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TMI Blog1989 (7) TMI 161X X X X Extracts X X X X X X X X Extracts X X X X ..... Bimla Devi two minor sons Master Anil Aggarwal and Sunil aggarwal minor daughter Km. Ritu Aggarwal. In the partial partition out of the total investment of Rs. 68,676.19 in the firm IHE a sum of Rs. 10,000 was set apart for the marriage of minor daughter, Km. Ritu and the entire balance investment of Rs. 58,676.19 was allocated between the other members as follows :--- Shri Chaman Prakash Rs. 14,669,05 Smt. Bimla Devi Rs. 14,669.05 Shri Anil Aggarwal Rs. 14,669,05 Shri Sunil Aggarwal Rs. 14,669.04 --------------------------- Rs. 58,676.19 --------------------------- In the entries made in the books of the IHE investment was recorded as divided between the said four persons as also Ritu Aggarwal for her marriage inasmuch as the necessary credit entries were made in their accounts. It was further stated in the memorandum that the parties had acknowledged that they had acquired full rights over their allotted shares of HUF investment in the said concern. Balance sheets were drawn both in the Individual case and in the HUF books on21-3-1973. The credits in the family members accounts by these entries were transferred to the individual account of Chaman Prakash and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly of which Shri Satya Prakash is the karta and the future accretions thereto as well as losses, if any, incurred shall not belong to the Joint Hindu Family." 5. The date of partition in the case of Shri Om Prakash and Sons was the same as in the case of Shri Chaman Prakash Sons and the pattern of memorandum executed was also similar which was also similar which was of21st March 1973. The entries in the firm books in the HUF books and Individual balance sheet were also identical with the only difference of the figure of investment partitioned. In this case equal shares of Rs. 11,361.67 to Shri Om prakash in his individual capacity, his wife Smt. Madhu Aggarwal and minor sons. Atul Aggarwal and Ashish Aggarwal with a provision for marriage of Rs. 10,000 for Km. Suvidha. 6. Though the first case in the caption is that of Shri Chaman Prakash Sons but we propose to take the facts in relation to assessments and orders under section 171 of the I.T. Act, 1961 in the case of Om Prakash Sons, first because not, only these were passed earlier, but the dispute whether after the partial partition the profit share in the name of Shri Om Prakash from IHE belonged to him in his Individu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partial partition made on 21st of March, 1973 covered share of interest in the firm also. It is considered expedient to reproduce the following relevant portion of paragraphs 4 and 5 of the Tribunal's order dated 13th June, 1983 which was the first order in point of time on the question being decided in all the three cases:--- "So far as the First ground is concerned, the matter can be better appreciated by looking to the memorandum of partial partition. The memorandum recognises the partial partition effected between Shri Om Prakash and his minor sons Atul and Ashish. It is in respect of the interest of the family in the partnership firm known as Indian Handicrafts Emporium. The recital, however, reads as follows: "AND WHEREAS the karta desired that the capital belonging to the HUF and invested in M/s. Indian Handicrafts Emporium (after providing for the marriage of Kumari Suvidha) should no longer be the property of the HUF but be distributed amongst the family members in equal proportion". The contention, therefore, raised by the Revenue is that what was divided was only the capital and there was no division of the interest of the family in the partnership concerned. On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continues to be the partner and entitled to the share in the partnership firm while he pays interest on loans taken from the other members of the family. This is a manner by which the partial partition took place. The entire share of profit is enjoyed by the karta and his obligation was to pay interest on the amounts deemed to have been taken as loan from the other members of the family in view of the partial partition. Such a mode of partial partition is also well known and there can be no legal objection to it. Perhaps the karta thought it fit not to see that the minor sons are put in jeopardy as they are not concerned with the losses in the partnership firm. He alone would be entitled to share profits or losses and so far as minors are concerned they would be entitled to interest to be paid by the karta on the amounts because of use of the money in the partnership firm as his capital. The next circumstance is that since the arrangement has been made in the above manner the karta of the family would be entitled to all the profits of the firm; his only obligation is to pay interest on the amounts allotted to other members of the family. This profit was assessed in the hands of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's favour, thought it fit to allow the Revenue's appeal by taking a different view than the one taken on identical set of facts in the case of Shri Om Prakash Sons. The Tribunal Bench in the case of Shri Chaman Prakash and Sons constituted of Shri O.P.Garg and Shri Rajendra, the former having earlier constituted a Bench which had dismissed the Revenue's appeal in the case of Shri Om Prakash Sons [IT Appeal No. 2868 (Delhi) of 1982] in respect of assessment year 1975-76. 