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income-tax Officer Vs. Vuddagiri Ramamurthy and Co. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
Reported in(1983)5ITD656(Hyd.)
Appellantincome-tax Officer
RespondentVuddagiri Ramamurthy and Co.
Excerpt:
.....shares, respectively. it was stated that these persons were taken in as partners consequent to partial partitions which took place on 31-3-1979 in the hufs of ramamurthy and gavararaju. the firm applied for registration. the ito referred to the provisions of section 171(9) of the income-tax act, 1961 ('the act') and stated that since the partition had taken place subsequent to 31-12-1978 and it was only a partial partition, in terms of section 171(9) the claim could not be enquired into and the family would continue to be assessed as such.according to the ito, the declaration of partial partition was null and void consequent to the operation of the provisions of section 171 and there were no powers to add the profits accruing to the minors in the hands of the karta and because the.....
Judgment:
1. IT Appeal No. 837 (Hyd.) of 1982 is an appeal by the revenue against the order of the Commissioner (Appeals) directing the grant of registration to the assessee-firm for the assessment year 1980-81 and IT Appeal No. 836 (Hyd.) of 1982 is also an appeal by the revenue against the Commissioner granting certain relief in quantum proceedings.

2. We first take up the appeal on the point of registration. There was a firm constituted under an instrument of partnership dated 26-2-1970, consisting of two partners, V. Gavararaju and V. Ramamurthy with 40 per cent and 60 per cent shares, respectively. Gavararaju had a son, Krishnakishore. Ramamurthy had two sons, Srinivasarao and Govinda-krishna. A fresh instrument of partnership was drawn up on 19-4-1979, By this instrument, with effect from 1-4-1979 two minors, Krishnakishore son of Gavararaju and Srinivasarao son of Ramamurthy, were admitted to the benefits of partnership with 10 per cent and 20 per cent shares, respectively. It was stated that these persons were taken in as partners consequent to partial partitions which took place on 31-3-1979 in the HUFs of Ramamurthy and Gavararaju. The firm applied for registration. The ITO referred to the provisions of Section 171(9) of the Income-tax Act, 1961 ('the Act') and stated that since the partition had taken place subsequent to 31-12-1978 and it was only a partial partition, in terms of Section 171(9) the claim could not be enquired into and the family would continue to be assessed as such.

According to the ITO, the declaration of partial partition was null and void consequent to the operation of the provisions of Section 171 and there were no powers to add the profits accruing to the minors in the hands of the karta and because the partnership deed stated that the minors were admitted to the benefits of partnership consequent to the partition, the ITO concluded that the partition being invalid there could be no admission of the minors without capital and, therefore, though he considered the firm was genuine, he came to the conclusion that registration could not be granted and he cancelled the registration.

3. The assessee appealed and the Commissioner (Appeals) discussed the facts referred to and he concluded that even if Section 171(9) was held to be applicable, the ITO could not refuse registration merely because the partial partition was invalid for purposes of income-tax assessments of the partners. The Commissioner also held that Section 171(9) came into operation only from 1-4-1980 and would not affect cases where claims for partial partition were pending for the assessment year 1979-80 and earlier.

4. The revenue is aggrieved with the findings of the Commissioner (Appeals). The learned departmental representative submitted that since partition being partial cannot be recognised, the refusal of registration was in order. The learned counsel for the assessee, on the other hand, stated that the partnership was valid and the provisions of Section 171(9) did not operate to render an otherwise valid partnership invalid.

5. We have considered the rival submissions. We now have the judgment of the Supreme Court in the case of Kalloomal Tapeswari Prasad (HUF) v.CIT [1982] 133 ITR 690. The case dealt with a set of facts where the assessee was not entitled to claim that a partition had taken place under the provisions of Section 171 in the absence of physical division of properties. The Supreme Court held reversing the High Court's decision as under: ... As long as a finding is not recorded under Section 171 holding that a partial partition had taken place, the HUF should be deemed for the purposes of the Act to be the owner of the property which is the subject-matter of partition and also the recipient of the income from such property. The assessment should be made as such and the tax assessed can be recovered as provided in the Act.... (p. 710) According to the aforesaid observations, all that happened was that the HUF was to be deemed for the purposes of the Act to be the owner of the property which was the subject-matter of partition. The provisions of Section 171(9) read as under: Notwithstanding anything contained in the foregoing provisions of this section where a partial partition has taken place after the 31st day of December, 1978, among the members of a 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 the 18th day of June, 1980, being the date of introduction of the 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 the family shall be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under this Act by the family in respect of any period, whether before or after such partial partition; (d) the several liability of any member or group of members aforesaid shall be computed according to the portion of the joint family property allotted to him or it at such partial partition, There is a bar in cases of partial partition after 31-12-1978 to enquire into such partial partition. The further presumption is that the family would continue to be liable to be assessed under the Act as if no partial partition had taken place and each member or group of members would be jointly and severally liable for tax, penalty, etc.

