ITR/46/1999 16/ 16 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 46 of 1999 For Approval and Signature: HONOURABLE MR.JUSTICE JAYANT PATEL HONOURABLE MR.JUSTICE AKIL KURESHI ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= P.V. THAKAR, C/O.M/S.MUKUND - Applicant(s) Versus THE COMMISSIONER OF INCOME TAX - Respondent(s) ========================================================= Appearance : MR SN DIVATIA for Applicant(s) : 1, MR MANISH R BHATT for Respondent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE JAYANT PATEL and HONOURABLE MR.JUSTICE AKIL KURESHI Date : 25/06/2008 ORAL JUDGMENT
(Per
: HONOURABLE MR.JUSTICE JAYANT PATEL)
The
question referred to this Court at the instance of the assessee are
as under:-
(1) Whether
the Tribunal is right on facts and in law in holding that the
assessee’s wife and son are entitled to receive 1/3rd
share each from only 75% shares in the profit of the business in the
name and style of M/s.Mukund and that they have no right to receive
any share from the remaining 25% share ?
(2) Whether
the Tribunal is right on facts and in law in holding that the
assessee is entitled to a deduction of only 50% and not 2/3rd
of the total income from the business of M/s.Mukund.
At
the instance of Revenue, following questions are referred to this
Court:-
(1) Whether
the Appellate Tribunal is right in law and on facts in confirming
the order passed by CIT(A) directing the A.O. to exclude 2/3rd
of the profits derived from M/s.Mukund as having been accrued in
favour of the assessee’s wife and minor son, is on account of an
over-riding title ?
(2) Whether
the Appellate Tribunal is right in law and on facts in holding that
the aspects of Section 64 have no application in the instant case ?
The
short facts, which may be relevant for examining the questions are
as under:-
3.1 M/s.Mukund
was carrying on the business of dealers of cloth and the said
business was carried by a partnership firm w.e.f. S.Y. 2033 i.e.
upto 28.2.1977 and the partnership comprised of three partners
namely; Shri Pravinchandra V. Thakar, Shri Kantilal P. Pandya and
Shri N.N. Joshi at the initial stage. Shri N.N. Joshi retired from
the firm w.e.f. 28.2.1977 and the remaining partners continued the
business of partnership firm from 1.3.1977. As per the partnership
deed executed on 10.3.1977 between two remaining partners, share of
Shri P.V. Thakar was 75%, whereas the share of Shri K.P. Pandya was
25%.
3.2 It
is an undisputed position that Shri P.V. Thakar was partner in the
firm in his capacity as Karta of HUF comprising of Shri P.V. Thakar
as Karta, his wife Smt. Ranjanben and his minor son Dhruman P.
Thakar. The partial partition of the aforesaid HUF was made by the
registered deed of partial partition dated 19.1.1978 and the said
partial partition was made effective from 19.4.1977. Upon the
application of HUF under Section 171 of Income Tax Act (hereinafter
referred to as ýSIT Actýý), the ITO vide order dated 17.3.1979
duly recognized such partial partition. As per the term of the
partition, each member of the said family had accepted his/her share
in the above referred 75% share in profit of M/s.Mukund in equal
proportion and it was also agreed that Shri P.V. Thakar shall
receive share as per the terms of the partnership deed executed
between Shri P.V. Thakar and the other partners of the firm. In
accordance with the terms of the said Memorandum of partial
partition, assessee had been duly showing the share of the income
from the said partnership after deducting 2/3rd share
thereof as belonging to assessee’s wife and minor child in view of
the over-riding title created in favour of his wife and minor son by
the above referred registered deed of partial partition. Such
continued from the A.Y. 1978-79 to 1987-88, which was also accepted
by the Assessment Officer.
In
A.Y. 1987-88, the partnership firm of M/s.Mukund was dissolved and
Shri P.V. Thakar became sole proprietor of the said business. The
assessee has, in the return of income for A.Y. 1987-88 onwards shown
the aforesaid income after deducting 2/3rd share as
belonging to his wife and minor son on account of the above referred
partial partition and resulting over-riding title. In A.Y. 1988-89,
the assessee shown the income accordingly. The A.O. came to the
conclusion that the entire income from the business of M/s.Mukund
represents individual income of the assessee and no part of the said
income belongs to either Smt. Ranjanben P. Thakar, being wife or
Dhruman P. Thakar, being minor son. He also opined that partial
partition made by HUF on 19.4.1977 was a colourable device made for
avoiding taxes. In appeal by the assessee, CIT(A) directed the A.O.
