1960 (3) TMI 5 - SC - Income Tax

Whether there were materials to justify the finding of the Tribunal that the income in the share of the commission agency of the mills was the income of the Hindu undivided family ? Held that - The assets still are in the name of Charandas Haridas, and looked again from the same view point, the division has no different signification. What has altered is the status of the family. While it was joint, the Department could treat the income as that of the family; but after partition, the Department could not say that it was still the income of the Hindu undivided family, when there was none. In the face of the finding that this was a genuine document and not a sham, and that it effectually divided the income and, in the circumstances, the assets, the question answers itself in the negative, that is to say, that there were no materials to justify the finding that the income in the share of the commission agency of the mills was the income of the Hindu undivided family. Appeal allowed.

Issues Involved:
1. Whether the income from the commission agency of the mills should be assessed as the income of the Hindu undivided family (HUF) or as the separate income of the divided members after the partial partition.

Detailed Analysis:

Issue 1: Assessment of Income Post-Partition
The appellants, Charandas Haridas and Chinubhai Haridas, represented two units of Hindu undivided families (HUF). Charandas Haridas, acting as the karta of his HUF, entered into an oral agreement on December 31, 1945, for a partial partition of the managing agency commissions from six mills. This partition was formalized in a memorandum executed on September 11, 1946. Charandas Haridas claimed that post-partition, the income should be treated as the separate income of the divided members, not as HUF income.

The Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal (ITAT) all held that the income should continue to be assessed as HUF income. The ITAT concluded that the partition was of income, not of the assets from which the income was derived, and thus, the family remained joint in terms of the assets. The ITAT also deemed the partition arrangement as a "farce."

High Court's Judgment
The Bombay High Court upheld the ITAT's decision, stating that the method adopted for partition was insufficient to achieve the intended result. The court emphasized that the source of income (the managing agency commissions) remained joint property of the HUF, despite the purported division of income.

Supreme Court's Analysis
The Supreme Court examined the arguments and the operative portion of the partition document. The court noted that the document referred to "commission" in two senses: the amount received and the right to receive it. The court highlighted three branches of law relevant to the case: the law of partnership, Hindu law, and income-tax law.

1. Law of Partnership: A HUF cannot be a partner in a firm. The karta, while representing the HUF, does not confer partnership rights to other HUF members.
2. Hindu Law: Permits partial partition, binding upon the family, without necessarily dividing assets by metes and bounds.
3. Income-tax Law: Assesses income based on the status of the family. Post-partition, the income cannot be considered HUF income if the family has disrupted.

The court found that the family had taken all possible measures to divide the joint interest into separate interests. The document was genuine and effective between the family members, and there was no HUF in respect of these particular assets. The assets remained in the name of Charandas Haridas, but the status of the family had changed from joint to divided.

Conclusion
The Supreme Court concluded that there were no materials to justify the finding that the income from the commission agency of the mills was the income of the HUF. The appeal was allowed, and the respondents were ordered to pay the costs of the two assessees.

Appeal allowed.

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