1978 (12) TMI 98 - AT - Income Tax

Summary

Issues:
1. Recognition of partition under s. 25A of the IT Act, 1922.
2. Assessment of income derived from properties post-partition.
3. Claim of income from joint purchase of Grove Estate.
4. Consideration of Grove Estate as HUF property.
5. Source of funds for the purchase of Grove Estate.
6. Determination of ownership of Grove Estate.
7. Characterization of property acquired post-partition.
8. Treatment of property in the books of the HUF.
9. Decision on the appeal regarding the ownership of Grove Estate.

Analysis:
1. The case involved appeals by the Department against orders modifying assessments made on the assessee by the Second ITO under s. 143(3) of the IT Act, 1961 for the assessment years 1975-76 and 1976-77. The issue revolved around the recognition of a partition in the HUF of the assessee's family and its impact on subsequent assessments.

2. The assessee claimed to be assessed in the status of an HUF for income derived post-partition, specifically disputing the inclusion of income from the Grove Estate. The ITO had included this income in the assessments, considering it as belonging to the assessee HUF due to the source of funds used for the purchase.

3. The key contention in the appeal was whether the Grove Estate, purchased jointly by the assessee and his brother, should be considered as individual property or HUF property. The AAC accepted the assessee's argument that the estate was purchased using borrowed funds, hence should be considered as belonging to them individually.

4. The Department argued that since funds for the purchase of the estate came from the partition allocation, it should be deemed as HUF property. The assessee's counsel countered, stating that subsequent entries in the HUF's books showed no detriment to the HUF funds, supporting the claim of individual ownership.

5. The Tribunal referred to legal precedent emphasizing that property acquired using family funds assumes the character of joint family property. Despite the timing of the acquisition concerning the formation of the HUF, ancestral properties acquired pre-HUF formation would automatically belong to the HUF upon its creation.

6. The Tribunal rejected the argument that the assessee treated himself as a creditor in the transaction, asserting that once property becomes HUF property, its character cannot be altered by subsequent book entries. Consequently, the Tribunal held that the Grove Estate should be considered as belonging to the assessee HUF, overturning the AAC's decision.

7. Ultimately, the Tribunal allowed the appeals by the Department, setting aside the AAC's orders and reinstating those of the ITO, thereby affirming the Grove Estate's classification as HUF property and the corresponding income as that of the assessee HUF.