to exclude 1/3rd share of the profit each belonging to
the assessee’s wife and minor son from the assessee’s income. In
further appeal by the Revenue, the Tribunal while accepting the
over-riding title of wife and minor son held that the assessee’s
wife and minor son had no right to receive any share from the
remaining 25% share of the profit derived from the business of
M/s.Mukund and they will continue to receive 1/3rd share
each from the 75% profit of the said business, which the said HUF
originally had in the partnership and also that the assessee shall
be entitled to a deduction of an aggregate amount of 50% of the
total income from the business of M/s.Mukund by virtue of an
over-riding title in favour of the assessee’s wife and minor son.
It is under these circumstances, the present reference to this Court
on the above referred questions.
We
have heard Mr.Divatia, learned Counsel for the assessee and
Mr.Manish Bhatt, learned Counsel for the Revenue.
It
appears that on the factual aspects, there is neither any dispute
qua the existence of partial partition, nor any on the aspects of
existence of the fact of recognition of such partial partition. The
pertinent aspect is that the position of over-riding title in view
of the partial partition amongst, inter se, three members of the HUF
namely; Shri P.V. Thakar, his wife, Ranjanben P. Thakar and his
minor son, Dhruman P. Thakar was accepted in the earlier assessment
proceedings by the Department from A.Y. 1978-79 to A.Y. 1987-88. It
is also not in dispute that the partnership firm came to be
dissolved and it remained as the sole proprietary concerned held by
Shri P.V. Thakar.
Mr.Divatia,
learned Counsel appearing for the assessee, contended that in view
of the partial partition having been recognized and the consequence
of conversion as sole proprietary concern, the proportion of the
shares amongst three members of HUF would continue on the basis of
1/3rd as it existed prior to the dissolution and,
therefore, it was submitted that the error is committed by the
Tribunal in restricting the share of the other two members of HUF
and assessing the shares of Shri P.V. Thakar to the extent of 50%.
In the submission of Mr.Divatia, the Tribunal has committed error in
law in considering the consequence upon the dissolution.
Whereas
on behalf of the Revenue, Mr.Bhatt, learned Counsel contended that
the HUF could not be as the partner in a partnership firm and if the
Karta of HUF has joined the partnership firm, the income will be
taxed at the hands of Karta in individual capacity, though
thereafter such income may be appropriated amongst the other members
of HUF. He submitted that the earlier assessment during the period
from 1978-79 to 1987-88 was also contrary to the legal position and,
therefore, the same was rightly not accepted by the A. O. He
submitted that if the status of the Karta was not concerned in the
relationship of the partnership firm, the Tribunal has committed
error even in recognizing 1/3rd share of each member
amongst 75% share of the HUF, which existed in the firm of Shri P.V.
Thakar. He also contended that if the properties, upon the
dissolution, are considered as individual share of the partner
namely; Shri P.V. Thakar, none of the other members will have any
share so far as the partnership firm is concerned and, therefore, it
was submitted that the Tribunal has committed error.
In
order to examine the legal position, we may refer to the
Constitution Bench’s decision of the Apex Court in case of
Commissioner of Income Tax, Ludhiana v. Om Prakash, reported in
1999(6) SCC, 349. The Apex
Court had an occasion to settle the issue in view of conflicting
decisions of various High Courts, which, inter alia, included the
question of treatment to the income of Karta of HUF with reference
to the provisions of Section 64 of the IT Act. The other part of
the decision may not be much relevant and, therefore, it may not be
required to be considered in the present decision. However, the
relevant observations made by the Apex Court can be extracted at
para 19 of the said decision, which reads as under:-
ýSWhen
a Karta of a Hindu undivided family is a partner in a partnership
firm, he has a dual capacity qua the partnership, he functions in
his personal capacity and qua third parties, in his representative
capacity. Under Income Tax Act, when he is assessed in respect of
the income derived by him from the partnership firm as a partner, it
is in his representative capacity as Karta of the Hindu undivided
family and not as an individual as such. That is because his
capacity vis-a-vis spouse/minor children who are members of the
Hindu undivided family is that of Karta and not as individual though
vis-a-vis other partners of the partnership firm he functions in his
personal capacity. This being the position, the income of Karta’s
spouse/minor child cannot be included in computation of his total
income for that is the income of the Hindu undivided family and not
his individual income. Section 64 will be attracted only when an
assessee’s own income is being assessed and not that of Hindu
undivided family. If a Karta is brought within the ambit of
ýSindividualýý in Section 64(1), the share income of the spouse of
the Karta and his minor children will, in effect, be included in the
income of the Hindu undivided family, which is not what is
contemplated by Section 64(1)(i) and (ii) and which, with respect,
we say has rightly been held to be impermissible by this Court in L.
