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Commissioner of Income-tax, Gujarat-i Vs. Keshavlal Prabhudas Shah - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No.17 of 1977
Judge
Reported in(1981)24CTR(Guj)178; [1981]131ITR229(Guj)
ActsIncome Tax Act, 1961 - Sections 64(2)
AppellantCommissioner of Income-tax, Gujarat-i
RespondentKeshavlal Prabhudas Shah
Appellant Advocate N.U. Raval, Adv.
Respondent Advocate J.P. Shah, Adv.
Excerpt:
.....we would like to point out that an important aspect has been overlooked by the ito while making assessment or the assessment year 1971-72. as pointed out above, the assessee made the declaration throwing his share in the firm into the hotchpot of the huf on october 17, 1970, only 13 days before the close of the accounting year......the assessee claimed that in view of the declaration made by him as stated above, the share income from the firm was not includible in his total income inasmuch as this income belonged to his huf. the ito accepted the declaration made by the assessee before the taluk magistrate to be genuine and acted upon it. in other words, he accepted the contention of the assessee that the share income from the firm belonged to his huf. he, however, included one-fifth share of the assessee and one-fifth share of the assessee's wife, i.e., in all two fifths share of the income, derived from the firm in the total income of the assessee under s. 64(2) of the act. he did not include three-fifths of the assessee's income from the firm in the assessee's total income on the ground that this.....
Judgment:

Mankad, J.

1. The Income-tax Appellate Tribunal has, at the instance of the Commissioner of Income-tax, Gujarat-I, Ahmedabad, referred the following question under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), for our opinion :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that an individual's interest in a partnership firm and his right to share profits/losses in the firm could be validly thrown into the hotchpot of the HUF of which the said individual was the kartan ?'

2. Assessee, Keshavlal Prabhudas Shah, had two sources of income. He had shares in partnership firms including a partnership firm running in the name and style of M/s. Bharat Oil Mill (hereinafter referred to as 'the firm'). He had also a property from which he derived income. The assessee held shares in Narhari Marine Insurance Company Ltd. (hereinafter referred to as 'the company'); but there is nothing on record to indicate that the assessee derived any income by way of dividends from his shares in the said company. The above properties were self-acquired properties of the assessee and until the assessment year 1971-72, the assessee was assessed as an individual in respect of the income therefrom. The year of account of the assessee was Samvat year. On October 17, 1970, i.e., about 13 days before the end of samvat year 2026, which ended on October 30, 1970, the assessee made a declaration before the Taluk Magistrate, Bulsar, throwing his share in the partnership firm, M/s. Bharat Oil Mill, including a capital investment of Rs. 48,483 in the said firm and the shares held by him in the company in the hotchpot of the HUF consisting of himself, his wife, his two sons and three grandsons. In other words, he impressed his share in the firm and the shares in the company with the character of Hindu undivided family (hereinafter referred to as 'HUF') property. In his declaration the assessee stated :

'I hereby impress my right, title and interest on the aforesaid partnership property and the shares and on my income thereof with the character of joint Hindu undivided family with the intention that the said properties shall hereafter belong to the aforesaid joint Hindu undivided family. Further, I state that thereafter, I have no individual interest of any kind whatsoever on the aforesaid property save as a karta of the HUF.'

3. In the course of the assessment proceedings for the assessment years 1971-72 and 1972-73, relevant previous years being Samvat years 2026 and 2027, respectively, the assessee claimed that in view of the declaration made by him as stated above, the share income from the firm was not includible in his total income inasmuch as this income belonged to his HUF. The ITO accepted the declaration made by the assessee before the Taluk Magistrate to be genuine and acted upon it. In other words, he accepted the contention of the assessee that the share income from the firm belonged to his HUF. He, however, included one-fifth share of the assessee and one-fifth share of the assessee's wife, i.e., in all two fifths share of the income, derived from the firm in the total income of the assessee under s. 64(2) of the Act. He did not include three-fifths of the assessee's income from the firm in the assessee's total income on the ground that this share income was impressed with the character of HUF property by the assessee's declaration referred to above. As a result of the finding recorded by the ITO, Rs. 2,886 and Rs. 400 out of the income derived from the firm were included in the assessee's total income for the assessment years 1971-72 and 1972-73, respectively.

