1988 (5) TMI 59 - AT - Income Tax

Summary

Issues Involved:
1. Recognition of partial partition under Section 171(9) of the Income-tax Act, 1961.
2. Assessment of share income from the partnership firm in the hands of the HUF or individual.

Issue-wise Detailed Analysis:

1. Recognition of Partial Partition under Section 171(9) of the Income-tax Act, 1961:

The primary issue revolves around the recognition of a partial partition effected by the Hindu Undivided Family (HUF) on 31-3-1979. The Income-tax Officer (ITO) did not recognize the partial partition citing Section 171(9) of the Income-tax Act, which bars recognition of partial partitions for assessment purposes. The ITO argued that the capital of the HUF remained invested in the firm even after the purported partition, and thus, the share income should be assessed in the hands of the HUF. The Appellate Assistant Commissioner (AAC) differentiated between the decision to withdraw from the partnership and the partial partition, stating that the former was not affected by Section 171(9). The AAC held that the share income from the firm belonged to Shri Kishore Chand in his individual capacity and not to the HUF.

2. Assessment of Share Income from the Partnership Firm in the Hands of the HUF or Individual:

The ITO included the share income from the firm in the hands of the HUF, arguing that the capital remained invested in the firm and no new individual investment was made by Shri Kishore Chand. The AAC, however, contended that the HUF had decided to withdraw from the partnership effective 1-4-1979, and thus, the share income belonged to Shri Kishore Chand individually. The AAC's decision was based on the premise that the agreement to withdraw from the partnership was independent of the partial partition and was not affected by Section 171(9).

Separate Judgments Delivered by Judges:

Judicial Member's Judgment:

The Judicial Member disagreed with the AAC, emphasizing that the firm did not recognize the decision of the HUF to withdraw from the partnership. He argued that the agreement among the HUF members could not be treated in isolation from Section 171(9), and thus, the share income should be assessed in the hands of the HUF. He pointed out that the capital of the HUF continued to be in the firm's books, and no individual investment was made by Shri Kishore Chand.

Accountant Member's Judgment:

The Accountant Member held a contrary view, stating that the HUF had the liberty to withdraw from the partnership, and this decision was not affected by Section 171(9). He argued that the share income belonged to Shri Kishore Chand individually, as the HUF had ceased to be a partner in the firm from 1-4-1979. The Accountant Member emphasized that the derecognition of the partial partition only affected the interest income and not the share income from the firm.

Third Member's Judgment:

The Third Member agreed with the Accountant Member, noting that the agreement to withdraw from the partnership was a distinct decision and was not affected by the provisions of Section 171(9). He pointed out that the share income was credited to Shri Kishore Chand's individual account, and the HUF could not claim this income post-1-4-1979. The Third Member also referred to a Madras High Court decision that declared Section 171(9) unconstitutional, further supporting the view that the share income should not be assessed in the hands of the HUF.

Conclusion:

The majority view held that the share income from the firm belonged to Shri Kishore Chand in his individual capacity and should not be assessed in the hands of the HUF. The decision to withdraw from the partnership was independent of the partial partition and was not affected by Section 171(9) of the Income-tax Act. The appeals by the Revenue were dismissed, and the AAC's order was upheld.