1973 (3) TMI 35 - HC - Income Tax

Hindu undivided family - HUF is partitioned according to the shares of the members - if they form a partnership, whether the partition is valid and the firm is entitled to registration

Summary

Issues Involved:
1. Refusal to register the firm of Hotchand Chattaram.
2. Assessment made in the status of a Hindu undivided family.

Issue-wise Detailed Analysis:

1. Refusal to Register the Firm of Hotchand Chattaram
The primary issue was whether the refusal to register the firm under section 26A of the Indian Income-tax Act, 1922, was justified. The Income-tax Officer rejected the application for registration, asserting that no genuine partition of the Hindu undivided family (HUF) occurred, thus no genuine partnership firm was formed. The Appellate Assistant Commissioner overturned this decision, finding substantial evidence of a complete partition and the formation of a partnership firm. However, the Appellate Tribunal reversed this, citing discrepancies in the partition deed and the partnership deed, and the lack of proof of the Rs. 10,000 advance by Muli Bai.

The High Court found that both the Income-tax Officer and the Tribunal operated under erroneous assumptions. They incorrectly believed that a strict partition of assets and liabilities was necessary for a valid partition, which is not a legal requirement. The High Court noted that the facts, including the registration of the firm with the Registrar of Firms, opening of a bank account, and sales tax assessments, supported the existence of a genuine partnership. The High Court emphasized that an unequal partition is not unknown to law and does not invalidate the partition.

2. Assessment Made in the Status of a Hindu Undivided Family
The second issue was whether the assessment in the status of a Hindu undivided family was justified. The Income-tax Officer and the Tribunal held that since there was no genuine partition, the business should be assessed as a HUF. The Appellate Assistant Commissioner disagreed, directing that the assessments be made in the status of a registered firm. The High Court supported this view, stating that the evidence indicated a genuine partition and the formation of a partnership firm.

The High Court also addressed the contention that without an order under section 25A recognizing the partition, the HUF could not be considered disrupted for tax purposes. The Supreme Court's ruling in Additional Income-tax Officer v. A. Thimmayya clarified that a HUF continues to be assessed as such until a partition is recognized. However, the High Court found that the Income-tax Officer's composite order, which refused to recognize the partition and rejected the registration application, was incorrect. The High Court concluded that the assessments should be made in the status of a registered firm, not as a HUF.

Conclusion
The High Court concluded that the refusal to register the firm was unjustified and that the assessments made in the status of a Hindu undivided family were also unjustified. The court emphasized that the evidence supported the existence of a genuine partnership firm and that the partition, though complicated, was valid. The questions referred were answered in the negative and against the revenue, with costs awarded to the petitioner.