1984 (6) TMI 75 - AT - Income Tax

Summary

Issues Involved:

1. Validity of partial partition.
2. Recognition of partition under section 171 of the Income-tax Act, 1961.
3. Assessments based on the partition.
4. Actions of the Commissioner under section 263 of the Income-tax Act, 1961.

Detailed Analysis:

1. Validity of Partial Partition:

The primary issue was whether the partial partition dated 31-10-1978, evidenced by the memorandum executed on 15-11-1978, was valid. The partition involved the division of capital investments and deposits among family members of two Hindu Undivided Families (HUFs). The Commissioner doubted the partition's validity, citing the lack of physical division of assets and the continued holding of assets by the HUF. However, the Tribunal held that the partition was valid as the necessary entries were made in the HUF's books, and the members acted on the partition by receiving profits and interest. The Supreme Court's decision in Charandas Haridas v. CIT was cited, emphasizing that Hindu law permits partial partitions and that such partitions are effective even without physical division if separate enjoyment is secured.

2. Recognition of Partition under Section 171:

The Tribunal emphasized that once an order under section 171 is passed by the Income Tax Officer (ITO) recognizing the partition, it remains valid until set aside by the Commissioner. The ITO had recognized the partial partition with effect from 31-10-1978 by his order dated 24-12-1979. The Tribunal referenced the Supreme Court's decision in Joint Family of Udayan Chinubhai v. CIT, which held that an order under section 25A of the Indian Income-tax Act, 1922, remains effective for subsequent years unless set aside. This principle applies to section 171 of the Income-tax Act, 1961, as well. Thus, the partition recognized by the ITO was valid and binding.

3. Assessments Based on the Partition:

The assessments of individual members were completed based on the recognized partial partition. The Tribunal found that the necessary entries were made in the HUF's books, transferring the capital and deposits to the divided members. The Supreme Court's decision in CIT v. K.G. Ramakrishnier and the Bombay High Court's decisions in CIT v. M.D. Kanoria and CIT v. Indramohan Sharma supported the view that entries in the HUF's books are sufficient to effect a partition. The Tribunal concluded that the ITO was justified in completing the assessments based on the partition.

4. Actions of the Commissioner under Section 263:

The Commissioner had invoked section 263 to set aside the assessments, arguing that the partition was not valid and the HUF still held the assets. The Tribunal disagreed, stating that the Commissioner's order under section 263 was not sustainable as the partition recognized by the ITO had not been set aside. The Tribunal referenced the Supreme Court's decision in Kalloomal Tapeswari Prasad (HUF) v. CIT, which held that section 171 applies to both total and partial partitions. Once an order under section 171 is passed, the income from partitioned property cannot be included in the HUF's total income. The Tribunal concluded that the Commissioner was wrong in invoking section 263 and directed the ITO to modify the assessments.

Conclusion:

The Tribunal held that there was a valid partial partition recognized by the ITO under section 171. The assessments based on the partition were justified, and the Commissioner was wrong in invoking section 263 to set aside the assessments. The Tribunal canceled the Commissioner's orders and allowed the appeals.