2014 (10) TMI 70 - HC - Income Tax

Application of section 60 and 64(4)(iv) The petitioner is the Kartha of HUF and the HUF is a partner, in a firm - petitioner gifted half of the holding in the firm to his wife - profit derived by Smt. Subbaratnamma Held that - The HUF held a share in the firm and it was receiving its share of profits from the firm - That in turn was being treated as the income of the HUF - Had it been a case where the HUF transferred part of its share in the firm in favour of an outsider, its income, to that extent could have certainly been treated as reduced - The transfer is said to have been made by the petitioner in the form of a gift to none other than his wife - the donee is very much part of the HUF, along with the children - Even if the disposition through the declaration is treated as valid, it did not have the effect of taking any fraction of the share of the HUF in the firm, outside the purview of the HUF. When the entire shareholding in the firm is by the HUF, there was no occasion or basis for further changing the extents among the persons constituting HUF - in a HUF, no member can claim any definite share in the assets, till the partition takes place - as long as the Hindu Family remains joint, which in fact is a sine qua non for it to be recognised as HUF, the question of one member of the HUF claiming any particular share in it, in contradistinction to undivided share much less transferring it in favour of another does not arise - once the assessee is a HUF and its income from the partnership firm remained unaffected, no legal consequences referable to the Act can be said to have flown from the declaration dated 15-04-1981 said to have been made by the petitioner Decided against assessee.

Summary

Issues:
1. Interpretation of provisions of sec. 64(1)(iv) of the Income Tax Act, 1961 regarding Hindu Undivided Family (HUF) status.
2. Application of sec. 60 of the Income Tax Act, 1961 to the facts of the case.
3. Assessment of profit derived by an individual within an HUF as the income of the assessee.

Analysis:
1. The petitioner, as the Kartha of an HUF, transferred a portion of the share in a partnership firm to his wife through a declaration. The assessing officer reopened the proceedings to ignore this gift, leading to appeals and subsequent tribunal decisions. The key issue was whether sec. 64(1)(iv) applied to the petitioner as an HUF. The court clarified that if an assessee transfers only profit, their income remains the same; if the asset yielding income is transferred, the income reduces. The tribunal also agreed with this distinction. As the wife was part of the HUF, the transfer did not alter the income status of the HUF, as the entire shareholding was within the HUF, and no change in shares occurred within the family. Since HUF members cannot claim definite shares until partition, and the income from the partnership remained unaffected, the court dismissed the petitioner's request.

2. The court addressed the application of sec. 60 of the Income Tax Act, 1961 to the case. The petitioner's transfer of a portion of the firm's share to his wife did not alter the income status of the HUF, as the wife was part of the HUF along with the children. The court emphasized that as long as the HUF remains joint, individual claims to specific shares are not recognized until partition. Since the income from the partnership firm remained with the HUF, no legal consequences under the Act arose from the petitioner's declaration of gifting a share to his wife. Consequently, the court found no basis to accept the petitioner's request for referral of questions to the court.

3. The court examined whether the profit derived by the wife, Smt. Subbaratnamma, should be assessed as the income of the assessee. The tribunal's decision to uphold the assessing officer's view was based on the understanding that the transfer did not alter the income status of the HUF. As the entire shareholding in the firm belonged to the HUF and no change in shares occurred, the court concluded that the wife's profit should not be treated as the income of the assessee. Therefore, the court dismissed the ITC, ruling in favor of the respondent without costs.