1989 (2) TMI 71 - HC - Income Tax

Summary

Issues:
1. Interpretation of Section 64(2)(c) of the Income-tax Act, 1961 regarding inclusion of interest and dividend income in the hands of the assessee.
2. Application of the provisions of section 64(2)(c) in a case involving partial partition of a Hindu undivided family and allocation of property.

Analysis:
The judgment of the High Court of Calcutta involved a reference of a question of law under section 256(1) of the Income-tax Act, 1961. The issue at hand was whether the interest and dividend income of Rs. 39,414 should be included in the hands of the assessee based on the provisions of section 64 of the Income-tax Act, 1961. The Tribunal had previously confirmed the decision of the Income-tax Officer to include the income arising from the shares and investments made from the sale proceeds in the total income of the assessee. The dispute arose from a partial partition where the assessee received shares but claimed they were received in a different capacity, i.e., as karta of a smaller Hindu undivided family (HUF) consisting of himself, his wife, and children.

The key contention revolved around the application of section 64(2)(c) which deals with the income of an individual, including income of spouse and minor child, arising from converted property. The Tribunal found that no property had been received by the spouse or minor child of the assessee, and no benefit or income had been received by them post-partition. As a result, it was questioned how section 64(2)(c) could be applicable in this scenario. The provision states that where converted property has been the subject of partition among family members, the income derived from such property received by the spouse or minor child on partition shall be deemed to arise to them.

The judgment highlighted that for section 64(2)(c) to apply, there must be an allocation of property to the spouse or minor child or a mechanism through which the income from the converted property is received by them. In this case, as no property was allocated to the spouse or minor child on partition, the provisions of section 64(2)(c) could not be invoked. The circular issued by the Central Board of Direct Taxes clarified that only income received by the spouse or minor child out of their share in the converted property on partition should be included in the hands of a member of the smaller HUF.

Based on the above analysis, the High Court ruled in favor of the assessee, stating that the income derived from property allocated to a smaller HUF on partition cannot be included in the hands of the karta of the smaller HUF under section 64(2)(c) unless there is a specific allocation of property or income to the spouse or minor child. The judgment answered the question referred in the affirmative and in favor of the assessee, with no order as to costs.