1996 (8) TMI 8 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the declaration dated September 30, 1969, for impressing a sum of Rs. 4,00,000 with the character of Hindu undivided family (HUF) property.
2. Applicability of Section 64(2) of the Income-tax Act, 1961, and Section 4(1A) of the Wealth-tax Act, 1957, based on the date of the declaration and subsequent book entries.

Issue-wise Detailed Analysis:

1. Validity of the Declaration Dated September 30, 1969:
The primary issue was whether the declaration made by the assessee on September 30, 1969, impressing a sum of Rs. 4,00,000 with the character of HUF property, was valid. The Income-tax Officer initially rejected the declaration due to the absence of contemporaneous book entries and doubted the availability of liquid cash as of that date. The Appellate Assistant Commissioner upheld this view, questioning the genuineness of the declaration.

Upon appeal, the Tribunal directed an examination of witnesses to the declaration. The witnesses confirmed that the declaration was indeed made on September 30, 1969. The Tribunal, considering these depositions, concluded that the declaration was genuine and effective from the stated date.

The Tribunal's findings were based on the existence of sufficient capital in the assessee's proprietary business and the fact that the HUF owed a debt to the individual assessee. The Tribunal held that blending individual property with HUF property did not require actual transfer of funds, and a mere declaration was sufficient. Therefore, the Tribunal ruled that the declaration was valid and effective from September 30, 1969.

2. Applicability of Section 64(2) of the Income-tax Act, 1961, and Section 4(1A) of the Wealth-tax Act, 1957:
The second issue concerned whether the provisions of Section 64(2) of the Income-tax Act and Section 4(1A) of the Wealth-tax Act were applicable, considering the date of the declaration and the subsequent book entries.

The Department argued that since the book entries reflecting the transfer were made only on March 30, 1970, the blending of the property should be considered effective from that date. Consequently, the transaction would be subject to the provisions of Section 64(2) of the Income-tax Act and Section 4(1A) of the Wealth-tax Act, which would deem the property as belonging to the individual if impressed with HUF character after December 31, 1969.

The Tribunal, however, held that the declaration made on September 30, 1969, was sufficient to impress the individual property with the character of HUF property, irrespective of the subsequent book entries. The Tribunal emphasized that the entries in the account books were a subsequent event and did not affect the validity of the declaration.

The Tribunal directed the Income-tax Officer to exclude Rs. 48,000 from the income-tax assessments for the years 1973-74 and 1974-75 and to exclude Rs. 4,00,000 from the wealth-tax assessments for the years 1972-73 and 1973-74.

Conclusion:
The High Court upheld the Tribunal's decision, agreeing that the declaration made on September 30, 1969, was valid and effective from that date. The Court affirmed that the provisions of Section 64(2) of the Income-tax Act and Section 4(1A) of the Wealth-tax Act were not applicable, as the declaration was genuine and the intention to impress the property with HUF character was clearly expressed on the stated date. The questions referred were answered in the affirmative and against the Department.