4. On examining the records of the assessment proceedings of the assessee's case for the assessment years 1971-72 and 1972-73, the Commissioner was of the view that the ITO had wrongly excluded three - if this of the assessee's income from the firm the assessee's total income, while making assessments. In the opinion of the Commissioner, the assessee's income from the firm could not be impressed with the character of the HUF property inasmuch as there was risk of liability being saddled on the HUF in case the firm suffered losses. Therefore, according to the Commissioner, the declaration dated October 17,1970, made by the assessee to the extent, it purported to impress his share in the firm with the character of HUF property was not valid in law and consequently ineffective. The Commissioner, therefore, proposed to direct the ITO to ignore the said declaration and to include the full share of income from the firm in the assessee's total income for the assessment years under consideration. Consequently, the Commissioner issued a notice calling upon the assessee to show cause why the action proposed should not be taken. The assessee resisted the proposed action contending, inter alia, that the declaration made by him was not invalid or ineffective.

5. It was contended that the action taken by the ITO in excluding three-fifths of the share income from the firm from the assessee's total income for the assessment years in question was in accordance with law. The Commissioner, however, rejected the contention of the assessee and held that the declaration dated October 17, 1970, made by the assessee is invalid and inoperative, inasmuch as it was likely to saddle the HUF with the liability in case the firm suffered losses. In the result, the Commissioner directed the ITO to ignore the declaration) and include the full share from the firm in the total income of the assessee for the aforesaid assessment years.

6. Being aggrieved by the order passed by the Commissioner, the assessee carried the matter in appeal to the Income-tax Appellate Tribunal. The Tribunal did not agree with the view taken by the Commissioner and held that the declaration made by the assessee on October 17, 1970, could not be said to be detrimental to the interest of the HUF. It was held to the effect that the assessee could have impressed his share in the firm with the character of HUF property and, therefore, the declaration made by him was valid. In the result, the Tribunal allowed the appeal of the assessee and set aside the order of the Commissioner.

7. It is contended on behalf of the revenue that the possibility of the firm suffering losses could not be ruled out and in such an eventuality, if the declaration made by the assessee was held to be valid, the HUF of the assessee would be saddled with the liability of showing such losses. It was contended that though the assessee could have conferred a benefit on the HUF by transferring his property to it or by impressing his property with the character of HUF property, he could not have saddled his HUF with the liability. Risk of sharing losses of the firm was by itself sufficient to render the declaration made by the assessee on October 17, 1970, invalid. We do not find any substance in this argument advanced on behalf of the revenue. It is not disputed, and indeed it cannot be, that the share in a partnership firm is an asset. It was not shown that there were outstanding debts or losses which in reality meant that it was a debt which was being impressed with the character of HUF and not assets. Now, a share in a partnership firm having assets is property. In other words, the share which the assessee had in the firm was one of the properties held by him. This property admittedly was the self-acquired property of the assessee. It is open to a coparcener or a member of the HUF to impress his self-acquired property with the character of HUF property. The share in the firm being one of the self-acquired properties of the assessee, he could certainly have impressed it with the character of HUF property, if he chose to decided on so. There is no legal bar or impediment, and none is pointed out to us against conversion of the share in a partnership firm into HUF property. There was, therefore, nothing to prevent the assessee from impressing his share in the firm with the character of HUF property. A mere risk or possibility of the firm suffering losses in the future will not and cannot convert the share in the firm from an asset to a liability. The entire approach of the Commissioner was erroneous and the conclusion reached by him has no basis in law. It is not in dispute that the declaration made by the assessee on October 17, 1970, was genuine. The only ground on which it was held to be invalid by the Commissioner was that a risk of sharing future losses of the firm was involved. As already observed above, we are not impressed with the reasoning and approach of the Commissioner. Mr. N. U. Raval, learned advocate appearing for the revenue, has not been able to point out as to why the share in a partnership firm which he could not deny was an asset, could not impressed with the character of HUF property.

