1983 (8) TMI 130 - AT - Income Tax

Summary

Issues:
- Taxation of share income from a partnership firm in the hands of the assessee.
- Interpretation of provisions related to the taxation of income earned by a minor child from a partnership firm.
- Application of section 64(1)(iii) of the Income-tax Act, 1961.
- Determining the capacity in which a minor can be admitted to the benefits of a partnership firm.

Analysis:
The judgment revolves around the taxation of share income from a partnership firm in the hands of the assessee, who is the mother of a minor child admitted to the benefits of the firm. The assessee argued that the share income belonged to the Hindu Undivided Family (HUF) and should be taxed as such, not in her individual capacity. The Appellate Assistant Commissioner (AAC) agreed with the assessee and deleted the share income from the assessee's assessment. However, the revenue appealed the decision.

Upon hearing the parties, the Appellate Tribunal analyzed the legal position. It was noted that if the karta of an HUF becomes a partner of a firm and the capital contribution belongs to the family, the income earned by the karta from the firm should be assessed in the hands of the HUF. However, in this case, the minor child was only admitted to the benefits of the partnership and not as a full-fledged partner. The partnership deed clearly indicated that the minor did not have the legal capacity to become a partner due to being a minor. As per the Indian Partnership Act, a minor cannot be a partner in a firm and is not personally liable for the firm's acts.

The Tribunal referenced Section 64(1)(iii) of the Income-tax Act, 1961, which mandates the inclusion of income arising to a minor child from being admitted to the benefits of a partnership firm in the total income of the individual. Since the minor child lacked the capacity to contract, the income was rightly assessed in the hands of the assessee, not the HUF. The Tribunal concluded that the deletion of the share income by the AAC was not justified in law and upheld the Income Tax Officer's order, thereby taxing the income in the hands of the assessee.

In conclusion, the Tribunal accepted the appeal, set aside the AAC's order, and restored the Income Tax Officer's decision to tax the share income from the partnership firm in the hands of the assessee, rejecting the argument that it should be taxed as HUF income.