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TMI Blog1988 (5) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... . Kanshi Ram Kishore Chand, Raman Mandi. 4. On 31-3-1979, the HUF effected a partial partition by dividing its capital in the firm M/s. Kanshi Ram Kishore Chand, Raman, and an agreement was executed amongst the members of the HUF to the effect that henceforth the HUF would not be a partner in the aforesaid firm and that Shri Kishore Chand alone to continue to be a partner in the firm, but in individual capacity w.e.f. 1-4-1979. Thus up to the asstt. year 1979-80, the share income from the firm was assessed and accepted in the hands of the HUF and Shri Kishore Chand, it was contended before the ITO that after 31-3-1979, the share income from the firm M/s. Kanshi Ram Kishore Chand Raman belonged to Shri Kishore Chand in his individual capacity and thus it was not taxable in the hands of the assessee-HUF; that even if the partial partition to be de-recognised under the proviso of section 171(9) of the Income-tax Act, 1961 (hereinafter referred to as the Act), it would warrant assessment of the interest earned on the divided capital in the hands of the HUF as before; that the agreement amongst the members of the HUF to withdraw from the partnership w.e.f. 1-4-1979 was an independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. He produced the relevant extract of the case relied upon by the assessee in his order, holding thereby that since the assessee has not invested any separate funds in individual capacity and the capacity of the HUF has been invested for earning share income, therefore, the share income earned from firm is assessable in the hands of HUF. The ITO also relied upon the decision of the Hon'ble Punjab and Haryana High Court in the case of observing therein that when a person acquired land with a view to Harbans Singh v. CIT [1981] 132 ITR 77, setting it later after developing it and actually sells it after dividing it into plots, he is dealing with land as stock-in-trade and carrying on business. Reliance was also placed on the following decisions : 1. S. Bhagwant Singh v. CIT [1960] 38 ITR 436 (Punjab). 2. Daljit Singh v. CIT [1964] 52 ITR 933 (Punjab). 3. New Cotton Wool Pressing Factory's case 73 ITR 423. 4. Ram Narain Bros. v. CIT [1969] (All.). 5. Bhai Sunder Dass Sons' case. Relying on the above decision the ITO observed that a partner could not be said to own the property of the firm and if any income was received from the property owned by firm, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontinuing of Shri Kishore Chand in individual capacity in the firm M/s. Kanshi Ram Kishore Chand. Thus, the AAC on account of the reasons mentioned above and that of the decision of Hon'ble Supreme Court in the case of Prem Bhai Parekh and that of Ram Lal [Appeal No. 606 of 1983-84, dated 7-4-1984] decided by him held that the share income from the firm M/s. Kanshi Ram Kishore Chand, Raman Mandi is not taxable in the hands of the HUF for the assessment years under consideration. He, therefore, set aside the order of the ITO for the inclusion of the share income from the firm mentioned above in the hands of the HUF and thereby deleted the addition made by him for this purpose in each asstt. year. 8. The Revenue being aggrieved has preferred these appeals. Shri S. P. Mehta, the learned DR contends that on the facts and in the circumstances of the cases the AAC has erred in deleting the income of Rs. 7,433, Rs. 5,540 and Rs. 2,040, respectively in each asstt. earned as a partner with the funds of the HUF; that the AAC failed to appreciate that Shri Kishore Chand became partner with the funds of the HUF and that partial partition took place after 31-12-1978. 9. On the other hand, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of it, Shri Kishore Chand, karta of the HUF to be partner therein in his individual capacity. Further, the agreement has no meaning or significance in view of the fact that the firm M/s. Kanshi Ram Kishore Chand had not recognised it and it is HUF, as we have already observed, which is the partner in the books of account of M/s. Kanshi Ram Kishore Chand, Raman. Certainly, it is HUF, which is the partner in the firm in view of the facts that a sum of Rs. 10,000 has been merely credited in the account of Shri Kishore Chand in the books of the firm and Shri Kishore Chand, therefore, did not make any investment in the firm in his individual capacity. 12. Moreover, the HUF did not withdraw its capital from the books of account of M/s. Kanshi Ram Kishore Chand, Raman. What to say of it, the assessee, Shri Kishore Chand in carrying out the agreement of the coparceners and members of the HUF did not withdraw the capital of the HUF in the capacity of its karta and even failed to deposit or make investment of share capital in the firm in his individual capacity. Therefore, in view of the specific fact of this case, which we have mentioned above, there is no doubt in our mind that the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amongst the family members to the effect that Shri Kishore Chand will be partner in that firm in his individual capacity w.e.f. 1-4-1979. The capital standing in the name of Shri Kishore Chand as on 31-3-1979 was Rs. 30,000. This capital was partitioned amongst three coparceners in the ratio of Rs. 10,000 each and the capital off Rs. 10,000 falling to the share of Shri Kishore Chand as a result of partial partition was credited in the account of Shri Kishore Chand, individual, as on 1-4-1979 in the account books of the firm. The ITO noted further that the remaining capital of Rs. 38,938 was credited in a separate account styled as M/s. Kishore Chand. All these facts are mentioned in the combined assessment order passed by the ITO. On these facts and noticing that no capital in individual capacity other than the amount of Rs. 10,000 received on partition was invested by Shri Kishore Chand in the firm and that all the partners of the firm were actively engaged in the conduct of business, the ITO concluded that share of profit earned by Shri Kishore Chand was a result of capital invested on the partial partition of HUF funds. The ITO's order merely emphasises the aspect of share of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd when, in fact, he was merely relying on statutory provisions of section 171(9) of the Act and it was the same case, i.e., the applicability of provisions of section 171(9) of the Act, which was pleaded by the departmental representative while arguing the departmental appeals. When the HUF itself had decided to discontinue its interest in partnership firm, the HUF can no longer think of earning income from that source and clubbing provisions of section 171(9) of the Act will obviously have no applicability in such a situation. The revenue at best could only reach the interest income on the