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Issues: Legality of partial partitions in money lending business, Recognition of partial partitions under section 171 IT Act, 1961.
Analysis: The main issue in this appeal is the legality of partial partitions in the money lending business of an HUF. The HUF, consisting of two brothers and their families, had divided the capital account on two occasions. Initially, a sum of Rs. 70,000 was divided equally between the two smaller HUFs, with each receiving Rs. 35,000. Subsequently, a further division of Rs. 15,000 was made, with Rs. 7,500 credited to each smaller HUF. The bigger HUF started paying interest to the smaller HUFs and sought recognition of these partial partitions. However, the ITO disallowed the partition, stating that it was merely on paper and the divided amounts had not been physically delivered to the members. The Appellate Authority Commissioner (AAC) upheld the decision, considering it a case of partial partition to the whole business as the entire capital and debtors were not divided. The AAC held that a partial partition in a business like money lending required a complete division of capital and assets, including debtors, which was not done in this case. The claim for recognition of partitions under section 171 was deemed untenable. The appeal was then brought before the ITAT Delhi-C. The assessee cited precedents, including a decision by the Patna High Court, to support the contention that a business can be divided as a going concern by specifying shares in the accounts without physical division. The ITAT noted that a partition of a part of the whole asset can occur, even in a running business, by making appropriate entries in the books. The division of capital was held to be permissible, even if the business itself was not divided. The revenue argued that without the distribution of debtors among the members, a partition as per section 171 was not effective. They contended that physical division of property was necessary, and in this case, even the entire capital was not divided. However, the ITAT, after considering the authorities and precedents, upheld the partial partitions claimed by the assessee. Another issue raised in the appeal was the combination of grounds related to the recognition of partition under section 171 with the present appeal. The ITAT noted that these grounds should have been filed separately, citing a decision of the Calcutta High Court. Despite this procedural error, the appeal was partly allowed based on the legality of the partial partitions in the money lending business.
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