Hirday Narain v. ITO, CIT v. Harbhajan Lal and CIT v. Jayantilal
Prem Chand Shah.ýý
As
such in the above referred decision, the Constitution Bench of the
Apex Court has confirmed its earlier view in case of Charandas
Haridas & Anr. v. Commissioner of Income Tax, Bombay North,
Kutch and Saurashtra, ahmedabad & Anr.ýý, reported at 39 Income
Tax Report, p. 202. Based on the above referred decision of law
settled by the Apex Court, it can be said that as a consequence of
the dissolution, the property as was held by Shri P.V. Thakar became
absolute so far as the rights amongst the partners in the firm, but
the effect of the over-riding title already confirmed earlier qua
his share will have to be recognized. If the over-riding title is
existed in the property held by Shri P.V. Thakar, the consequence
would be that each member namely; Shri P.V. Thakar, his wife, Smt.
Ranjanben and his minor son Dhruman P. Thakar will have equal share
namely; 1/3rd in the total property and such will be the
consequence even in the income so derived therefrom.
The
Tribunal, in principle, has accepted the over-riding title, however,
it appears to us that without there being any factual foundation,
has committed error in restricting such consequence to the extent of
75% of the profits of the business instead of 100%. Further, there
is no factual foundation either from the order of the A.O. Or of
CIT(A) for making departure based on service rendered by Shri P.V.
Thakar in his individual capacity.
The
reliance placed by Mr.Bhatt, learned Counsel for the Revenue, upon
the decision of the Apex Court in case of Commission of Income
Tax v. Sunil J. Kinariwala is ill-founded inasmuch as it was a
case for assessment of the interest by assessee, who was the partner
in the firm. The assessment would stand on a different footing than
that of Karta representing HUF in a partnership firm. In case of
National Wire Manufacturing Co. v. Commissioner of Income Tax
reported at 253 ITR, p. 496 upon which the reliance is placed by
Mr.Bhatt, learned Counsel for the Revenue, this Court was
considering the question as to whether the partner could claim the
remuneration in a firm on the premise that his capacity is as Karta
of HUF and not as the partner. The relationship amongst the
partner, inter se, would not get altered irrespective of his
capacity as partner in individual capacity or as Karta of HUF. Such
aspect is not the subject matter in the present case and, therefore,
the decision cannot be made applicable in the questions to be
considered by this Court.
Mr.Bhatt,
learned Counsel for the Revenue, also relied upon the observations
of the Apex Court in case of Rasik Lal & Co. v. Commissioner
of Income Tax, reported at 229 ITR, p. 458 for contending that
if a person has become partner in his capacity as Karta of HUF, he
is not entitled to have a separate status and so far as the
Partnership Act is concerned, he is to be treated as in personal
capacity and his capacity being Karta of HUF is of no relevance.
As
such the aforesaid decision is also a case for admissibility of the
additional remuneration by way of commission by a partner, claiming
his capacity as Karta of HUF. Such observations may apply if the
rights are to be considered, inter se, amongst the partners for
entitlement of the remuneration vis-a-vis Partnership Act and the
admissibility of the expenses under the Income Tax Act. Such is not
the fact situation to be considered in the present questions coming
up before this Court.
In
view of the above, it is held that each Member of HUF being Shri
P.V. Thakar, his wife, Smt. Ranjanben P. Thakar, and his minor son,
Dhruman P. Thakar, in view of the over-riding title, were entitled
to equal 1/3rd share each. Hence, we answer Question
Nos.1 and 2 in favour of assessee, against the Revenue.
Such
will be the situation for question referred to at the instance of
Revenue inasmuch as Question No.1 is answered against the Revenue,
in favour of the assessee.
As
regards Question No.2 referred at the instance of Revenue is
concerned, it appears to us that there is absolutely no factual
foundation inasmuch as the Appellate Tribunal has not held that the
provisions of Section 64 of the IT Act has no application in the
instant case. Therefore, as the question does not arise from the
judgement of the Tribunal, the same is not required to be answered.
The
Reference shall stand disposed of accordingly.
(Jayant Patel, J.) 25.6.2008 (Akil Kureshi, J.) vinod