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