1987 (11) TMI 126 - AT - Income Tax

Summary

Issues Involved:
1. Legality of the partition of HUF assets.
2. Recognition of partition under Section 171 of the IT Act.
3. Physical division of assets versus division by book entries.
4. Unequal partition and its implications.
5. Applicability of Supreme Court decisions.

Detailed Analysis:

1. Legality of the partition of HUF assets:
The appeal concerns the partition of the HUF assets between Srikrishnamohan Rao and his minor son, Mallikarjuna Pradeep, recorded in a memorandum of partition dated 25-3-1982. The ITO rejected the claim for partition, stating it was not legally conceivable as no physical division of assets occurred. The AAC confirmed this decision, emphasizing that the partition was not by metes and bounds as required by law.

2. Recognition of partition under Section 171 of the IT Act:
A petition was filed to recognize the partition under Section 171 of the IT Act. The ITO conducted an inquiry and found that the assets, primarily movable properties like stocks, shares, and debentures, were not physically divided. The ITO held that the partition did not meet the legal requirements since the assets were capable of physical division but were instead divided by book entries.

3. Physical division of assets versus division by book entries:
The ITO relied on the Supreme Court's decision in Kalloomal Tapeswari Prasad (HUF) v. CIT, which stated that any partition without physical division of assets, when possible, lacks legal sanction. The ITO argued that the shares and debentures, being movable properties, should have been physically divided. The assessee contended that dividing the book capital by making relevant entries in the books of account is a recognized mode of partition, especially when the assets involve risks and uncertainties.

4. Unequal partition and its implications:
The ITO also argued that the partition was unequal as the shares were not taken at their market price, and the difference between cost price and market price was not given to the minor son. The assessee countered that the partition was not unequal, as the father assumed the risks associated with the assets, and the minor son received half the value of the assets in cash, which was more advantageous. The assessee cited the Supreme Court decision in Apoorva Shantilal Shah v. CIT, which stated that the Department cannot refuse recognition of a partition on the grounds of inequality, as only the minor, upon attaining majority, could challenge it.

5. Applicability of Supreme Court decisions:
The assessee distinguished the Supreme Court decision in Kalloomal Tapeswari Prasad (HUF)'s case, arguing it concerned immovable properties and partial partition, whereas the present case involved movable properties and a full partition. The Supreme Court recognized that a partition could involve one coparcener taking the whole asset and the other receiving an equivalent amount of money, which was applicable in this case. The Supreme Court's decision in Apoorva Shantilal Shah v. CIT further supported the assessee's position, emphasizing that the father, as a natural guardian, could effect a partition even against the wishes of the minor sons.

Conclusion:
The Tribunal upheld the assessee's contention, stating that the memorandum of partition was a record of a past transaction and did not create the partition. The division of book value by making relevant entries was recognized as a valid mode of partition. The Tribunal found no basis for the lower authorities' objections and directed the ITO to recognize the partition dated 25-3-1982. The appeal was accordingly allowed.