capital contributed by Shri Kishore Chand after the partial partition of the capital of the HUF and that is also the stand of the assessee itself in these appeals and is, therefore, an admitted position in this case. I consequently see no merit in the appeals of the revenue, which are dismissed by me. THIRD MEMBER ORDER Per Shri K. C. Srivastava, Vice President - In these three Departmental appeals there was a difference of opinion between the learned Judicial Member and the learned Accountant Member and the point of difference has been referred to me as Third Member by the President of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued to arise to the HUF notwithstanding the agreement to the contrary. The Income-tax Officer pointed out that the capital of the HUF remained invested with the firm and, therefore, the share income to be included in the hands of the HUF. He declined to recognize the individual capital account of Shri Kishore Chand in view of the provisions of section 171(9). He also referred to the decision in the case of P. N. Krishna Iyer to hold that in spite of personal exertion by Shri Kishore Chand, the share income will be the income of the Hindu undivided family. 5. On appeal the Appellate Assistant Commissioner accepted the plea of the assessee by making the following observations : "4. I have carefully considered all the facts and contentions put before me. The HUF as it existed up to 31-3-1979 effected two specific changes w.e.f. 1-4-1979. One was the agreement amongst its members to withdraw from the partnership firm M/s. Kanshi Ram Kishore Chand, Raman Mandi wherein the firm was up to that date being represented through its Karta Shri Kishore Chand. It was decided that the HUF would no longer be sharing the profits and losses in the said firm w.e.f. 1-4-1979 and if Shri Kishore Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to the learned Judicial Member, the agreement between the members of the learned Judicial Member, the agreement between the members of the family could not be treated in isolation to section 171(9) of the Income-tax Act. He did not agree with the view of the Appellate Assistant Commissioner that the Hindu undivided family could always withdraw from the partners of the firm without going into the question of partial partition. He declined to recognise the investment of Rs. 10,000 by Shri Kishore Chand as he held it to be a part of the investment by the HUF in the absence of partial partition. He also referred to the fact that the capital of the HUF continued to be in the books of the firm. He, therefore, held that the Appellate Assistant Commissioner has committed an error in including the share income from the hands of the HUF. 7. The learned Accountant Member however, took a different view. He referred to the fact that it was open to the HUF to decide to discontinue this partnership in the firm from 1-4-1979 and nobody had doubted the genuineness of this agreement. The learned Accountant Member held the view that as far as the firm was concerned, Shri Kishore Chand was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fail. He submitted that in this case the capital in the firm continued in the same manner though in different names and the share income also was earned by Shri Kishore Chand, who, according to him, it was assessed by him in his individual capacity. He submitted that the share income was also earned to the detriment of the wife's funds and in view of the de-recognition of partial partition this income should continue to be assessed in the hands of the HUF. He, therefore, supported the order of the learned Judicial Member. The learned counsel for the assessee, on the other hand, supported the order of the learned Accountant Member by standing that by the agreement between the members of the family to withdraw from the partnership as its income or loss cannot be ignored and that agreement had not been held to be non-existent or non-genuine by the Income-tax Officer. The share income from the firm was not the subject-matter of partial partition and that was, therefore, not affected by the provisions of section 171(9). He contended that from 1-4-1979 even after derecognising the partial partition only the interest income could be assessed in the hands of the HUF, whereas the share inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r December 31, 1978, made for the first time in the assessment year 1980-81 and that the provision of section 171(9)(a) would not affect a partial partition which has already been recognised in the assessment year 1979-80 and in respect of which a finding has already been recorded in the assessment proceedings for the assessment year 1979-80. This illustrates one set of cases in which partial partitions, though made after December 31, 1978, will not be affected by section 171(9). As section 171(9) refers to a partial partition effected which has taken place among the members of a Hindu undivided family hitherto assessed as undivided, the bar operates only in respect of a partial partition among the members of a Hindu undivided family which was an assessee prior to the assessment year 1980-81, if the partition has taken place after December 31, 1978, but the bar does not operate if there is a partial partition among the members of a Hindu undividend family which is not an assessee for the assessment year 1980-81, if the partition has taken place after December 31, 1978, but the bar does not operate if there is a partial partition among the members of a Hindu undivided family which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed before me, I have to note that the agreement of partial partition had nothing to do with the agreement to withdraw from the partnership firm which was a conscious act on the part of the members of the Hindu undivided family. After this date if there was a loss in the firm Shri Kishore Chand could not call upon the members of the family to be responsible for this loss. In the same way, the HUF could not be entitled to the profits of the firm from 1-4-1980. The provisions of section 171(9) could not affect this income from the firm. "The direct income from the investment of the money was by way of interest and, there is no dispute before me regarding that amount. It has already been offered to be assessed in the hands of the HUF." I find that the share income has been credited in the account of Shri Kishore Chand and not in the account of Shri Kishore Chand Sons in the books of the firm. The Income-tax Officer may not recognise the partial partition but the effect of that is that he would continue to assess the HUF. It would, however, not affect the question of the inclusion of income that the HUF was not at all earning in this period. I, therefore, agree with the learned Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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