Income-tax Reference No.184 of 1975
DESAI J. - The Income-tax Appellate Tribunal has referred the following question of law for the opinion of this court:
'Whether the Tribunal was right in holding that the assessee was not liable to be assessed in his individual capacity in respect of the share income from the firm of M/s. Damodardas & Co. for the assessment, in question ?'
The assessment year with which we are concerned herein is assessment year 1969-70, the previous year being Samvat year 2024.
The assessee, since deceased, was a partner in the firm of M/s. Damodhardas & Co. His share in the profits and losses of the firm was four annas in a rupee The income derived by him as and by way of his share in profit of the said firm was taxed as his individual income up to assessment year 1968-69.
On September 18, 1968, the assessee made a declaration on oath stating that on and with : effect from September 1, 1968, he had impressed his shares in the firm of M/s. Damodardas & Co. with the character of joint family property forming part of the joint family property owned by Ramaswaroop Kalumal-HUF. The assessee, by his letter dated September 27,1968, informed the concerned ITO that such a declaration was made by him and enclosed with his letter a copy of the said declaration. In the return of income for the assessment year under consideration furnished by the assessee in the status of individual, he specifically stated that the income arising from the share in the concerned partnership firm was not included in the return as a result of his having divested himself of the shares in his individual capacity on and with effect from September 1, 1968, as recorded in the declaration.
In the course of the assessment proceedings, it was contended on behalf of the assessee that the income derived from the partnership firm was not assessable in his hands in the status of individual since, on and effect from September 1, 1968, he, in his individual capacity ceased to have any right or interest in the share in the partnership firm and that since then the income of the said partnership firm accrued to and was received by Ramswaroop Kalumal-HUF. The ITO rejected the contention and, on appeal, the AAC upheld the order of the ITO. On further appeal to the Income-tax Appellate Tribunal, the Tribunal after considering the facts and circumstances of the case, accepted the claim the assessee for the exclusion of the income derived from the partnership firm his individual assessment. Hence, the present reference.
Now, the diversion of the source of income is, in the instant case evidenced by a written declaration. The material terms of the declaration, which reproduced by the Tribunal in its order, read as under :
'3. I have on and from 1-9-1968, by the exercise of volition impressed the side 0-4-0 share in M/s. Damodardas & Co., Ashok Nivas,Relief Road Ahmedabad (excluding credit balance in that firm), which was my individual property, with the character of joint family property forming part of the joint family property of Ramswaroop Kalumal.
4. The said property ceased to be my personal property and I abandoned my personal claims over and interest in the said property on and from I-9-1968, and thus the above said Hindu undivided family own and said property for their common use and enjoyment.
5. The abovesaid property , as also income arising therefrom, is no longer my separate property and belong to the joint Hindu family of Ramswaroop Kalumal of which I am the Karta.
6. I declare that on and from 1-9-1968, I have no claim, right and interest in the aforesaid Act property, in my individual capacity.
7. The aforesaid Act of impressing my aforesaid individual property with the character of joint family property has been done by me in exercise of the powers conferred upon me as a karta of the family under the Hindu law and is of my own free will and choice.
8.I have made this declaration to record my unequivocal intention as aforesaid.'
Upon a perusal of the aforesaid terms, it is evident that on and with effect from the date mentioned therein the assessee had voluntarily impressed his share in the partnership firm, which was till then his individual property, with the character of joint family property. The source of income was thereby diverted from the assessee to the HUF. The income derived by way of share in the profits of the firm was also expressly declared as belonging to the HUF on and with effect from the said date. It is not the case of the Department that this transaction is sham and bogus. On and with effect from the date in question, the income derived as and by way of profits from the date in question, the income derived as and by way of profits from the said firm would not, therefore, be includible in the individual assessment of the assessee.In this connection, the Tribunal rightly pointed out that the conduct of the assessee following upon the transaction clearly indicated that the declared intention of the assessee to divest the source from himself to the HUF, was acted upon. The conduct relied upon by the Tribunal consisted of the information furnished by the assessee within a few days of the making of the declaration to the concerned ITO and the note made in the return filed in the status of individual.
The Tribunal also rightly rejected the contention of the Revenue that since in the books of the partnership firm no change had been effected and the account maintained in the name of the assessee was continued to be so maintained and the share of profits and other amounts were credited in the said account, the assessee had not acted upon his intention, if any, to divest himself of the share in the said firm and to impress it with the character of the property of the HUF. A contract of partnership has no concern with the obligation of the partners to others in respect of the share of profits in the partnership. It only regulates the rights and liabilities of the partners. Even if a partner may be the representative of a joint Hindu family qua partnership, he functions in his personal capacity. Under the circumstances, in the books of the partnership firm, no change could have been legally effected so as to give effect to or recognise the declaration. Consequently, the account could only have been maintained in the name of the assessee and share of profits, etc., could have been credited only in such account.
Before us an attempt was made to urge an altogether new point, namely, that the share of the assessee in the partnership firm was not an of property which could be treated as divorced from or de hors the capital contribution of the assessee in the partnership firm as reflected in his capital account ' in the books of the partnership firm and that, therefore, in law such share alone could not have been impressed with the character of HUF property. The submission, in other words, was that both the amount standing to the credit of the assessee in his 'capital account' in the books of the firm and his share in the firm, were required to be impressed with the character of HUF property and that unless that was done, there could be no diversion of the share and that the share must be treated as having continued as the private property of the assessee. Now, apart from the question whether this submission is sound in law. we are of the view that it is not open to the Revenue to urge the same at this stage on the facts and in the circumstances of the case. A submission on these lines was not advanced before the Tribunal in specific terms. Whether the assessee at all contributed to the capital of the firm, Whether there was any nexus or inseparable connection between the amount, if any, standing to his credit in the so-called 'capital account' and the share of the assessee in the partnership firm and whether the 'capital account' consisted only of the capital, if any, so contributed are all questions of fact which were required to be urged before the Tribunal and the Tribunal was required to be invited to decide those questions. If these facts were found by the Tribunal, we could have bean called upon to answer the question on that basis, even assuming that the submission made is an aspect of the controversy. It might be incidentally pointed out that an extract of the so-called 'capital account' of the assessee in the books of the firm relating to the account year in question (S.Y. 2024) has been incorporated in the order of the Tribunal and the said extract shows that the 'capital account' consisted of the opening balance and interest and profits earned during the year. On this slender evidence, it is not possible to hold that the assessee had initially contributed any amount as capital. Besides, the amount standing to the credit of the assessee in the said account cannot, by any stretch of imagination, be said to consist only of the capital which was intrinsically connected with his share.
For the foregoing reasons, we are of the opinion, that the Tribunal was right in the view that it took as regards the assessability of the income derived as and by way of share from the profits of the partnership firm in the hands of the assessee. The reference is, therefore, answered in the affirmative, that is to say, in favour of the assessee and against the Revenue. In view of the fact that the assessee is not represented at the hearing, there shall be no order as to the costs of the reference.