1978 (3) TMI 121 - AT - Income Tax

Summary

Issues:
1. Whether the order of the CIT under s. 263 of the IT Act, 1961 for the assessment year 1970-71 was correct in directing the inclusion of the share of profit from the firm in the income of an individual.
2. Whether the share of profit from the firm should have been assessed in the hands of the individual or the Hindu Undivided Family (HUF).

Detailed Analysis:

Issue 1:
The appeal was filed by the assessee against the order of the CIT under s. 263 of the IT Act, 1961 for the assessment year 1970-71. The CIT concluded that the ITO assessing the assessee did not consider the share of income from the firm in the individual's income and erroneously allocated the share of profit as if the individual had entered into the partnership as a karta of the HUF. The CIT invoked s. 263 and directed the ITO to include the share of profit in the income of the individual. The assessee argued that the assessment was not erroneous as the AAC had already discussed and excluded the share of profit in previous years. However, the CIT rejected these arguments and upheld the inclusion of the share of profit in the individual's income.

Issue 2:
The Tribunal considered whether the share of profit from the firm should be assessed in the hands of the individual or the HUF. The assessee contended that all formalities required for throwing the capital and share into the hotchpot of the HUF were fulfilled, and the ITO was justified in assessing the firm and allocating the share of profit to the individual as karta of the HUF. The departmental representative argued that previous decisions by the AAC and the Tribunal favored assessing the income of the firm in the hands of the HUF. However, the Tribunal held that there was no legal flaw in the individual becoming a partner in the reconstituted firm as karta of the HUF. The Tribunal determined that the share of profit could be thrown into the hotchpot of the family, and the order of the CIT directing assessment in the individual's capacity was reversed, restoring the decision of the ITO.

In conclusion, the Tribunal allowed the appeal, reversing the order of the CIT and restoring that of the ITO.