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Commissioner of Income-tax, Nagpur Vs. Nemkumar Porwal and Others - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 176 of 1980
Judge
Reported in[1984]148ITR30(Bom); [1984]18TAXMAN382(Bom)
ActsIncome Tax Act, 1961 - Sections 171
AppellantCommissioner of Income-tax, Nagpur
RespondentNemkumar Porwal and Others
Excerpt:
.....partition could it be said that there was overriding title created in favour of divided members - share income from firm ceased to be joint property and respective members became owners of their individual share in income - when partner of firm received income by way of share in partnership firm he was receiving it not on behalf of huf but as representative of seven persons who in their own rights entitled to share of income by partition - held, assessee to be assessed in status of association of person. - - pyarchand keshrimal porwal and that the 70% shares in the profits and losses belonged to the huf represented by nemkumar till diwali ending 1966. it also recites that it has been agreed among the members orally as from november 13, 1966, that the said share and share income is..........the huf represented by nemkumar was a partner in the firm of m/s. p. k. porwal, kamptee, having a share income of 70%. there was a partial partition among the members of the huf which is evidenced by a partial partition agreement dated september 7, 1967.2. this agreement recites that nemkumar was a partner in the firm of m/s. pyarchand keshrimal porwal and that the 70% shares in the profits and losses belonged to the huf represented by nemkumar till diwali ending 1966. it also recites that it has been agreed among the members orally as from november 13, 1966, that the said share and share income is 'agreed to be partitioned' among the members of the huf and each member will have one-seventh share, of which each will be the absolute owner as a result of the partial partition and each.....
Judgment:

Chandurkar, J.

1. The assessment years in question in this reference are 1968-69, 1969-70, 1973-74, and 1974-75. The HUF in this case consisted of Shri Nemkumar Porwal, his five minor sons Sushilkumar, Rakeshkumar, Rajeshkumar, Sunilkumar and Sanjivkumar and his wife, Smt. Chintamani Devi. The HUF represented by Nemkumar was a partner in the firm of M/s. P. K. Porwal, Kamptee, having a share income of 70%. There was a partial partition among the members of the HUF which is evidenced by a partial partition agreement dated September 7, 1967.

2. This agreement recites that Nemkumar was a partner in the firm of M/s. Pyarchand Keshrimal Porwal and that the 70% shares in the profits and losses belonged to the HUF represented by Nemkumar till Diwali ending 1966. It also recites that it has been agreed among the members orally as from November 13, 1966, that the said share and share income is 'agreed to be partitioned' among the members of the HUF and each member will have one-seventh share, of which each will be the absolute owner as a result of the partial partition and each member will be free to enjoy the same as per his or her own free will as from November 13, 1966. The agreement contains a declaration that the share income from the said firm of M/s. Pyarchand Keshrimal Porwal accruing to the share of Nemkumar after November 13, 1966, has ceased to be the joint property and share income of the said family and the respective members have each become the absolute owner of one-seventh of the said share income.

3. This partial partition has been recognized by the ITO by an order made under s. 171 of the I.T. Act, 1961, on February 21, 1972 (annex.'B' to the statement of case).

4. For the assessment year 1968-69, the ITO took the view that though there was no HUF subsequent to the date of partition, an association of persons had come into existence from that date, as there was common intention on the part of various members of the group to derive income by employing capital for the common benefit of all the members. The share income in the partnership firm was thus assessed in the hands of an association of persons consisting of the erstwhile members of the HUF. For the subsequent years 1969-70, 1973-74 and 1974-75 also, the ITO assessed the erstwhile members of the HUF as an association of persons.

5. In appeal against the orders for the assessment years 1968-69 and 1969-70, the AAC held that because of the partition the separated members had their separate one-seventh share. These orders of the AAC were challenged by the ITO before the Income-tax Appellate Tribunal, and the Tribunal set aside the orders of the AAC and remanded the matter to him for a fresh decision. On remand, the AAC took the view that the agreement of partition created an overriding title in favour of the divided members and that there was no association of persons and, therefore, the divided members had to be assessed individually in respect of their share of the share income. He took the same view in the appeals for the subsequent assessment years 1973-74 and 1974-75 and cancelled the assessments made in the status of an association of persons.

6. When the matter went to the Tribunal in appeals filed by the ITO, the Tribunal dismissed the appeals holding that the ITO had erred in assessing the assessee in the status of an association of persons. All the Departmental appeals for the assessment years in question were, therefore, dismissed by a common order.

7. Arising out of this common order, the following questions have been referred by the Tribunal at the instance of the Revenue :

'(1) Whether, on the facts and in the circumstances of the case, having accepted the partial partition, could it be said that there was an overriding title created ?

(2) After the acceptance of partial partition and having given a finding that there is a clear-cut diversion of income, can it be said that there was an association of persons in existence ?'

8. The answer to question No. 1 depends on the legal position with regard to the nature of income received by Nemkumar by way of the share of profits from the partnership firm. This, in turn, will depend upon the effect of the partial partition on the status of Nemkumar as a partner in the partner ship firm. Now, admittedly, there was a partial partition on November 13, 1966, which has been recognised by the ITO. The effect of that partition is that though Nemkumar continued to be a partner in the partnership firm, it was not in his capacity as a manager of the HUF but he represented the interests of all the seven members independently among whom there was a partial partition on November 13, 1966. Nemkumar is a party to the partial partition, and there is a positive declaration in the partition deed that the share income from the said firm has ceased to be the joint property and the respective members have become owners of their individual share in the income. It is obvious, therefore, that Nemkumar, when he received income by way of share in the partnership firm, was receiving it not on behalf of any HUF but as a representative of seven persons who, in their own right, were entitled to share of income by virtue of the partition of November 13, 1966.

9. We may usefully refer to our decision in CIT v. M. D.Kanoria : [1982]137ITR137(Bom) , where, on similar facts, we have held that the income received by the erstwhile karta of the HUF from the partnership firm in which the karta originally represented the HUF, but where there was subsequent partition among the members of the HUF, is received by him as a representative of the different members of the joint family and that where there is a diversion by overriding title of the income of the other members. This question has been elaborately discussed in Kanoria's case : [1982]137ITR137(Bom) , and we see no reason to repeat that discussion in the present case. Consequently, question No. 1 will have to be answered in the affirmative and in favour of the assessee.

10. So far as question No. 2 is concerned, we have considered an identical question in Kanoria's case : [1982]137ITR137(Bom) , and we have held that where there is a partition among the members of the HUF which originally held a share in another partnership, then after partition, all the separated members of the HUF cannot mechanically and automatically be assessed in the status of an association of persons, but that the income of each person has to be separately considered for the purposes of assessment, consequent upon partition among the members of the HUF. A natural corollary of this position must be that the answer to question No. 2 has to be in the negative and against the Revenue. The two questions referred are answered as follows :

Question No. 1 : In the affirmative and in favour of the assessee.

Question No. 2 : In the negative and against the Revenue.

11. The assessee to get the costs of this reference.


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