S.V. DALAPPA v. INCOME TAX OFFICER
[Citation -1984-LL-0817-4]

Citation 1984-LL-0817-4
Appellant Name S.V. DALAPPA
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 17/08/1984
Assessment Year 1980-81
Judgment View Judgment
Keyword Tags hindu undivided family • grant of registration • joint family property • capital contribution • partial partition • physical division • registered firm • total partition • capital account • value of stock • closing stock • share income • karta
Bot Summary: The income earned by the firm was income of that assessable entity and not that of the HUF. Unless there was some direct relationship between the HUF and the firm, the income of the firm could never be assessed in the hands of the HUF. In the hands of the firm could never be assessed in the hands of the HUF. In the hands of the partners, he submitted, the income of the firm became share income. The firm derived income, he stated, primarily because of personal exertions of the partners and the income could not be considered as having been earned by utilisation of HUF funds. The Court thereafter has held: Having held that the assessee was not entitled to claim that a partial partition had taken place under section 171, the High Court fell into an error in holding that the income of the properties which were the subject-matter of partial partition could not be included in the total income of the assessee by relying upon the decisions which had been rendered on the basis of section 25A of the 1922 Act which had been construed as not being applicable to partial partitions. We have already held that section 171 of the Act applies to all partitions-total and partial-and that unless a finding is recorded under section 171 that a partial partition has taken place the income from the properties should be included in the total income of the family by virtue of sub-section of section 171 of the Act. The property which is the subject-matter of partial partition would continue to be treated as belonging to the family and its income would continue to be included in its total income until such a finding is recorded. In examining whether the income is that of the HUF or of the individual members, we would state that the principle is that the burden of proving in such cases that the income is the income of the HUF and not that of the members is upon the department as pointed out by the High Court of Madhya Pradesh in S.S. Khubchand Motilal Jain's case. There is no such agreement in the present case and we do not consider that any bifurcation could be made between the income belonging to the HUF and the income sought to be considered as belonging to the particular partner from the profits of the firm.


This appeal is by assessee and relates to assessment year 1980- 81. assessee is HUF. family consisted of Shri S.V. Dalappa and his two sons, Mohana Rao and Jagadeeswara Rao. They carried on joint family business as cloth merchants at Cheepurupalli in Srikakulam district, under name and style of S.V. Dalappa & Sons. According to assessee, partial partition of above joint family took place on 31-3-1979. This partition was recognised by order passed by ITO under section 171(9) of Income- tax Act, 1961 ('the Act') on 29-11-1979. By said partition, amount lying in capital account in joint family business was divided amongst father and two sons. father and two sons entered into partnership and deed in that regard was executed on 5-5-1979. One of clauses stated: " three partners agreed to carry on business in partnership by taking business with sundry debtors, sundry creditors, closing stock and cash, etc., of HUF of Sunkari Venkata Dalappa, Cheepurupalli, as at 31-3- 1979. " Regarding capital contribution, there was further clause: " 5. capital of partnership business is as follows: Rs. 1. Sunkari Venkata Dalappa, first partner 14,643.50 2. Sunkari Mohana Rao, second partner 14,643.49 3. Sunkari Jagadeswara Rao, third partner 14,643.49 " capital was excess of value of assets over liabilities divided equally amongst father and two sons. 2. For assessment year 1980-81, assessee sought for registration. Originally, registration was refused but there were appeals and eventually matter came to be decided by Tribunal in IT Appeal No. 1309 (Hyd.) of 1982, dated 27-7-1983, wherein facts were elaborated upon. Tribunal concluded that notwithstanding provisions of section 17J(9), introduced with effect from 1-4-1980, since provisions did not invalidate partial partitions under general Hindu law, but only deemed that partial partition did not take place for certain purposes enumerated in said sub-section, there was no b r to partnership constituted by members of erstwhile joint family if otherwise permissible, and after examining various aspects, Tribunal came to conclusion that there was valid partnership in law and upheld order of first appellate authority granting registration. 3. assessment of HUF was made on 16-12-1982. ITO was of view that partial partition was to be derecognised in view of amendment in section 171(9), referred to above, which came into effect from 1- 4-1980, for assessment year 1980-81. Therefore, income as determined in assessment of firm was included in hands of assessee-HUF in assessment order dated 16-12-1982. There was appeal and appeal has been decided by AAC on 31-10-1983. AAC held that notwithstanding grant of registration, in view of provisions of section 171(9), entire income of firm had to be assessed in hands of assessee-HUF. After deducting firm's tax, balance amount came to Rs. 28,406 and AAC held that this amount of Rs. 28,406 was to be treated as income from firm in lieu of Rs. 29,700 assessed. 