1966 (7) TMI 6 - HC - Income Tax

Partition - entries in the books of account of the family - allotment of the promissory notes to the son, they being a component of the capital - Tribunal is justified in holding that there was no effective partition on July 24, 1954, with reference to any or all the assets

Summary

Issues Involved:
1. Effective partition of Government promissory notes.
2. Effective partition of shares in partnership firms: Haridranathi Rice Mill, Dhanalakshmi Rice Mill, and Dhanalakshmi Rice Trade.

Detailed Analysis:

1. Effective Partition of Government Promissory Notes:
The primary issue was whether the Government promissory notes were effectively partitioned on July 26, 1954. The promissory notes stood in the name of Kuppiah Mudaliar, the karta of the Hindu undivided family. On July 26, 1954, a sum of Rs. 1,11,169, including Government promissory notes worth Rs. 55,960, was transferred to the credit of the son, Balasubramanian. The interest on these securities was credited to Balasubramanian's account in the family books after April 13, 1954. Although the actual endorsements on the bonds were made on November 16, 1956, the court held that the property in the Government promissory notes vested in the son from July 26, 1954. The promissory notes had been pledged with the State Bank for a family loan and were endorsed in favor of the son after being retrieved on November 16, 1956. The court referenced the Full Bench decision in *Muthuveeran Chetty v. Govindan Chetty*, which held that a member to whom a promissory note was allotted on partition is entitled to sue on the note even without an endorsement or deed of assignment in writing. Thus, the court concluded that there was an effective partition of the Government promissory notes on July 26, 1954.

2. Effective Partition of Shares in Partnership Firms:
The court examined whether there was an effective partition of the family's shares in the partnership firms: Haridranathi Rice Mill, Dhanalakshmi Rice Mill, and Dhanalakshmi Rice Trade.

- Haridranathi Rice Mill: The court noted that the share of the profits of the son was separately credited in the family books for the years 1954, 1955, and 1956. The agreement for partition specified that the father and son would conduct the rice mill business as co-owners. Despite the capital adjustments being made only on April 12, 1957, the court held that there was an effective division of the assets by the agreement for partition followed by the division of income.

- Dhanalakshmi Rice Mill: The Tribunal had already excluded the income from this firm from the family's income based on the registration under section 26A of the Income-tax Act from 1955-56. The court agreed with this exclusion, noting that appropriate entries had been made in the firm's books showing the father and son as partners and their shares in the profits separately credited.

- Dhanalakshmi Rice Trade: The Tribunal had remarked that there was no information about this firm. However, the court noted that the department had granted registration under section 26A to Dhanalakshmi Rice Trade from the assessment year 1955-56, recognizing the father and son as partners in their separate status. The court held that the same principles applied to Dhanalakshmi Rice Trade as to Dhanalakshmi Rice Mill, and there was an effective partition of the family's share in this firm as well.

Conclusion:
The court concluded that there was an effective partition of the Government promissory notes and the shares in the partnership firms (Haridranathi Rice Mill, Dhanalakshmi Rice Mill, and Dhanalakshmi Rice Trade) on July 26, 1954. The income from these assets ceased to be the income of the Hindu undivided family and should not be assessed as such in the hands of the karta. The question was answered in favor of the assessee, with costs awarded to the assessee and counsel's fee set at Rs. 250.