
share in a partnership firm in V’s favour to cover her marriage and educational
expenses - Said declaration stated that to extent of share gifted, assessee
ceased to be its owner - In view of categorical averment in declaration of
gift, income corresponding to moiety of share gifted should be excluded from
assessee’s hands
The assessee, by a declaration dated
12.02.1977, gifted one-fourth of his share in a partnership firm in favour of V
in order to cover her marriage and educational expenses. To the extent of the
share gifted, the assessee ceased to be the owner of the share. In the said
declaration, he stated that he was wrongly assessed to income-tax in the status
of an individual, and the correct status was of a joint family. Thus, the
assessee claimed that the share in the partnership firm belonged to the joint
family and it was the joint family which gifted a moiety of that share to the
karta’s daughter, for the assessment year 1977-78, while the ITO accepted, the
status of the assessee as of HUF, he rejected the assessee’s request that the
income corresponding to the moiety of share gifted should be excluded from the
assessment of the assessee. The AAC dismissed the appeal. On further appeal,
the Tribunal, however, directed exclusion of the said share income. On
reference:
Held : The document relating to
declaration of gift categorically stated that the gift was not merely the
profits but also the corpus of the share itself. There was a clear indication
in the declaration that the corpus together with the accumulated profits would
be delivered to the donee as and when called upon to do so. In view of this, it
was clear that what was transferred was not merely a right to secure the
profits but also the corpus itself. Thus, the provision of section 60 had no
application in a case where the corpus itself was transferred. Hence, there was
a valid gift by the assessee in V’s favour, and the share of profits
corresponding to the extent of share so gifted could not be included in the
assessee’s hands. -
[Grandhi
Narayana Rao (1988) 173 ITR 593 : 73 CTR 226 : 38 Taxman 69 (AP)]
Where the assessee had assigned and
donated the benefit of the share in a firm to specified beneficiaries and had
also declared that the assessee thereafter held the share as trustee and not as
owner, section 60 will not be attracted, since the income-producing apparatus
was itself transferred
The assessee was a partner in two
partnership firms AR and SR. By two separate declarations dated 16.12.1964 and
04.05.1967, she assigned and donated the benefits of share in the two firms to
the beneficiaries named in the two trusts (P and M) whose trustees duly
accepted the said donation. The declarations, however, stipulated that she held
the respective shares as trustees and not as owner. For the assessment years
1967-68, 1968-69 and 1969-70, she claimed that her share of profits in the two
firms was not includible in her total income as the income was diverted at
source in favour of the named beneficiaries. The ITO, however, disallowed this
claim because the transactions evidenced by these declarations amounted only to
the gift of the shares and not the asset, namely, her interest as a partner,
which continued to remain her property and section 60 was thus applicable. The
AAC confirmed the assessments. The Tribunal, however, deleted the share income,
holding that there was a diversion of the income at source by creation of an
overriding title in favour of the named beneficiaries. On reference:
Held : It was true that the relevant
declarations referred to the donation of the benefits of share and that it was
the said donation which had been accepted by the trustees. It was, however, not
possible to read those words as conveying that the gift was merely of profits
without the liability to contribute in case of losses. The documents would
evidently convince that they were not the handiwork of an expert either in
language or in law and that the expressions therein were not so precisely used,
as in a formal conveyance, that each word signified a technical or legal
meaning. There was no warrant, therefore, to read the words “benefits of share”
as equivalent to the expression ''benefits of partnership" in section 30
of the Partnership Act and construe them accordingly. Even the collocation was
different and so was the context. Each declaration would have to be read as a
whole in order to appreciate the true effect of the transaction which it
purported to record.
On a fair comprehensive and integral
reading of the declarations in all their material parts, it could be reasonably
interpreted that the words "the benefit of share" would mean that the
impugned gifts were of the right to share in the profits coupled with the
liability to contribute to the losses, if any, of the two firms. This was
further fortified by the fact that the relevant transactions were evidenced by
the cross-entries of debits and credits in the respective account books of the
assessee and the trust. If profits alone were gifted, there was no question of
debiting the loss to the trust. Since that was the true nature of the
transactions, the assessee had undoubtedly divested herself of the
income-producing apparatus or asset and that by the overriding title created in
favour of the beneficiaries of the trusts, the share income of the assessee
stood diverted even before it reached her. She undoubtedly continued to collect
it but she did so not as a part of her own income but for and on behalf of the
beneficiaries. Such income could not, therefore, have been taxed in her hands.
There was not only a valid and
effective gift of the income in favour of the beneficiaries of the trust but
also the income-producing asset was transferred to these beneficiaries within
the meaning of section 60. Once the right to receive profits and to contribute
to losses of the two firms as well as the income-producing apparatus or asset
stood transferred by way of gift to the beneficiaries, section 60 could not be
invoked. [In favour of assessee] – [CIT v. Nandiniben
Narottamdas (1983) 140 ITR 16 (1982) 26 CTR 200 : (1981) 7
Taxman 389 (Guj.)]
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