4. assessee is in appeal before us. It is contended that provisions of section 171(9) do not authorise inclusion of share income in hands of assessee-HUF. learned counsel placed considerable reliance on decision of Supreme Court in CIT v. Prem Bhai Parekh [1970] 77 ITR 27. He submitted that provisions of section 171(9) by fiction created artificial income for HUF. Normally, income relating to assets, which were subject of partial partition, would go out of fold of HUF and by directing that partition is to be ignored, section 171(9) created fiction. effect of such fiction had to be interpreted in restrictive manner, because income created was really artificial income. He stated that firm was different entity, that is why registration was granted to firm. income earned by firm was, therefore, income of that assessable entity and not that of HUF. Unless there was some direct relationship between HUF and firm, income of firm could never be assessed in hands of HUF. In hands of firm could never be assessed in hands of HUF. In hands of partners, he submitted, income of firm became share income. question of further inclusion on basis of fiction in hands of HUF would not, according to him, arise. He also submitted that in case relied on by him, Supreme Court had held that connection between gifts made by assessee and income earned by minors was remote one and it could not be said to arise directly or indirectly from transfer of assets. So, also, in present case, income of firm could not be said to have arisen directly or indirectly out of assets transferred by HUF to firm. income arose because partners were working full time. other salary payments were only in region of Rs. 3,000. firm derived income, he stated, primarily because of personal exertions of partners and, therefore, income could not be considered as having been earned by utilisation of HUF funds. In any view of matter, he, therefore, submitted that income had to be eluded from hands of assessee-HUF. He also relied on order expressing minority view in ITO v. R. Brahadeeswaran [1983] 6 ITD 798 (Mad.)(TM). 5. learned departmental representative, in reply, submitted that following ratio of judgment of Supreme Court in CIT v. S. Teja Singh [1959] 35 ITR 408, it was well settled that in construing scope of legal fiction, it would be proper and even necessary to assume all those facts on which alone, fiction can operate and further, construction which defeated very object sought to be achieved by Legislature must, if possible, be avoided. He stated that there was ample authority for proposition that if HUF funds were invested by karta in partnership, share income from partnership was liable to be taxed as family income. In this regard, decision of Calcutta High Court in Kaniram Hazarimull v. CIT [1955] 27 ITR 294 was one of cases relied on and other cases referred to were those of Mangalchand Mohanlal, In re. [1952] 21 ITR 164 (All.) and S.S. Khubchand Motilal Jain v. CIT [1975] 100 ITR 206 (MP). 6. We have considered rival submissions. provisions of section 171(9), together with Explanation thereto, read as under: " Notwithstanding anything contained in foregoing provisions of this section, where partial partition has taken place after 31st day of December, 1978, among members of Hindu undivided family hitherto assessed as undivided,-- (a) no claim that such partial partition has taken place shall be inquired into under sub-section (2) and no finding shall be recorded under sub-section (3) that such partial partition had taken place and any finding recorded under sub-section (3) to that effect whether before or after 18th day of June, 1980, being date of introduction of Finance (No. 2) Bill, 1980, shall be null and void; (b) such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken place; (c) each member or group of members of such family immediately before such partial partition and family shall be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under this Act by family in respect of any period, whether before or after such partial partition; (d) several liability of any member or group of members aforesaid shall be computed according to portion of joint family property allotted to him or it at such partial partition, and provisions of this Act shall apply accordingly. Explanation: In this section,-- (a) 'partition' means-- (i) where property admits of physical division, physical division of property, but physical division of income without physical division of property producing income shall not be deemed to be partition; or (ii) where property does not admit of physical division, then such division as property admits of, but mere severance of status shall not be deemed to be partition; (b) 'partial partition' means partition which is partial as regards persons constituting Hindu undivided family, or properties belonging to Hindu undivided family, or both. " By virtue of provisions of section 171(9)(a), order recording that there was partial partition which was made by ITO, dated 29-11-1979, has become null and void. partition, according to assessee, had taken place on 31-3-1979 and, therefore, in terms of section 171(9)(a), no finding was to be recorded that there was partial partition and even such claim was not to be enquired into. result is that claim of partial partition made by assessee becomes, as far as provisions of section 171 are concerned, non est on facts. 