1982 (3) TMI 137 - AT - Income Tax

Summary

Issues Involved:
1. Inclusion of HUF income in individual assessment.
2. Nature of business ownership (individual vs. HUF).
3. Validity of the Commissioner's order under section 263 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Inclusion of HUF Income in Individual Assessment:
The Commissioner directed the Income Tax Officer (ITO) to include the assessed income of K.C. Khanna & Sons, HUF, for the assessment years 1977-78, 1978-79, and 1979-80 as part of the income of Shri K.C. Khanna, enhancing his individual assessments. The assessee contended that the income earned from the wholesale cloth business was rightly assessed in the name of the HUF and not as individual income. The Tribunal found that the HUF maintained separate accounts, and the business was conducted in the name of the HUF, with separate bank accounts and interest payments to individual members, which were duly shown in their individual returns. Therefore, the Tribunal concluded that the income derived from the wholesale business was rightly assessed in the hands of the HUF.

2. Nature of Business Ownership (Individual vs. HUF):
The primary question was whether the business was carried on by the HUF or by Shri K.C. Khanna individually. The Tribunal noted that the HUF had no independent business premises or telephones and maintained separate account books from April 1, 1976. The business conducted by the HUF was distinct from the individual business of Shri K.C. Khanna, which was closed on March 31, 1976. The Tribunal emphasized that loans advanced by Shri K.C. Khanna and his wife to the HUF did not make them the real owners of the business, as the funds became the property of the HUF once borrowed. The Tribunal referred to the Delhi High Court decision in L. Bansi Dhar & Sons v. CIT, which supported the view that loans advanced to an HUF do not make the creditors the owners of the business conducted by the HUF.

3. Validity of the Commissioner's Order under Section 263:
The Tribunal examined whether the Commissioner was correct in revising the assessment under section 263. The Commissioner had concluded that the business was carried on by Shri K.C. Khanna individually, not by the HUF, based on the lack of joint efforts by family members and the absence of ancestral funds. However, the Tribunal found that the Commissioner's conclusions were based on conjectures and lacked credible evidence. The Tribunal noted that the business was conducted in the name of the HUF, with separate account books, and there was no evidence that loans were secured on the personal security of Shri K.C. Khanna. The Tribunal held that the Commissioner's order was unsustainable and erroneous in law, as the business was conducted by the HUF and not by Shri K.C. Khanna individually.

Conclusion:
The Tribunal allowed the appeals, setting aside the Commissioner's order and restoring the original assessments made by the ITO for the assessment years 1977-78, 1978-79, and 1979-80. The Tribunal concluded that the income from the wholesale cloth business was rightly assessed in the hands of the HUF and not as individual income of Shri K.C. Khanna.