1979 (12) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Inclusion of income from Medical Stores in the hands of the HUF.
2. Validity of partial partition and its recognition under Section 171 of the Income-tax Act.
3. The necessity of an order under Section 171 for partial partition.

Detailed Analysis:

1. Inclusion of income from Medical Stores in the hands of the HUF:

The primary issue was whether the income from Lakshmi Medical Stores should be included in the hands of the Hindu Undivided Family (HUF). The HUF consisted of a father and three sons, one of whom, Mr. Venkataratnam, executed a registered relinquishment deed on July 21, 1969, relinquishing his right in the joint family properties and taking Lakshmi Medical Stores as his share. For the assessment years 1970-71 and 1971-72, the income from the medical stores was returned and assessed in the hands of Mr. Venkataratnam as an individual. However, the Income-tax Officer (ITO) included the income from the medical stores in the hands of the HUF, arguing that there was no order regarding the partition under Section 171 of the Income-tax Act. The Appellate Tribunal held that the income from the medical stores, which ceased to belong to the family, could not be included in the hands of the HUF.

2. Validity of partial partition and its recognition under Section 171 of the Income-tax Act:

The ITO contended that the relinquishment deed operated as a partial partition, and since no claim for partial partition had been made and no finding had been recorded, the family should be assessed as a joint family. The Appellate Tribunal, however, found an endorsement in the record where the karta of the HUF mentioned that his son, Venkataratnam, had gone out of the family, which constituted a claim for partial partition. The Tribunal accepted this claim and held that it was unnecessary to send the case back to the ITO for passing a proper order under Section 171, as the property ceased to belong to the family and the income therefrom could not be included.

3. The necessity of an order under Section 171 for partial partition:

Section 171 of the Income-tax Act deals with the assessment after the partition of a Hindu undivided family. The section stipulates that a Hindu family hitherto assessed as undivided shall continue to be so assessed until a finding of partition is recorded by the ITO. The explanation to Section 171 differentiates between "partition" and "partial partition." The presumption under sub-section (1) applies only to a case of total partition. In the case of a partial partition, the joint family continues, and there is no need to invoke the fiction that the family is deemed to continue as an HUF in relation to a particular source of income that has gone out of the HUF. The Tribunal's decision was supported by precedents, including the Supreme Court's observation in Addl. ITO v. Thimmayya and the Allahabad High Court's ruling in Kalloomal Tapeshwari Prasad v. CIT, which clarified that an HUF cannot be assessed in respect of the income of an asset that has ceased to belong to it.

Conclusion:

The High Court ruled in favor of the assessee, holding that the income from the asset, which ceased to belong to the HUF, could not be included in the income of the HUF. The court found that the relinquishment deed, being a registered document, and the assessment of Venkataratnam as an individual, negated the necessity to remand the case to the ITO for a finding on the partial partition. The reference was answered in favor of the assessee and against the department, with no order as to costs.