7. Under provisions of section 171(9)(a), family assessed as undivided shall be deemed, for purposes of Act, to continue as HUF except where finding of partition has been given. Therefore, HUF is to continue for purposes of Act, since question of giving finding that there was partition does not arise. It is only where finding of total or partial finding is recorded that total income of family subsequent to date of partition is to be assessed separately. income prior to date of partition, it follows, under section 171(4), is to be assessed in hands of HUF as if there was no partition. 8. Supreme Court in case of Kalloomal Tapeswari Prasad (HUF) v. CIT [1982] 133 ITR 690 had occasion to examine scheme of section 171 in detail. Court observed: " After partial partition as regards property, property divided is held by members of undivided family as divided members with all incidents flowing therefrom and property not so divided as members of undivided family. fiction enacted in section 171(1) of Act can, therefore, operate in such case also because family which has become divided as regards property which is subject-matter of partial partition is deemed to continue as owner of that property and recipient of income derived from it except where and in so far as finding of partition has been given under section 171. In such case it is obvious that real state of affairs is in fact different from what is created by fiction and it cannot be said that there is no occasion for fiction to operate. That is true meaning of section 171(1) of Act. In view of substantial changes that are brought about in section 171, we find it impossible to accept contention that fiction in section 171(l) of Act does not operate in case of partial partitions as regards property where composition of family has remained unchanged. " Court thereafter has held: " Having held that assessee was not entitled to claim that partial partition had taken place under section 171, High Court fell into error in holding that income of properties which were subject-matter of partial partition could not be included in total income of assessee by relying upon decisions which had been rendered on basis of section 25A of 1922 Act which had been construed as not being applicable to partial partitions. We have already held that section 171 of Act applies to all partitions--total and partial--and that unless finding is recorded under section 171 that partial partition has taken place income from properties should be included in total income of family by virtue of sub-section (1) of section 171 of Act. To put it in other words, what would have been position of HUF, which had claimed in assessment proceedings under 1922 Act that total partition had taken place and had failed to secure finding to that effect in its favour under section 25A thereof, would be position of HUF, which has failed to substantiate its plea of partial partition as regards property under section 171 of Act. property which is subject-matter of partial partition would continue to be treated as belonging to family and its income would continue to be included in its total income until such finding is recorded. That is true effect of section 171(1). It was, however, urged on analogy of income from family property alienated by karta in favour of stranger that income which was not actually received by family could not be taxed and in support of this plea reliance was placed on decision of Madras High Court in A. Kannan Chetty v. CIT [1963] 50 ITR 601, 612. In that decision, it is observed thus: 'For instance, if karta of family effects alienation or even makes gift, in so far as taxing department is concerned, it is income of members of Hindu undivided family that can be assessed, and if by reason of alienation, whether it is binding upon members of joint family or not, item of property ceases to be in hands of joint family, it would not be open to department to say that they would ignore such alienation, notwithstanding that possession of properties and its income may pass into hands of stranger. It may be different in cases where joint family deals with one or more items of property or converts it into different estate retaining both possession and income in its own hands. That may properly be case where department may ignore such transaction.' It is significant that in passage extracted above, Madras High Court has distinguished case of alienation in favour of stranger from case where joint family deals with one or more items of property or converts it into different estate retaining both possession and income in its own hands. We do not consider that such plea is available to assessee because acceptance of such plea would lead to nullification of scheme of section 171 of Act itself. As long as finding is not recorded under section 171 holding that partial partition had taken place, HUF should be deemed for purposes of Act to be owner of property which is subject- matter of partition and also recipient of income from such property. assessment should be made as such and tax assessed can be recovered as provided in Act. In circumstances, decision of High Court on second question has to be reversed.... " So, in present case, claim of partial partition, in view of provisions of section 171(9), could not be enquired into and order recognising partial partition, though it had actually been passed, has become null and void. result is that there is no partial partition recognised under section 171 and in view of ratio of judgment of Supreme Court, referred to above, HUF has to be deemed to be owner of all property it was possessed of which was subject-matter of partition and has also to be deemed to be recipient of income from such property. 