6. It has been pointed out by the Andhra Pradesh High Court in the case of Ramakrishna Transports v. CIT [1968] 68 ITR 107 that where a member of a HUF became a partner in a firm: ... he or they in such cases occupy a dual position. As between the parties to the contract they are partners and their relationship is regulated by the Partnership Act. They as a rule are personally liable for all the obligations under the contract as against the partners/strangers. In relation to the family members they have a duty to account for the profits that they made. For purpose of income-tax the income derived is assessed to tax as the income of the Hindu undivided family. Thus, the provisions of three distinct laws are attracted in view of the role that they occupy....

The Andhra Pradesh High Court also referred to the observations of the Supreme Court in the case of CIT v. Bagyalakshmi & Co. [1965] 55 ITR 660 which were as under: ... If the distinction between the three concepts is borne in mind much of the confusion disappears. A partnership is a creature of contract. Under Hindu law a joint family is one of status and right to partition is one of its incidents. The income-tax law gives the Income-tax Officer a power to assess the income of a person in the manner provided by the Act. Except where there is a specific provision of the Income-tax Act which derogates from any other statutory law or personal law, the provision will have to be considered in the light of the relevant branches of law. A contract of partnership has no concern with the obligation of the partner to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the karta of a joint Hindu family; he may be a trustee; he may enter into a sub-partnership with others; he may, under an agreement, express or implied, be the representative of a group of persons; he may be a benamidar for another. In all such cases he occupies a dual position, qua the partnership, he functions in his personal capacity; qua the third parties, in his representative capacity. The third parties whom one of the partners represents, cannot enforce their rights against the other partners nor the other partners can do so against the said third parties. Their right is only to a share in the profits of their partner-representative in accordance with law or in accordance with the terms of the agreement, as the case may be....

7. The decision of the Supreme Court in the case of CIT v. Sir Hukumchand Mannalal & Co. [1970] 78 ITR 18, referred to by the Commissioner (Appeals), is also relevant on the point and in the said judgment there are the following observations: The Indian Contract Act imposes no disability upon members of a Hindu undivided family in the matter of entering into a contract inter se or with a stranger. A member of a Hindu undivided family has the same liberty of contract as any other individual: it is restricted only in the manner and to the extent provided by the Indian Contract Act. Partnership is under Section 4 of the Partnership Act the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all: if such a relation exists, it will not be invalid merely because two or more of the persons who have so agreed are members of a Hindu undivided family. It is now settled law that in considering an application for registration of a firm, the Income-tax Officer is not concerned to determine in whom the beneficial interest in the share in the partnership vests: Commissioner of Income-tax v. A. Abdul Rahim & Co. [1965] 55 ITR 651; Commissioner of Income-tax v. Bagyalakshmi & Co.

As stated by the Supreme Court, the ITO is not concerned to determine in whom the beneficial interest in the share in the partnership vests.

Therefore, whether the partnership is recognised or not for the purposes of the Act, as long as there is a partial partition in Hindu law, it cannot be held that there was any make-believe on the part of the parties in holding out that the minors received certain amounts consequent to the partial partition. The ITO hemself has considered the firm to be genuine, but he took the view that in view of the provisions of Section 171(9) registration could not be granted. Since the aspect of to whom the beneficial interest belongs is not the issue in determining whether registration can be granted to the firm or not and in view of there being no material to hold that the minors were benamis of any of the partners, registration has to be allowed to the firm and the Commissioner (Appeals) was justified in directing the grant of registration. The Commissioner had also given a finding that since Section 171(9) came into operation only from 1-4-1980, it would not affect cases where there was a claim for partial partition pending for the assessment year 1979-80. In the present case, there was such a claim pending by the HUF for the assessment year 1979-80 and in appeal the AAC, by order dated 28-7-1982, had restored the matter for further examination by the ITO following an order of a Single Member of this Tribunal in IT Appeal No. 776 (Hyd.) of 1981 dated 19-5-1982 which was to the effect that the amendment in Section 171(9) would not affect assessments for the year 1979-80. The learned departmental representative sought to contest this view and he submitted that the provisions of Section 171(9) applied to all partitions which took place subsequent to 31-12-1978. In the view that we have taken that registration has to be allowed even assuming that the provisions of Section 171(9) applied, we leave the issue as to whether the amendment would apply to the assessment year 1979-80 open in the present case.

9 to 12. [These paras are not reproduced here as they involve minor issues.]


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