1986 (7) TMI 189 - AT - Income Tax

Summary

Issues Involved:
1. Whether the share income derived from Segu Venkata Narayana Setty & Co. should be included in the hands of the assessee-HUF for the assessment years under consideration.

Detailed Analysis:

Issue 1: Inclusion of Share Income in the Hands of Assessee-HUF

Background and Initial Assessments:
For the assessment year 1980-81, two returns were filed: one in the status of an HUF and another in the status of an individual. The share income from Segu Venkata Narayana Setty & Co. was shown in the individual returns of Shri S.V. Anandmohan, while other income was shown in the hands of HUF. The ITO reopened the assessment under section 148/147(a) of the Income-tax Act, 1961, alleging failure to disclose all material facts. The assessee-HUF argued that an agreement dated 31-3-1979 stated that from 1-4-1979, the share income and losses would be borne exclusively by Shri S.V. Anandmohan in his individual capacity. The ITO rejected this, stating that the agreement could not convert joint family property into individual property, and hence, the income was assessable in the status of HUF.

Subsequent Assessments:
For the assessment years 1981-82 to 1983-84, the ITO included the share income in the hands of the assessee-HUF on a regular basis and assessed it in the hands of Shri S.V. Anandmohan (individual) as a protective measure.

Appeal to AAC:
The AAC found that the wife and daughters had gifted their shares in the capital to Shri S.V. Anandmohan, making him a partner in his individual capacity from 1-4-1979. The AAC held that the ITO had no power to add income to the assessee-HUF since it ceased to be a partner in the firm. Thus, the appeals were allowed.

Revenue's Second Appeal:
The revenue argued that the funds of the assessee-HUF were invested in the firm, and hence, the share income should be assessed in the hands of the assessee-HUF. The departmental representative relied on the Andhra Pradesh High Court decision in Sardarilal Changanlal v. CIT, summarizing that where property was not owned by a HUF before being owned by a sole surviving coparcener, the assessment has to be made as individual.

Assessee's Argument:
The assessee contended that there was no nexus between the share income derived by Shri S.V. Anandmohan in his individual capacity and the HUF income. The capital standing in the name of the HUF was not a partner's contribution but an advance to the firm. The assessee-HUF was assessed to gift-tax for the deemed gift when it exited the firm.

Tribunal's Findings:
The Tribunal found that the amounts standing in the name of the assessee-HUF in the firm were advances, not capital contributions. Interest payments to the HUF and to Shri S.V. Anandmohan individually supported this. The partnership deed dated 1-4-1979 indicated that Shri S.V. Anandmohan became a partner in his individual capacity. The Tribunal held that the share income derived from the firm should be included in the hands of Shri S.V. Anandmohan individually, not in the hands of the assessee-HUF.

Legal Precedents:
The Tribunal referred to cases like Satinder Kumar (HUF) v. CIT and CIT v. Ram Narain, which supported the view that the mere fact of a karta being a partner does not imply he represents the HUF. The partnership is a question of contract, and reconstitution is permissible.

Conclusion:
The Tribunal concluded that the share income from Segu Venkata Narayana Setty & Co. for the assessment years in question should be included in the hands of Shri S.V. Anandmohan individually. The appeals of the department were dismissed, and the order of the AAC was upheld.