11. We have reproduced relevant portion of paras 4 and 5 of the first Tribunal's order in the case of Shri Om Prakash Sons to project the arguments which came to be accepted. Paragraphs 5 to 11 of the Tribunal's order in the case of Shri Chaman Prakash and Sons for assessment year 1973-74 must also be noticed because it is necessary to adjudicate as to which of the two views can be held to be valid and proper i.e. one taken by the Bench earlier on 13th of June, 1983 or the diametrically divergent view on the same set of facts taken in the case of Shri Chaman Prakash and Sons for the same assessment year vide order dated 8th of Sept., 1983 : "5. Being aggrieved from the AAC's finding, revenue has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship of the right to share profits. So far the ITO is concerned, there is no indication that he was ever notified for purpose of sec. 171. It act to the effect that the HUF's right to receive thereof firm's profit was partitioned. 8. ITO's order u/s 171 dated28-2-73only deals with partition of capital in the aforesaid firm. Learned counsel for the assessee particularly submitted that because the assessee HUF stopped including in its Income-tax returns share income in question and because the karta returned entire share income as his individual income, from this conduct the factum of partition of the right to share profits as a consequence of partition of capital invested in the firm should be inferred. There are two aspects. Firstly such a position would be in violation of the provision of sec. 171. It act in the sense that without obtaining a recording of the fact of partition of the said right to a share of profit from the firm claim based on such partition is being put forward. Second aspect is that such conduct on the part of the karta of the HUF is of only of self-serving nature and it cannot in law debar the department from continuing to assess the share income in question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haman Prakash to the extent of capital invested by him as partner. According to Narayanappa Krishnappa, the amount due to a partner on account of capital becomes relevant only at the stage of settlement of accounts u/s 48, Partnership Act after the dissolution of the firm. It clearly implies that the amount of a partner's capital has no relevance during continuance of partnership." 12. After the above order, however, the Revenue's appeal in the case of Shri Chaman Prakash Sons, HUF [IT Appeal Nos. 2299, 2309 and 2865 (Delhi) of 1982] in respect of assessment years 1974-75, 1975-76 and 1976-77, came to be dismissed by the Tribunal by relying on the Tribunal's order in relation to assessment year 1974-75 in the case of ITO v. Om Prakash Sons [IT Appeal No. 2021 (Delhi) of 1982 dated 26-7-1983] and that has given rise to the cause of action for referring of these cases to a Special Bench under section 255(3) of the Act. 13. Shri D.C. Aggarwal, learned Departmental Representative, appearing for the Revenue, very strenuously argued and relying upon the Income-tax Officer's order in the case of Shri Om Prakash Sons which had finally come to be reversed by the Tribunal submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case also. 16. However, in the case of Shri Satya Prakash and Soils, the learned Departmental Representative', fairly accepted that in view of the recitations in the memorandum being different the arguments in relation to other two cases may not be open to the Revenue, but submitted that in the absence of a separate specific agreement that profits or losses shall be home by Shri Satya Prakash, the profit came to be rightly assessed in the hands of the HUF of Satya Prakash and Sons which continued to be separately taxable entity. 17. For the respondent, Shri R. Ganesan, very effectively pleaded that as far as the cases of Shri Om Prakash Sons and Shri Satya Prakash and Sons were concerned, there was no occasion to take a different view than the one adopted by the Tribunal in the earlier order:,. At the same time he Very strongly pleaded that since a reference in terms of section 255(3) has come to be made in view of the divergent views taken on the same set of facts the issue Should be thrashed out and decided once and for all. Mr. Ganesan asserted and argued that 'it was more a question of fact because what was partitioned could be and was only best known to the members of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, and it is the Partnership Act alone which was relevant for finding out who could be Joined as partners. The definition of the term " person "under section 2(31) of the Income-tax Act, 1961 has remained the same and, therefore, the judgment in Agarwal Co.'s case is valid even now. In the said case the Hon'ble Supreme Court further held that when the karta of a Hindu undivided family joins a firm as a partner, even though he contributes his share from Out Of the family funds, the other members of the family did not ipso facto became partners of that firm. In the present cases the said principle has more relevance because the minors as such could not become partners as such in spite of there being deposits in their names and the wife's admission in the partnership would have made the firm invalid and disentitled to registration in view of the statutory constraints imposed in the Income-tax Act, 1961 20. Therefore, there was no question of either the family remaining as a partner or the partitioned members having enjoyed any rights after21st March, 1973as far as Shri Om Prakash Sons and Shri Chaman Prakash Sons cases go. 21. Next we must briefly refer to the judgment of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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