1978 (7) TMI 3 - SC - Income Tax

There was no question of any services being rendered by the three minors and, therefore, the share income received by them must, in substance, be regarded as a return made to the family because of the investment of family funds in the business. In our view, therefore, the taxing authorities as also the Tribunal and the High Court were right in assessing the said income in the hands of the Hindu undivided family-assessee.

Issues Involved:
1. Whether the share income of three minor sons from the firm M/s. Grand Smithy Works is liable to be assessed as the income of the Hindu undivided family (HUF) for the assessment year 1969-70.

Issue-wise Detailed Analysis:

1. Facts and Background:
The case revolves around the assessment of Rs. 3,08,187, being the share income of three minor sons from the firm M/s. Grand Smithy Works for the period from December 19, 1967, to August 31, 1968. The deceased, Yudhisthir Lal Agarwalla, was the karta of a Hindu undivided family (HUF) and a partner in the firm with a 36% share. Upon his death on December 18, 1967, his widow and four major daughters declined to join the partnership, while the three minor sons were admitted to the benefits of the partnership. A new partnership deed was executed on January 11, 1968, effective from December 19, 1967, giving each minor son a 14% share in the profits.

2. Income Tax Officer's Decision:
The Income-tax Officer included the share income of the three minor sons in the income of the HUF, reasoning that despite the letters of disclaimer, the minors were admitted to the benefits of the partnership with collective shares of 42%, more than their father's share. Additionally, the HUF did not charge interest on its capital amount, indicating continued interest in the firm.

3. Appellate Authorities' Decisions:
The Appellate Assistant Commissioner and the Appellate Tribunal upheld the Income-tax Officer's decision. The High Court, following principles from the Supreme Court case Raj Kumar Singh Hukam Chandji Commissioner of Income-tax [1970] 78 ITR 33 (SC), also held that the share income was assessable in the hands of the HUF.

4. Assessee's Contentions:
The counsel for the assessee argued that the minors' share of profits should be considered their individual income unless shown to be benami or nominees of the HUF. He pointed out the department's failure to prove such a connection and emphasized the bona fides of the minors' admission to the partnership. He also argued that there was no agreement that the HUF was to continue as the real owner of the shares given to the minors.

5. Revenue's Contentions:
The learned Attorney-General argued that the real test was whether the share income was earned with the aid and assistance of HUF funds and whether the HUF suffered any detriment. He relied on the principles from Dhanwatey's case [1968] 68 ITR 365 (SC) and Raj Kumar's case [1970] 78 ITR 33 (SC), asserting that the share income was a return to the family due to the investment of family funds in the business.

6. Supreme Court's Analysis:
The Court examined whether the share income received by the minors was their individual income or that of the HUF. It noted that the widow and daughters' letters of disclaimer only declined to become partners but did not relinquish their right to the deceased's share in the firm. The capital amount of Rs. 10,00,000 remained with the firm, and clause 6 of the new deed allowed its interest-free use, indicating tacit assent from the widow on behalf of the HUF. The Court found a direct nexus between the share income and the utilization of HUF funds, leading to the conclusion that the income was of the HUF.

7. Legal Principles Applied:
The Court referred to Raj Kumar's case [1970] 78 ITR 33 (SC), which laid down tests to determine whether income earned by a coparcener is individual or HUF income. Applying these principles, the Court found that the share income was earned with the aid and assistance of HUF funds, directly related to their utilization, and the HUF suffered detriment due to interest-free retention of funds by the firm.

Conclusion:
The Supreme Court concluded that the share income of Rs. 3,08,187 received by the three minor sons was not their individual income but the income of the HUF. The appeal was dismissed with costs, affirming the decisions of the lower authorities.

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