1978 (8) TMI 122 - AT - Income Tax

Summary

Issues Involved:
1. Legality of the reassessment proceedings under section 147(b).
2. Validity of the blending of individual property into joint family property.
3. Applicability of section 64(2) to the income from the property converted into joint family property.
4. Division of the share in the firm and its impact on tax assessment.
5. Assessment of income between the period 2nd April 1970 and 16th April 1970.

Detailed Analysis:

1. Legality of the Reassessment Proceedings under Section 147(b):
The assessee contended that the reassessment proceedings initiated under section 147(b) were "ab initio illegal." The Income Tax Officer (ITO) had received an audit objection pointing out that section 64(2) applied to the property thrown into the common hotchpot, resulting in income escaping assessment. The Appellate Assistant Commissioner (AAC) rejected the assessee's claim, validating the reassessment proceedings.

2. Validity of the Blending of Individual Property into Joint Family Property:
The assessee had impressed his interest in the firm M/s Cork Industries with the character of joint family property on 2nd April 1970. The Department objected, arguing that share income from a firm includes both assets and liabilities, and thus cannot be thrown into the common hotchpot. However, the Tribunal found this argument to be a misconception, stating, "Even from a purely theoretical point of view there can scarcely be an asset unencumbered with some liability or other." The Tribunal concluded that the net assets represented by the assessee's interest in the firm could be thrown into the common hotchpot of the joint family.

3. Applicability of Section 64(2) to the Income from the Property Converted into Joint Family Property:
The Tribunal noted that after the property was thrown into the common hotchpot, it became the property of the joint Hindu family. The Department argued that section 64 applied, requiring the entire 14/64 share in Cork Industries to be assessable in the hands of the individual assessee. The Tribunal disagreed, stating, "The income after 16th April 1970 is clearly to be assessed in the hands of the HUF consisting of the assessee and his wife."

4. Division of the Share in the Firm and Its Impact on Tax Assessment:
The Tribunal examined whether the share in the firm could be partitioned among the co-parceners of a family. Citing the case of Charandas Bharidas vs. CIT, the Tribunal explained that while the law of partnership does not account for a Hindu Undivided Family (HUF), the Hindu law permits a partition of the family, including a partial partition. The Tribunal concluded that the 14/64 share was divisible among the three entities: the assessee, a HUF consisting of himself and his wife, and the two joint families of his sons. Consequently, only 1/3rd of the 14/64 share was assessable in the hands of the individual assessee.

5. Assessment of Income Between the Period 2nd April 1970 and 16th April 1970:
The Tribunal addressed the nature of income earned during this period, noting that section 64(2) prior to its amendment in 1976 would apply. The Tribunal remanded the matter back to the AAC to take note of the interpretation of section 64(2) and make a computation of the likely income of the firm during this period. The Tribunal accepted the assessee's argument that since a partial partition of the assets had already been effected on 16th April 1970, no share under section 64(2) could be included in the income of the assessee. Thus, no share for this period was assessable in the individual's hands.

Conclusion:
The Tribunal allowed the assessee's appeals and dismissed the Departmental appeals, concluding that the reassessment proceedings were valid, the blending of individual property into joint family property was lawful, and only 1/3rd of the share income was assessable in the hands of the individual assessee. The income earned between 2nd April 1970 and 16th April 1970 was not assessable in the individual's hands under section 64(2).