Gujarat High Court
Commissioner Of Income-Tax vs Rajendraj P. Bhow on 29 March, 1986
Equivalent citations: [1987]166ITR359(GUJ)
JUDGMENT S.A. Shah, J.
1. This reference arises at the instance of the Revenue for our opinion. The questions of law that arise out of the order dated January 24, 1978, of the Income-tax Appellate Tribunal, Ahmedabad Bench "A" (hereinafter referred to as "the Tribunal"), are as under :
"(1) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that : (i) the asset's interest in the partnership firm styled M/s. Public Construction Company; and (ii) the amount of R. 5,000 standing in the said firm's books to the assessee's credit as accumulated profit stood converted into joint property of the Hindu undivided family headed by the assessee as karta?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that conversion of the said properties into joint property of the Hindu undivided family did not involve a transfer within the meaning of section 60 read with section 63(b) of the Income-tax Act ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law inholding that only a portion (namely, 1/7th portion) of the share income earned by the partner, Rajendra P. Bhow, from the said firm was includible in the computation of the assessee's individual total income ?"
2. In order to appreciate the contentions raise by the Revenue, short facts are required to be stated. The year concerned is the assessment year 1973-74. The assessee, Shri Rajendra P. Bhow, is an individual. The previous year is Samvat year 2028 - the period from October 28, 1971, to November 6, 1972. The asset's share in the profit and loss of the partnership firm styled as M/s. Public Construction Company was 15 naye paise. He also had in the said firm some amount lying to his credit,. that amount being accumulated profits and the interest thereon. On October 20, 1972, the assessee made a declaration throng his interest in the said partnership firm into the common stock of the Hindu undivided family and also the amount of Rs. 5,000 out of the accumulated profits as aforesaid. In the return of total income furnished by the asset, he included only 1/7th portion of the share income earned by him during the previous year under consideration. The Income-tax Officer, however, included the entire share income amounting to Rs. 8,812 in the assessment which was completed on October 23, 1975. The Income-tax Officer took the view that a partner's interest in a partnership firm is not always beneficial inasmuch as sometimes the partnership firm may be running into losses, and that under Hindu law it is not open to coparcener to blend his separate property which is of an onerous character, Further, the Income-tax Officer held that even if blending purported to be effected in the assessee's case is valid under Hindu law, section 60 of the Income-tax Act would come into play, inasmuch as the assets giving rise to the share income did not stand transferred to the Hindu undivided family in whose favour the overriding title was intended to be credits. Company of the declaration dated October 20, 1972, is annexure "A", and copy of the Income-tax Officer's order is annexure "B" to this reference.
3. Being aggrieved by the said order of the Income-tax Officer, the assessee took the matter in appeal to the learned Appellate Assistant Commissioner of Income-tax, where he urged that the Hindu undivided family consisted of his father, mother and five major brothers (including himself) and his interest was only 1/7th portion which was taxable in the assessment of the assessee as an individual. The Appellate Assistant Commissioner accepted the contention of the assessee and directed the Income-tax Officer to exclude 6/7ths portion of the share income from the computation of the assessee individual's total income.
4. In the appeal before the Tribunal filed by the Revenue, the Tribunal agreed with the view taken by the Appellate Assistant Commissioner and held that the entire interest in the firm had been thrown into the common stock of the Hindu undivided family, relying upon the decision of the court in Addl. CIT v. Chandulal C. Shah [1977] 107 ITR 91. With regard to the question of applicability of the provisions of section 63(b) of the Income-tax Act, the Tribunal rejected the argument by stating that the revocability of a transfer is to be traced in the very terms of the transfer and not anywhere else outside the transfer. With regard to the question under section 60 of the Income-tax Act, the Tribunal held that in the instant case, it cannot said that the transaction comprised in the coparcener's act of throwing his separate property into the common stock of the Hindu undivided family involved a bilateral transaction as such. It well settled that such act of impressing a coparcener's separate property with the character of coparcenary property is not tantamount to transfer in the general sense. Hence, this reference.
5. Mr. B. R. Shah, the learned advocate for the Revenue, contended, as was contended before the Tribunal, that the possibility of the partnership firm suffering losses could not be ruled out; in such circumstances, throwing of his share of partnership into the Hindu undivided family can be said to be onerous. Such a question has been decided by a Division Bench of this court to which one of us was a party, in CIT v. Keshavlal Prabhudas Shah [1981] 131 ITR 229. It has been observed therein (at P. 232).