9. Notwithstanding partial partition being non est in view of provisions of section 171(9), members were not prohibited from entering into partnership and such partnership has also been recognised in IT Appeal No. 1309 (Hyd.) of 1982 dated 27-7-1983 by this Tribunal. Supreme Court, in Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33, had set out certain tests to determine whether income could be considered to be that of HUF or not. These tests are as under: " ...The other tests enumerated are: (1) Whether income received by coparcener of Hindu undivided family as remuneration had any real connection with investment of joint family funds? (2) Whether income received was directly related to any utilization of family assets? (3) Whether family had suffered any detriment in process of realization of income? and (4) Whether income was received with aid and assistance of family funds? In our opinion from these subsidiary principles, broader principle that emerges is whether remuneration received by coparcener in substance though not in form was but one of modes of return made to family because of investment of family funds in business or whether it was compensation made for services rendered by individual coparcener. If it is former, it is income of Hindu undivided family but if it is latter then it is income of individual coparcener. If income was essentially earned as result of funds invested fact that coparcener has rendered some service would not change character of receipt. But if on other hand it is essentially remuneration for services rendered by coparcener, circumstances that his services were availed of because of reason that he was member of family which had invested funds in that business or that he had obtained qualification shares from out of family funds would not make receipt, income of Hindu undivided family.... " In P.M. Krishna Iyer v. CIT [1969] 73 ITR 539, Supreme Court had In P.M. Krishna Iyer v. CIT [1969] 73 ITR 539, Supreme Court had observed: " Income received by member of Hindu undivided family from firm or company in which funds of Hindu undivided family are invested, even though income may be partially traceable to personal exertion of member, is taxable as income of Hindu undivided family, if it is earned by detriment to family funds or with aid or assistance of those funds; otherwise it is taxable as member's separate income. " In examining whether income is that of HUF or of individual members, we would state that principle is that burden of proving in such cases that income is income of HUF and not that of members is upon department as pointed out by High Court of Madhya Pradesh in S.S. Khubchand Motilal Jain's case. 10. In present case, there is validly constituted firm. Tribunal has already held that such firm is entitled to grant of registration. Income-tax Act provides that where firm is treated as registered firm, income has to be apportioned to partners. That is what has been done in present case. It is apportioned to father and two sons. At this stage, question arises as to in whose hands, income so apportioned is to be taxed. learned counsel very fairly placed all relevant facts before us and what we find is stocks worth Rs. 1,43,171, which belonged to family business, were taken over and traded in by father and two sons who became partners of firm. aggregate turnover came to Rs. 4,02,000. No doubt, they worked full time because salary paid to others is only in region of Rs. 3,000. In this background, we have to apply tests enumerated in case of Raj Kumar Singh Hukum Chandji. income had real connection with utilisation of joint family funds, because value of stock was more than one-third of total turnover. It was directly related to utilisation of family assets and family assets had suffered detriment in process of realisation of income, because stock was sold and income was received with aid and assistance of family funds. Once partial partition is non est, in aforesaid background, and in view of ratio of judgment of Supreme Court in case of Kalloomal Tapeswari Prasad (HUF) already referred to HUF has to be considered to be recipient of income. If it was considered by partners that their personal exertion in earning income was paramount, they could have provided for partners being individually remunerated since partnership is matter of contract. There is no such agreement in present case and we do not, therefore, consider that any bifurcation could be made between income belonging to HUF and income sought to be considered as belonging to particular partner from profits of firm. In light of our aforesaid findings, order of AAC is upheld and appeal of assessee is dismissed. *** S.V. DALAPPA v. INCOME TAX OFFICER
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