1986 (8) TMI 87 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of share income from Mayabhai Associates and Vimal Corporation from the assessee's total income.
2. Validity of the declarations made by the coparceners and the creation of new HUFs.
3. Applicability of section 171(9) of the Income-tax Act, 1961.
4. Assessment of income in the hands of the assessee versus the newly claimed HUFs.

Detailed Analysis:

1. Deletion of Share Income from Mayabhai Associates and Vimal Corporation
The revenue contended that the learned AAC erred in law and on facts in deleting the share income from Mayabhai Associates and Vimal Corporation from the total income of the assessee. The revenue argued that the AAC should have upheld the addition made by the ITO in the total income of the assessee. The ITO had included the assessee's share of profit from these firms in the total income, computing it at Rs. 61,782 as against Rs. 10,340 declared by the assessee.

2. Validity of the Declarations and Creation of New HUFs
The assessee, a Hindu Undivided Family (HUF), claimed that two new HUFs were created following the declarations made by two coparceners, Vipin Mayabhai and Pravin Mayabhai, on 28-3-1979. These declarations purportedly relinquished their rights in the assessee's share in the firms of Mayabhai Associates and Vimal Corporation. The assessee argued that these new HUFs, named Mayabhai Laxmichand HUF No. 2 and HUF No. 3, should be assessed separately.

The ITO rejected this claim, stating that the Hindu law does not contemplate the existence of two kartas within the same HUF. Furthermore, the ITO viewed these declarations as a partial partition, which, under section 171(9) of the Income-tax Act, 1961, effective from 1-4-1980, is null and void if executed after 31-12-1978. Consequently, the income from the firms was assessed in the hands of the original HUF.

3. Applicability of Section 171(9) of the Income-tax Act, 1961
The ITO emphasized that section 171(9) nullifies any partial partition of an HUF occurring after 31-12-1978. Since the declarations were made on 28-3-1979, they were deemed to have no legal effect. The AAC, however, accepted the assessee's submissions and deleted the share income from the assessee's total income. The revenue argued that the AAC's decision was erroneous, as the declarations did not create new HUFs but merely attempted a partial partition, which is legally ineffective post-31-12-1978.

4. Assessment of Income in the Hands of the Assessee versus the Newly Claimed HUFs
The revenue highlighted that the assessments of the newly claimed HUFs under section 143(3) would not preclude the ITO from assessing the income in the hands of the original HUF. The revenue's representative argued that the declarations did not transfer the income-generating assets from the original HUF to the new HUFs but merely relinquished the rights of two coparceners. This action did not legally create new HUFs, and the income should be taxed in the hands of the original HUF.

The Tribunal found considerable force in the revenue's submissions. It concluded that the declarations made by the coparceners did not create new HUFs and that the income from the firms remained with the original HUF. The Tribunal agreed with the ITO's assessment and set aside the AAC's order, restoring the ITO's decision to include the share income from the firms in the total income of the assessee.

Conclusion
The appeal was allowed, and the Tribunal set aside the AAC's order, restoring the ITO's assessment. The Tribunal emphasized that the declarations did not create new HUFs and that the income from Mayabhai Associates and Vimal Corporation should be assessed in the hands of the original HUF.