1984 (3) TMI 178 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee should be taxed as an individual or as a Hindu Undivided Family (HUF).
2. Applicability of Section 64(1)(iii) of the Income-tax Act, 1961, regarding the income of minor children.
3. The impact of the partial partition and subsequent reconstitution of the firm on the tax status of the assessee.

Issue-wise Detailed Analysis:

1. Tax Status: Individual vs. HUF:
The primary contention revolves around whether the assessee should be assessed as an individual or as a HUF. The Income Tax Officer (ITO) assessed the assessee as an individual, arguing that the share income from the firm was earned in the personal capacity of Shri Devatha Papaiah and thus constitutes absolute and individual income. The ITO also held that the minor sons' income should be included in the assessee's income under Section 64(1)(iii). However, the Appellate Assistant Commissioner (AAC) determined the status of the assessee as a HUF, relying on the Supreme Court decisions in N.V. Narendranath v. CWT, Gowli Buddanna v. CIT, and other relevant case law. The AAC held that the property falling to a single coparcener on a partition does not lose its character of joint family property solely because there is no other member, male or female, at a particular point of time.

2. Applicability of Section 64(1)(iii):
The ITO included the income of the minor sons in the assessee's income under Section 64(1)(iii), which pertains to the inclusion of minor children's income in the parent's income if the minor is admitted to the benefits of partnership in a firm. However, the AAC directed the deletion of the incomes of the minor sons from the total income of the assessee, concluding that the assessee should be assessed as a HUF. The Tribunal upheld this view, referencing the Andhra Pradesh High Court decision in CIT v. Sanka Sankaraiah, which clarified that the expression 'individual' in Section 64(1) does not include the karta of a joint family. Therefore, the share income from the firm derived by the minor children cannot be included in the individual assessment of the partner.

3. Impact of Partial Partition and Reconstitution of Firm:
The partial partition of the joint family property on 18-10-1971 and the subsequent reconstitution of the firm on 25-10-1971 were significant events. The ITO recognized the partial partition under Section 171 of the Income-tax Act, 1961, and the reconstituted firm commenced business from 20-10-1971. Despite the partition, the AAC and the Tribunal concluded that the character of the property in the hands of Shri Devatha Papaiah remained that of joint family property. The Tribunal noted that after the birth of another male issue, Master D. Chandrashekhar, on 23-2-1973, the property held by Shri Devatha Papaiah continued to be joint family property, and he no longer remained the sole surviving coparcener. Consequently, for the assessment year 1973-74, the HUF consisted of Shri Devatha Papaiah, his wife, and two minor daughters, and for the assessment year 1974-75, it included his after-born son as well.

Conclusion:
The Tribunal dismissed the revenue's appeals, affirming that the assessee should be assessed as a HUF for the assessment years 1973-74 and 1974-75. The inclusion of the minors' share income under Section 64(1)(iii) was deemed incorrect, as the assessee's status as a HUF precluded the application of this section. The Tribunal's decision was based on comprehensive legal precedents and a thorough analysis of the facts and circumstances of the case.