1984 (11) TMI 78 - AT - Income Tax

Summary

Issues Involved:

1. Validity of partial partition under Hindu law and its recognition for income-tax purposes.
2. Inclusion of share of profit from partnership firms in the total income of the assessee-HUF.
3. Jurisdiction of the Commissioner (Appeals) to enhance the assessment.

Detailed Analysis:

1. Validity of Partial Partition under Hindu Law and its Recognition for Income-Tax Purposes:

The assessee-HUF argued that due to partial partitions, it no longer remained a partner in three firms, and thus, the share of profit from these firms should not be included in its total income. The ITO rejected this claim, citing that under Hindu law, there cannot exist more than one HUF. Furthermore, section 171(9) of the Income-tax Act, 1961, which came into effect from 31-12-1978, does not recognize partial partitions for income-tax purposes. Consequently, the family continues to be taxed as an HUF unless there has been a total partition of the family properties by metes and bounds. The Commissioner (Appeals) upheld the ITO's decision, stating that the amendment to section 171 makes it clear that partial partitions after 31-12-1978 are not recognized, and the family remains joint for tax purposes.

2. Inclusion of Share of Profit from Partnership Firms in the Total Income of the Assessee-HUF:

The ITO included the share of profits from the three firms in the total income of the assessee-HUF, albeit at reduced percentages (27%, 25%, and 35%) instead of the original shares (32%, 30%, and 39%). The Commissioner (Appeals) noticed this discrepancy and proposed to enhance the assessment by including the full original shares. The assessee-HUF contended that the share of profits belonged to the smaller HUFs formed after the partial partitions. However, the Commissioner (Appeals) rejected this argument, stating that the partial partitions are not recognized under the Act, and thus, the entire share of profits from the firms should be assessed in the hands of the assessee-HUF.

3. Jurisdiction of the Commissioner (Appeals) to Enhance the Assessment:

The Commissioner (Appeals) issued a notice of enhancement to include the full original shares of profit from the firms in the total income of the assessee-HUF. The assessee-HUF argued that the Commissioner (Appeals) exceeded his jurisdiction by enhancing the assessment and that the increased share of profit was a result of an agreement between partners, not a mere partition. The Commissioner (Appeals) overruled these contentions, stating that the enhancement was within his jurisdiction as the ITO had already considered the source of income (share of profits from the firms) in the assessment. The Tribunal upheld the Commissioner (Appeals)'s decision, stating that the ITO had inadvertently omitted to consider the full shares of profit and that the Commissioner (Appeals) was competent to correct this mistake by enhancing the assessment.

Conclusion:

The Tribunal dismissed the appeal, upholding the Commissioner (Appeals)'s decision to include the full original shares of profit from the partnership firms in the total income of the assessee-HUF and confirming the jurisdiction of the Commissioner (Appeals) to enhance the assessment. The partial partitions were not recognized for income-tax purposes, and the family continued to be taxed as an HUF.