8. Mr. Raval made an attempt to support the view taken by the Commissioner on an entirely new ground which was not even urged before the Tribunal. It was contended that the assessee had entered into a contract with the other partners of the firm to constitute a partnership in his individual capacity and, therefore, notwithstanding the declaration made by him, he would continue to be a partner in the firm in his individual capacity. The share income which he received in the previous years relevant to the assessment years under consideration and which he would receive in future, would be received by him in his individual capacity. Mr. Raval contended that the only consequence which would flow from the declaration made by the assessee was that the income which the assessee received from the firm in his individual capacity would ultimately go to the hands of the HUF. Mr.Raval submitted that this was a clear case of application of income after it was received by the assessee in his individual capacity. Receipt of the income by the assessee from the firm being in his individual capacity, it was liable to be assessed to income-tax in the hands of the assessee. The Commissioner also did not direct the ITO to include the entire share income from the firm in the total income of the assessee on the above ground. However, we do not find any substance in the contention of Mr.Raval on merits also. Once the declaration was made by the assessee on October 17, 1970, and the declaration was accepted as a genuine one, the asset and interest held by the assessee in the partnership became the asset and interest of the HUF - the assessee becoming a partner representing the HUF for the purposes of assessment to income-tax. In other words, he was a partner in the firm for and on behalf of the HUF. It is true that, qua the other partners of the firm, the assessee would be answerable in his individual capacity. However, once his share in the partnership firm became the property of the HUF, it would be his HUF alone which would be entitled to receive income from the firm. The assessee, after the declaration, would receive the share income from the firm for and on behalf of his HUF. We are, therefore, unable to agree with Mr. Raval that the income which the assessee received during the future, was received by him and would be received by him in his individual capacity. It is not a case of application of income after its receipt as urged by Mr.Raval. We, therefore, reject the above contention of Mr.Raval.

9. Before parting with the matter, we would like to point out that an important aspect has been overlooked by the ITO while making assessment or the assessment year 1971-72. As pointed out above, the assessee made the declaration throwing his share in the firm into the hotchpot of the HUF on October 17, 1970, only 13 days before the close of the accounting year. The question which arises is whether the share of the assessee in the income of the firm earned up to October 17, 1970, could be said to belong to the HUF. The ITO has proceeded to make assessment on the basis or assumption that the assessee's share in the entire income of the firm for the year of account relevant to the assessment year 1971-72 belonged to the HUF, and it is on that basis that he added only 2/5th share in the income derived from the firm in the assessee's income-tax assessment for the assessment year 1971-72. The ITO did not apply his mind to the question whether or not the assessee's share in the income earned by him the firm up to October 17, 1970, could be included in his assessment for the assessment year 1971-72. The earnings made by him till then were 'past' profits which had already accrued and there was no question of impressing the past profits with the character of HUF with retrospective effect so as to render the same immune from his personal tax liability by creating a fiction. No such difficulty arises for the assessment year 1972-73, inasmuch as the declaration was made during the accounting year relevant to the assessment year 1971-72, and when the year of account relevant to the assessment year 1972-73 commenced, the assessee's income from the firm belonged to the HUF. We need not say anything more with finality on the above question, as the point as neither been referred nor been argued before us, but we merely point out that an important aspect has escaped the notice of the ITO. The Commissioner has also not applied his mind to this aspect. We are making this observation so that, in future, if a similar question arises, the taxing authorities may apply their mind to the above aspect.

10. In the result, we affirm the view taken by the Tribunal and answer the question referred to us in the affirmative and against the revenue. Reference answered accordingly with no order as to costs.


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