"It is not disputed, and indeed it cannot be, that the share in a partnership firm is an asset. It was not show that there were outstanding debts or losses which in reality meant that it was a debt which was being impressed with the character of Hindu undivided family 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 Hindu undivided family to impress his self-acquired property with the character of Hindu undivided family property. The share in the firm being one of the self-acquired properties of the assessee, he could certainly have impressed it was the character of Hindu undivided family property, if he chose to do so. There is no legal bar or impediment and none has been pointed out to us against conversion of the share in a partnership firm into Hindu undivided family property. There was, therefore, nothing to prevent the assessee from impressing his share in the firm with the character of Hindu undivided family 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 into a liability."
6. We are in complete agreement with the aforesaid observation made by the Division Bench of this Court. Hence, we answer the first question in the affirmative.
7. The second question of the Revenue that throwing of the assets of the partnership belonging to the assessee into the common stock of the Hindu undivided family through the act of impressing such separate property with the character of the Hindu undivided family property involves a "transfer" within the meaning of Section 60 read with Section 63(b) of the Income-tax Act, has also no merit. It is settled position of law that when a coparcener throws his individual property into the common stock or common hotchpotch of the Hindu undivided family and thereby coverts that property into a joint family property, with a desire to blend his separate property with the coparcenary property, separate property of the member is said to be impressed with the character of joint family property and thereafter he cannot make a separate claim over the said property. The separate property of a Hindu coparcener thus acquires the characteristic of a joint family property not by any physical mixing with his joint family a property but, by his own volition, he has waived or surrendered his separate rights in it as separate property. This is unilateral act of the coparcener and also there will be no question of the family either rejecting or accepting the said property. In other words, the individual by his own act and volition renounces his individual right and treats his individual property as a property of the family. This doctrine of throwing the individual property into the common stock is peculiar to the Mitakshara school of Hindu law. It has been held by the Privy Council in case of Rajanikanta Pal v. Jagamohan Pal, AIR 1923 PC 57, that where a member of a joint Hindu family blends his self-acquired property with the property of the jointly family by bringing his self-acquired property into a joint family account, the effect is that all the property so blended becomes joint family property.
8. Now, in the case of Goil Eswariah v. CGT [1970] 76 ITR 675 (SC), a question arose before the Supreme Court whether the declaration by which the assessee has impressed the character of joint Hindu family property on the self-acquired properties owned by him amounts to a "transfer" so as to attract the provisions of the Gift-tax Act, 1958. Section 2(xxiv) of the Gift-tax Act defines "transfer" within the meaning of the said section. Reference has been made to the case of CIT v. M. K. Stremann [1965] 56 ITR 62 (SC), wherein the assessee first threw his private properties into the common stock and afterwards there was a partition amongst the members of the family which included his two minor sons and a minor sons and a minor daughter represented by their mother. The question arose whether the partition in question amounted to a transfer of assets by the assessee to the three minor children so as to attract the provisions of section 16 (3) (a) (iv) of the Indian Income-tax Act, 1922. In that case, the Revenue did not contend before the Supreme Court that the act of the assessee in throwing into common stock his self-acquired properties amounted to transfer of assets by the assessee to his three minor children. On the other hand, it contended that the partition that took place subsequently amounted to a transfer of assets of the assessee to his minor children. The Supreme Court overruled that contention of the Revenue. In that very case, the Supreme Court has approved the observations of the court which are as under ([1970] 76 ITR at page 681) :
"The High Court observed that when the separate property of a coparcener ceases to be his separate property and becomes impressed with the character of coparcenary to the coparcenary; it becomes joint family property because the coparcener to the coparcenary; it becomes joint family property has by the exercise of his volition, impressed it with the character of joint family or coparcenary property, to be held by him thereafter along with other members of the joint family; it is by his unilateral action that the property became joint family property; the transaction by which a property ceased to be the property of a coparcener and became impressed with the character of coparcenary property, does not itself amount to a transfer need precede the change and no transfer ensures either - Shri M. K. Stremann v. Commissioner of Income-tax, [1961] 41 ITR 297 (Mad). We are in agreement with those findings".
9. In view of the aforesaid settled legal position, we agree with the findings of the Tribunal and answer question No. 2 in the affirmative.
10. So far as question No. 3 is concerned, in view of our answer to question No. 2, the Tribunal is right in law in holding that only a portion, viz, 1/7th portion of the share income earned by the partner, Rajendra P. Bhow (assessee), from the said firm was includible in the computation of the assessee individual's income, in view of the provisions of section 64(2) of the Income-tax Act, as in force during the assessment period in question. We, therefore, answer question No. 3 also in the affirmative.
11. In the result, we affirm the view taken by the Tribunal and answer all the question in the affirmative and against the Revenue. Reference is answered accordingly with no order as to costs.