1985 (4) TMI 62 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of share income derived by the assessee from a partnership firm.
2. Status of the assessee for tax purposes-whether as an individual or a body of individuals.
3. Applicability of Hindu Succession Act and Indian Trusts Act provisions.
4. Procedural requirements for changing the status of the assessee in tax assessments.

Issue-wise Detailed Analysis:

1. Taxability of Share Income:
The primary issue is whether the share income derived by the assessee from a partnership firm can be taxed fully in her hands or only 1/7th of the share income, representing her share. The assessee argued that she represents her six minor children as they are legal heirs of her deceased husband, and thus only 1/7th of the share income should be taxed in her hands. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) rejected this claim, treating the entire share income as her individual income. The Tribunal modified this, stating that the correct status would be a "body of individuals."

2. Status of the Assessee:
The Tribunal held that the status of the assessee should be "a body of individuals," following the decision in Deccan Wine and General Stores v. CIT [1977] 106 ITR 111. The assessee contended that under the Hindu Succession Act, the heirs should be assessed individually for their respective shares. The Tribunal's decision was based on the fact that the assessee was continuing the business for the benefit of her minor children and herself, thus constituting a "body of individuals."

3. Applicability of Hindu Succession Act and Indian Trusts Act:
The Tribunal observed that upon the death of Karodimal, his properties, including his interest in the firm, devolved on his heirs as tenants-in-common under Section 19 of the Hindu Succession Act. The Tribunal noted that the capital standing in the name of Karodimal was transferred to the assessee's account, indicating that she continued the business for the benefit of her children. However, there was no explicit agreement between the assessee and her minor children, which the Tribunal deemed unnecessary for the continuation of the business. The Tribunal also considered the provisions of Sections 81, 90, and 94 of the Indian Trusts Act, which imply that the assessee might be holding the income in a fiduciary capacity for her children.

4. Procedural Requirements:
The Full Bench highlighted that the Tribunal erred in modifying the status of the assessee to a "body of individuals" without issuing the mandatory notice under Section 139(2) of the Income Tax Act. The correct procedure would have been to annul the assessment and allow the ITO to reassess the income in the status of a "body of individuals" after issuing the necessary notice. This procedural lapse rendered the Tribunal's modification invalid.

Conclusion:
The Tribunal should have annulled the assessment with liberty to the ITO to reassess the income in the status of a "body of individuals" after issuing the required notice. The Full Bench emphasized that the procedural requirements under Section 139(2) must be adhered to, and the status of the assessee cannot be altered without due process. The reference was answered in favor of the assessee, and the case was remanded for reassessment by the ITO.