1994 (7) TMI 306 - AT - Income Tax

Summary

Issues Involved:

1. Whether the share of income from the firms devolving on the wife and the minor son is liable to be included in the total income of the assessee for the assessment years 1978-79 and 1980-81.

Issue-wise Detailed Analysis:

1. Inclusion of Wife's and Minor Son's Income in Assessee's Total Income:

The primary issue in these appeals is whether the share of income from the firms devolving on the wife and the minor son of the assessee should be included in the total income of the assessee for the assessment years 1978-79 and 1980-81. The assessee, as the karta of a joint Hindu family, represented the family in five firms. A partial partition was effected on August 9, 1973, wherein the capital of the joint family invested in the partnership firms was partitioned among the family members but not communicated to the firms. The assessee continued to represent the family in the firms, and the capital remained invested on behalf of the family members.

For the assessment year 1978-79, the Income-tax Officer included the shares of income devolving on the wife and minor son in the total income of the assessee, aggregating to Rs. 12,527. Similarly, for the assessment year 1980-81, the shares of income aggregating to Rs. 18,386 were included. The Income-tax Officer's rationale was that the members of the erstwhile family formed a sub-partnership by agreeing to share the profit or loss received by the assessee from the firms, thus invoking section 64(1)(i) of the Income-tax Act.

The assessee appealed to the Appellate Assistant Commissioner, who struck down the additions, relying on the Punjab and Haryana High Court decision in CIT v. Ram Narain [1980] 126 ITR 267, which did not support the finding of a sub-partnership on similar facts.

The Revenue, aggrieved by this decision, appealed to the Tribunal. The Departmental Representative argued that the Appellate Assistant Commissioner misconceived the facts and failed to appreciate the true purport of the Punjab and Haryana High Court decision. The assessee's counsel distinguished the Gujarat High Court decision in CIT v. Mahendrasingh Mohansingh [1980] 123 ITR 938, arguing that the facts were materially different.

The Tribunal's Judicial Member found that the Appellate Assistant Commissioner misled himself by not appreciating the true purport of the Punjab and Haryana High Court decision. The Judicial Member agreed with the Income-tax Officer that there was an agreement among the family members, which constituted a sub-partnership, thus making the shares of income of the wife and minor son includable in the assessee's income under section 64(1)(i).

However, the Accountant Member disagreed, holding that the clauses in the memorandum of partition did not create a sub-partnership but rather an overriding obligation to make over the income to the minors, thereby creating a superior title in their favor. The Accountant Member relied on the Gujarat High Court decision in Addl. CIT v. Chandulal C. Shah [1977] 107 ITR 91 and the Andhra Pradesh High Court decision in CIT v. Pabbati Shankaraiah [1984] 145 ITR 702, which supported the view that no sub-partnership was created.

Due to the difference of opinion, the case was referred to a Third Member. The Third Member, after considering the facts and rival submissions, concurred with the Accountant Member. The Third Member held that the right to take the 1/5th share flowed from well-accepted principles of Hindu law and not from any contract, thus no sub-partnership was created. The Third Member distinguished the facts from the Gujarat High Court decision in CIT v. Mahendrasingh Mohansingh [1980] 123 ITR 938 and found the case parallel to the decisions of the Punjab and Haryana High Court and the Andhra Pradesh High Court.

Conclusion:

The Third Member agreed with the Accountant Member that the shares of income of the wife and minor son should not be included in the total income of the assessee under section 64(1)(i) of the Income-tax Act. The appeals of the Revenue were dismissed, and the orders of the Appellate Assistant Commissioner were upheld.