SRINIVASAN J. - The question that stands referred to us, 'Whether, on the facts and in the circumstances of the case, the share of profits from K. G. Ramkrishnier and Co. is assessable in the hands of the Hindu undivided family or in the hands of the individual members of the Hindu undivided family ?' arises on the following facts :
The Hindu undivided family consisting of the father, K. G. Ramakrishnier and his two adult sons, Perumal Iyer and Venkatakrishna Iyer, was a partner in the firm of K. G. Ramakrishnier and Co., the father representing the family in that firm. In that firm, the other partner was K. G. Sitarama Iyer, who represented an other Hindu undivided family. In this reference, we are concerned with the first-mentioned family. The Hindu undivided family of K. G Ramakrishnier had income from property besides the half share of the income from the firm. Up to and including the assessment year 1957-58, assessments were made on the Hindu undivided family. On 5th February, 1958, the Income-tax Officer issued a notice calling upon this family to pay advance tax in respect of the assessment year 1958-59 on the basis of the last completed assessment for 1957-58. The assessee family replied stating that there was a partial partition in the family in so far as the familys interest in the firm was concerned and that it would not be liable to pay advance tax on the share income. The individual members of the family, however, filed estimates under section 18A (3) and paid tax on the share of each. The Income-tax Officer was not prepared to accept the partial partition which was claimed to have taken place. His view was that no intimation of the alleged partial partition was given except in response to the demand for payment of advance tax. He also thought that there were no entries in the books of the firm to evidence the alleged partition. It may be mentioned here that on the 13th April, 1957, following the partial partition claimed, these three members of the family purported to enter in to a partnership agreement as among themselves with regard to the interest in the firm. Income-tax Officer thought that this new firm of the members of the family did not carry on any business of its own and was only concerned in sharing the profits which the Hindu undivided family had been receiving from the firm of K. G. Ramakrishnier and Co. The Income-tax Officer accordingly held that the family itself continued to be the partner in that firm and that the share income had to be assessed in its hands only.
An appeal was taken to the Appellate Assistant Commissioner. It was contended before him that the Income-tax Officer had overlooked the entries relating to transfer of the capital as among the three members of the family and that on the closing date of the previous accounting year, the capital had been divided into three shares and necessary entries had been made in the books of the family. In the accounts of the following year commencing on the 13th April, 1957, separate folios had been opened for each of the members crediting the capital in his name and indicating further the subsequent dealings by each of the members individually. While the Appellate Assistant Commissioner accepted the fact that the books of the family contained separate ledger folios and entries evidencing the division of the capital, he thought that there were no corresponding changes in the constitution of the firm, K. G. Ramamkrishnier and Co., in which the father K. G. Ramakrishnier figured as partner. The Appellate Assistant Commissioner took the view that the entries in the books of the family did not bring about the partition of the assets, solely relying upon the circumstance that the investment of the family with K. G. Ramakrishnier and Co. continued unchanged. He thought that what happened was only a division of the income as among the members of the family after the income had been earned by the Hindu undivided family.
In the further appeal to the Tribunal, it was pointed our that a partition in the family could not possibly involve any change in the constitution of the firm of K. G. Ramakrishnier and Co., and that though K. G. Ramakrishnier necessarily continued as a partner in that firm he represented the interest of the three divided members of the family in so far as this with partnership asset was concerned. The Tribunal dealt this contention thus :
'No doubt, if partial partition of the business asset of a Hindu undivided family is claimed, the assets must be divided between the sons of the several shares, and at the same time, this division had to be incorporated in the firms books in which these assets are held after having gone out of the Hindu undivided family. In the case where business assets of a Hindu undivided family are so divided and a partnership is entered into with those divided assets as capital, then there is a co-ordination between partial division of assets and their utilisation in the partnership business. In such cases, the income cannot be taxed in the hands of the Hindu undivided family but in the hands of the partnership only. But in a case where the Hindu undivided family itself had an interest in the partnership and the entries regarding partition of business assets in the Hindu undivided family books did not find a corresponding place in the books of the firm, it cannot be said that in lieu of the Hindu undivided family assets have become partners of the firm (sic)'.
Though the above observations are not very intelligible, later the Tribunal held, 'If the Hindu undivided family has actually divided its business assets on 12th April, 1947, and the income does not belong to the Hindu undivided family but to the different shares, then effect should be given to it. In any view, we hold that the taking of the income from the partnership in the hands of the Hindu undivided family is not right. It is deleted from the assessment. The appeal is allowed.'
