5. Shyam, a partner of a firm constitutes a partnership with his two sons and a daughter with his share in the main partnership. Shyam is separated from his wife and is paying maintenance to her. What is his tax liability on the income earned from the main partnership and the amount?

1. Facts of the Case

Mr. Shyam is a partner in a main partnership firm. He has entered into a sub-partnership with his two sons and a daughter, sharing his share of profit from the main firm with them. This means that he has effectively created a sub-partnership by pooling his partnership interest.

Additionally, Shyam is separated from his wife and is paying her maintenance regularly.

The question now arises:

• What is Shyam’s tax liability in respect of the income from the main partnership firm?
• Can the income be taxed in the hands of the sub-partners (his children)?
• What is the treatment of the maintenance payment to his separated wife?

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2. Issues in the Case

1. Whether the income from the main partnership firm, which is diverted to the sub-partnership, should be taxed in the hands of Shyam or in the hands of the sub-partners?
2. Whether Shyam is eligible for any deduction for the amount paid as maintenance to his separated wife?
3. Whether the formation of sub-partnership affects the primary tax liability of the partner in the main firm?

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3. Legal Principles and Supporting Judgements

A. Sub-Partnership and Diversion of Income

• A sub-partnership is a valid arrangement under Indian law where an individual (Shyam) forms a partnership with others (his children) in respect of his share in another partnership (the main firm).
• Key Case Law:
  • Rashik Lal & Co. v. CIT (1998) 229 ITR 458 (SC)
    Held that a sub-partnership creates a superior title in favour of sub-partners, and the income does not reach the original partner but is diverted at source.
  • CIT v. Bagyalakshmi & Co. (1965) 55 ITR 660 (SC)
    Recognized the concept of diversion of income by overriding title. The income is not Shyam’s income in the first place—it is diverted to the sub-partnership before it becomes taxable.

B. Taxability of Income from Firm

• As per Section 10(2A) of the Income Tax Act, 1961:
  • Share of profit received by a partner from a partnership firm (which is assessed as a firm) is exempt from tax in the hands of the partner.
• However, this exemption applies only to the recipient. If a sub-partnership exists, and the income is diverted to sub-partners by overriding title, the exemption applies in the hands of sub-partners.

C. Maintenance to Separated Wife

• No specific deduction is allowed under the Income Tax Act for voluntary or court-ordered maintenance paid to a separated (but not divorced) spouse.
• Key Case Law:
  • CIT v. Smt. Kamalini Khatau (1994) 209 ITR 101 (SC)
    Held that unless there is diversion of income by overriding title, the income is first taxed in the hands of the assessee, and then payment (such as maintenance) is treated as application of income, not deductible.
• Thus, maintenance paid by Shyam to his wife is not deductible under the Income Tax Act.

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4. Possible Judgement

Based on the facts and legal principles:

1. Income from Main Partnership:
   Since Shyam has created a sub-partnership with his children, his share in the main firm is diverted at source to the sub-partnership. This results in a diversion of income by overriding title. Hence, the income will not be taxed in the hands of Shyam, but in the hands of the sub-partnership and its partners (i.e., his children), based on their agreed share.
2. Exemption under Section 10(2A):
   The share of profit received by each sub-partner from the sub-partnership (assuming it is also assessed as a firm) will be exempt in their hands under Section 10(2A).
3. Maintenance to Wife:
   The ₹ paid by Shyam as maintenance to his separated wife is a personal obligation and is considered an application of income. Hence, it cannot be claimed as a deduction while computing his taxable income.