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Seth Puran Chand (Huf) Vs. Income-tax Appellate Tribunal and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 171 of 1977
Judge
Reported in[1981]127ITR773(All)
AppellantSeth Puran Chand (Huf)
Respondentincome-tax Appellate Tribunal and ors.
Appellant AdvocateL.P. Naithani, Adv.
Respondent AdvocateR.K. Gulati and ;A. Gupta, Advs.
Excerpt:
.....to the company and should be taxed as their individual income and not that of an huf, which is the assessee in the present..........in holding that the salaries enjoyed by seth puran chand and shri ram niranjan from the kundan sugar mills p. ltd. constituted their individual income '2. coming to the first question, which is at the instance of the assessee, the relevant facts are these : an huf owned a sugar mill being the kundan sugar mills. in 1951, there was a partition in the family and the business was being run by the firm. the firm had three partners, two of whom represented their smaller huf which had come into existence as a result of a partition. the assessee was one of the kartas who represented the smaller huf. this firm was dissolved on december 14, 1961, and in the dissolution, the assessee's family got the business of kundan sugar mills. it ran the mills up to 31st october, 1922, and thereafter this.....
Judgment:

C.S.P. Singh, J.

1. This is a composite reference, one question at the instance of the assessee, and the other at the instance of the department. The two questions referred are :

' 1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in coming to the conclusion that the sum of Rs. 3 lakhs is the income assessable under the head 'Income from other sources' and not the income from business ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the salaries enjoyed by Seth Puran Chand and Shri Ram Niranjan from the Kundan Sugar Mills P. Ltd. constituted their individual income '

2. Coming to the first question, which is at the instance of the assessee, the relevant facts are these : An HUF owned a sugar mill being the Kundan Sugar Mills. In 1951, there was a partition in the family and the business was being run by the firm. The firm had three partners, two of whom represented their smaller HUF which had come into existence as a result of a partition. The assessee was one of the kartas who represented the smaller HUF. This firm was dissolved on December 14, 1961, and in the dissolution, the assessee's family got the business of Kundan Sugar Mills. It ran the mills up to 31st October, 1922, and thereafter this running business including all assets and liabilities was taken over by the newly constituted company, known as Kundan Sugar Mills P. Ltd. No formal transfer deed or agreement was made for effecting this change. All that happened was that the board of directors of the company passed a resolution stating that the running business of the HUF along with all the assets and liabilities had been taken over by the company and the company would pay an amount of Rs. 3,00,000 per year till the company was in a position to purchase land, buildings, plant, machinery, etc., of the mills. From this date the mills are being run by the company and the assessee has been receiving Rs. 3,00,000 per annum as lease money. The question that arose was under which head of income was this lease money chargeable. The ITO held that inasmuch as the assessee had totally closed its business of manufacture and sale of sugar when the same was transferred to the limited company, it showed that the assessee had no intention of carrying on the business itself at any time in the future. He, therefore, assessed the lease income as 'income from other sources' instead of as 'income from business'. The AAC upheld the view of the ITO. On appeal to the Tribunal, it was held that the conduct of the assessee and the company clearly indicated that the assessee had altogether given up its intention to run and operate the sugar mills, inasmuch as the assessee had transferred the entire running business of the sugar mills to the company. It, accordingly, held that the lease money had to be taxed under the head 'Income from other sources' and not as 'Income from business.' In holding so, it relied on New Savan Sugar and Gur Refining Co. Ltd. v. CIT : [1969]74ITR7(SC) . Counsel for the assessee has not been able to persuade us that the ratio of the New Savan Sugar and Gur Refining Co. Ltd. will not apply to the present case. We think that the Tribunal was right in holding against the assessee on this point.

3. Coming now to the second question, the facts leading to the lease of the sugar mills business have already been set out earlier. The additional facts necessary to be noticed for answering the second question are now being detailed. After the company took over the sugar mills it appointed Seth Puran Chand, assessee, as managing director and Ram Niranjan as a director on a salary of Rs. 3,500 and Rs. 1,500 per month, respectively. Certain other perquisites were granted to these directors. The assessee claimed that the salaries were enjoyed by them for their individual efforts and services rendered to the company and should be taxed as their individual income and not that of an HUF, which is the assessee in the present case. The ITO, however, held against the assessee. On an appeal being filed the AAC found that there was no evidence on record to indicate that the investments made came from any independent sources. He, as such, held that the share investment came to the company from the HUF funds. He also held that plant, machinery, building, etc., worth Rs. 25 lakhs belonging to the HUF were given on a lease of only Rs. 3 lakhs per annum, when the depreciation of these assets amounted to Rs. 2 lakhs per year. Apart from this the HUF had made additions to the building, plant and machinery year after year without increasing the lease money. The additions in the year 1963-64 amounted to Rs. 2,55,216 and in the year 1962-63 they were Rs. 2,09,135. Apart from this the HUF had incurred establishment expenses varying from Rs. 20,000 to Rs. 30,000 per year although under the lease there was no such, liability. The HUF had also offered its assets as security for making funds available to the limited company. On these considerations, he held that the lease amount paid by the company to the HUF was inadequate, considering the assets leased out and the other facilities given to it by the HUF. He, accordingly, held that the salaries paid to the two members of the HUF were by way of compensation for use of the family assets in the business of the limited company. The assessee took up the matter in appeal before the Tribunal. The Tribunal noticed the various reasons given by the AAC and the ITO for holding that the salary income was chargeable in the hands of the HUF and did not record its express dissent from the view expressed by the AAC on these matters. It, however, held that inasmuch as the HUF had not advanced any money to the company, the salary income did not have any nexus with the HUF assets or funds, and, as such, the salary received by the two coparceners of the assessee was chargeable in their individual assessments. We are of the view that the Tribunal should have considered the various circumstances relied upon by the AAC before arriving at this conclusion. No doubt, the fact that the HUF had not advanced any money to the company was a relevant factor to be taken into account for adjudging whether the salary should be charged in the hands of the coparceners in their individual assessments or treated to be the income of the HUF, but the other circumstances considered by the AAC were equally relevant for deciding this issue. It would have been worthwhile for the Tribunal to have considered the decisions of the Supreme Court in the case of P.N. Krishna Iyer v. CIT : [1969]73ITR539(SC) and in the case of Raj Kumar Singh Hukam Chand v. CIT : [1970]78ITR33(SC) , before deciding this matter. As the Tribunal has not recorded any clear finding on the various relevant aspects which had to be considered before any conclusion could be reached as to the taxability of the salaries in the hands of the HUF, it is not possible for us to answer this question either way. The Tribunal should now reconsider the matter and arrive at a conclusion after considering all the factual matters involved in the controversy. The second question has, as such, to be left unanswered.

4. We, accordingly, answer the first question in the affirmative and return the second question unanswered. The department is entitled to costs which are assessed at Rs. 200 and the counsel fee at the same figure.


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