The question set out earlier was referred on the application of the Commissioner of Income-tax under section 66(1) of the Act.
The facts and circumstances available in this case clearly show that the Tribunal was right in the conclusion it reached that the income derived from the partnership was not on and after the 12th April, 1957, the income of the Hindu undivided family, We have examined the accounts maintained by the family, extracts from which are printed as part of the reference, and we are satisfied that there was a partial partition of the assets with the necessary entries being made in the capital accounts of the three members. On this date, the value of this asset was Rs. 4,28,977. In the family books it was divided into three shares and one-third thereof was credited in favour of each of the members. In the ledger folios of the exceeding account year, the capital account of each of the members started with this credit with subsequent withdrawals and credits, the principal credit being the share of the profit derived from K. G. Ramakrishnier and Co. There seems to be no doubt, therefore, that there was a partial partition of this particular asset of the family. On 12th April, 1957, the three members, the father and the two sons became divided. As the immediate division by metes and bounds of the immovable and movable properties of the family not being possible, they effected a division only of the assets which the family held in Ramakrishnier and Co. In a partnership agreement which they entered into on the 13th April, 1957, it was stipulated that each of the members should invest his one-third share of the capital and that the profits derived from K. G. Ramakrishnier and Co. should be divided equally among themselves. It may be mentioned that long subsequently, the firm of K. G. Ramakrishnier and Co. was itself reconstituted, all these three members becoming partners in that business in their individual right as also the members of the other Hindu undivided family of K. G. Sitarama Iyer becoming members therein. Though this matter is not directly relevant, it is set down only to show that the two families which were originally partners of that firm reconstituted that firm making all the individual divided members of both the families the partners of the reconstituted firm.
The proposition of law that where a partial partition has been effected among members of the family, the income from the assets so divided can no longer be assessed in the hands of the joint Hindu family, hardly requires support of authority. On and after such partial partition, the joint family having become disrupted, and where all the properties had been divided by metes and bounds, the law no doubt deems that the Hindu family to be undivided in so far as the properties that have not been divided by metes and bounds are concerned. Nevertheless, the income from properties which have been divided cannot but be treated as the income of the individual members to whom those properties have been allotted. It is equally well settled that an item of property which is not capable of property which is not capable of division by metes and bounds such as the interest of the family in a firm can be divided only by making necessary entries in the books of account and that would be satisfactory evidence of the partition of such an asset. There seems to be no doubt, therefore, that in the present case there is ample evidence that this asset was in fact divided among the three divided members of the joint Hindu family, though the remaining immovable and movable properties had not been divided by metes and bounds. The view taken by the Income-tax Officer and the Appellate Assistant Commissioner that this division by entries in the account books of the family should be discredited solely for the reason that there were no corresponding entries in the books of account of the firm of K. G. Ramakrishnier and Co. is clearly erroneous. It is not the case that on and after the partition in the family of K. G. Ramakrishnier and Co. each and every one of the members therein become automatically members of any firm in which the family was a partner through its karta. The two sons of K. G. Ramakrishnier do not as a consequence of the of the partition become members of the firm, and if that is so, the capital which stood to the credit of the family in the firms accounts could not for any conceivable reason be apportioned among members who were not partners of the firm. It would be an improper method of accounting if any such entries were to be made in the firms accounts. The absence of any entries in the firms accounts relevant to the partition in the family of K. G. Ramakrishnier does not, therefore, militate against the claim that there was a partition in this family.
It is true that Ramakrishnier, the father, continued to figure as the partner in the firm of K. G. Ramakrishnier and Co. on and after the 12th April, 1957, the date of the partial partition. The capacity in which he figured as a member of that firm was not the representative capacity of the karta of the joint Hindu family. He did no doubt represent the other persons who became entitled to a one-third share in that capital, but that character was entirely different from that of the karta of the joint Hindu family. The conclusion reached by the Appellate Assistant Commissioner that it was the family that earned the income and the division among the three members was only an instance of subsequent application of the income in thus wholly erroneous.
We are satisfied that the Tribunal reached the correct conclusion in the matter. The question is answered against the department. The assessee will be entitled to its costs. Counsels fee Rs. 250.