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TMI Blog1989 (7) TMI 162X X X X Extracts X X X X X X X X Extracts X X X X ..... Aggarwal and Sunil Aggarwal and 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 Total 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 HUF books on21st March, 1973. The credits in the family members accounts by these entries were transferred to the individual account of Chaman Prakash and the investment of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the investment in M/s Indian Handicrafts Emporium no more belongs to the joint Hindu Family 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 partial 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 of21st March, 1973. The entries in the firm s books in the HUF books and individual balance sheet were also identical with the only difference of the figure of investment partioned. In this case capital investment of Rs. 55,446.69 came to be allotted in four 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 s. 171 of the IT Act, 1961 in the case of OM Prakash Sons, first because not only these were passed earlier, but the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal came to be dismissed. The Tribunal opined that the 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 dt.13th June, 1983which 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 Handicraft Emporium. The recital, 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 fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... family is that karta continues to be the partners 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 partnership firm as his capital. The next circumstances is that since the arrangement has been made in the above manner the karta of the family would be entitled to all he 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dispute had been decided in 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 and Sons in respect of asst. yr. 1975-76 (ITA No. 2868 (Del) of (1982)). 11. We have reproduced relevant portion of paras 4 and 5 of the first Tribunal s order in the case of Shri Om Prakash and 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 asst. yr. 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: "Being aggrieved from the AAC s finding. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erned was not informed at all about the change of ownership of the right to share profits. So far the ITO is concerned there is of no indication that he was ever notified for purpose of s. 171 It Act to the effect that the HUF s right to receive there of firm s profit was partitioned. (8) ITO s order under s. 171 dt.28th Feb., 1973only 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 provisions of s. 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inuance of the firm, it could not be said to be a debtor to partner Chaman Prakash to the extent of capital invested by him as partners. According to Narayanappa Krishnappa, the amount due to a partner on account of capital becomes relevant only at the stage of settlement of accounts under 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 Chaman Prakash and Sons, HUF in expect of asst. yrs. 1974-75, 1976-77 and 1975-76 in ITA Nos. 2299, 2309 and 2865 (Del) of 1982 came to be dismissed by the Tribunal by relying on the Tribunal s order dt. 26th July, 1983 in relation to asst. yrs. 1974-75 in ITA No. 2021 (Del) of 1982 in the case of ITO Central Circle-XX, New Delhi vs. Om Prakash and Sons and Sons and that has given rise to the cause of action for referring of these cases to a Special Bench under s. 255(3) of the Act. 13. Shri D.C. Aggarwal, learned Departmental Representative appearing for the Revenue, very strenuously argued and relying upon the ITO s order in the case of shri Om Prakash an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rakash and Sons, the Departmental Representative accepted that the decision in the one shall govern the other case also. 16. However, in the case of Shri Satya Prakash and Sons, 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 borne by Shri Satya Prakash, the profits 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 and 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 orders. At the same time he very strongly pleaded that since a reference in terms of s. 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 mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded an HUF, could not be imported into the Partnership 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 s. 2(31) of IT Act, 1961 has remained the same and, therefore, the judgment in AGARWAL AND CO. s case is valid even now. In the said case the Hon ble Supreme Court further held that when the karta of an HUF 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 t heir names and the wife s admission in the partnership would have made the firm IHE invalid and disentitled to registration in view of the statutory constraints imposed in the IT 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 and Sons and Shri Chaman Prakash and Sons cases go. 21. Next we must briefly re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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