Income Tax Appellate Tribunal - Hyderabad
Income-Tax Officer vs S.V. Anandmohan Nandyal on 22 July, 1986
Equivalent citations: [1986]19ITD147(HYD)
ORDER
T.V. Rajagopala Rao, Judicial Member
1. These four departmental appeals are directed against the independent orders dated 15-10-1984 passed in each of the four assessment years under consideration.
2. The only point involved in these appeals is whether the share income derived from Segu Venkata Narayana Setty & Co. for these four assessment years should be included in the hands of the assessee-HUF.
3. For the assessment year 1980-81, two returns were filed, one in the status of an HUF and another in the status of individual. Share income derived from the firm of S.V. Narayana Setty & Co. was shown in the individual returns of Shri S.V. Anandmohan and other income derived was shown in the hands of HUF. Though the date of the original assessment was not available in the records it is not disputed that the assessed income in the hands of the HUF was accepted at Rs. 9,120. The share income offered for tax in the individual status of Shri S.V. Anandmohan for the assessment year 1980-81 which assessment also was completed was Rs. 16,570. After the original assessments were thus completed the ITO reopened the assessment by giving notice under Section 148/147(a) of the Income-tax Act, 1961 ('the Act') alleging that there was omission or failure on the part of the assessee to make a return or that the assessee failed to disclose fully and truly all material facts necessary for completing the assessment for 1980-81. The assessee-HUF filed a letter dated 27-6-1983 stating that the original return which he had filed may be treated as returns filed in the reopening proceedings. The assessee filed an agreement on a plain paper executed on 31-3-1979 between Shri S.V. Anandmohan, his wife and two unmarried daughters. Photostat copy of the agreement on two stamp papers of a total worth of Rs. 5 was filed before us in a paper compilation. In the recitals of the agreement it is stated that Shri S.V. Anandmohan, karta, his wife Vijayalaxmi and his daughter Sridevi who were members of HUF were having 60 per cent shares in Segu Venkata Narayana Setty & Co. till 31-3-1979. Due to risks involved in the business the HUF thought it fit to withdraw its share from the said firm from 1-4-1979 onwards. They allowed Shri S.V. Anandmohan to be a partner in the said firm in his individual capacity if he wants and did not permit him to represent the HUF in the said firm. It is clearly stated that from 1-4-1979 and onwards the share income and the loss derived or sustained by the carrying on of the business of the firm are to be borne exclusively by Shri S.V. Anandmohan in his individual capacity and they have no concern with the HUF. It is the case of the assessee before the ITO that in view of the said agreement the share income was rightly assessed in the hands of Shri S.V. Anandmohan but not in the hands of the assessee-HUF. The ITO, however, rejected the plea of the assessee by finding that the agreement dated 31-3-1979 will have no significance for the purposes of assessment under the Act. Wife and daughter may be joint family members but not coparceners under Hindu law, they cannot demand partition of joint family properties. So also they cannot claim a share of the said property on partition. The agreement dated 31-3-1979 cannot convert what was already joint family property into individual property of Shri S.V. Anandmohan, therefore, the entire income was rightly assessable only in the status of HUF and, hence, the amount of Rs. 16,570 was included to the originally assessed income of Rs. 9,120 and the ITO thus determined the total taxable income of the assessee-HUF at Rs. 25,690 in the reassessment proceedings dated 20-6-1983 passed under Section 143(3), read with Section 147(a), of the Act.
4. From the rest of the assessment years, the ITO passed assessment orders for the first time under Section 143(3) and the appeals for those assessment years arise out of those assessments. It is specifically stated in the assessment order for 1981-82 that the share income of Rs. 30,604 derived from the firm of Segu Venkata Narayana Setty & Co. (the impugned company) is included in the hands of the assessee-HUF on regular basis whereas the same income was assessed in the hands of Shri S.V. Anandmohan (individual) as a protective measure.
5. However, from a reading of the assessment orders for assessment years 1982-83 and 1983-84 we may not know whether any protective assessments were completed including the share income of the impugned company in the hands of Shri S.V. Anandmohan as a protective basis. However, for the assessment year 1982-83 an amount of Rs. 15,654 and for assessment year 1983-84 an amount of Rs. 23,608 were added in the hands of the assessee-HUF as income derived from the impugned company and the assessments were completed for 1982-83 and 1983-84 respectively.
6. Aggrieved against the reassessment for 1980-81 and the regular assessments for 1981-82 to 1983-84 the assessee came up in appeal before the AAC. The AAC considered the appeal for the assessment year 1980-81 and disposed it of by giving elaborate reasons. He had adopted the same order while disposing of the appeals pertaining to 1981-82 to 1983-84 also. The AAC found that he had found from the records that the wife and two daughters have gifted their share in the capital lying with the impugned company to Shri S.V. Anandmohan with effect from 1-4-1979. He further found that Shri S.V. Anandmohan became a partner of the firm in his individual capacity with effect from 1-4-1979. He also further found that the capital of the HUF stands in the name of Shri S.V. Anandmohan in his individual capacity but the HUF ceased to be a partner in the partnership firm. Ultimately he held that the ITO had no power to add to the income of the assessee-HUF since it had ceased to be a partner in the impugned company and has nothing to do with the profits and losses of the firm. Thus, he allowed the appeals by separate orders.
7. Having been aggrieved by each of the impugned orders passed by the AAC the revenue came up in second appeal for each of the assessment years and, thus, these four appeals stand for our consideration. We have heard Shri C. Satyanarayana, the learned departmental representative and Shri M.J. Swamy, the learned counsel for the assessee-HUF. The learned departmental representative cited and very much relied upon the Andhra Pradesh High Court decision in Sardarilal Changanlal v. CIT [1984] 148 ITR 440. In that case their Lordships considered the Supreme Court cases-Gowli Buddanna v. CIT [1966] 60 ITR 293, N.V. Narendranath v. CWT [1969] 74 ITR 190 and Kalyanji Vithaldas v. CIT [1937] 5 ITR 90 (PC) on the one hand and the seemingly conflicting decisions of the Hon'ble Supreme Court with the above decisions rendered in C. Krishna Prasad v. CIT [1974] 97 ITR 493 and Surjit Lal Chhabda v. CIT [1975] 101 ITR 776 and they have summarised the legal position which can be deduced from a consideration of the above and other case law on the point into two propositions. The two propositions were found as follows :
(1) Where the property 'was originally' owned by coparceners of a HUF and later devolved on a sole surviving coparcener who had female members in his family, the character of the property as HUF does not change in spite of the temporary reduction of the number of coparceners, and the sole surviving coparcener has to be assessed as a HUF as in Gowli Buddanna's case [1966] 60 ITR 293 (SC). Similarly, where the property of a HUF is partitioned, the property so allocated to a single coparcener who has female members in the family has to be assessed as HUF, on the principle of Gowli Buddanna's case as applied in Narendranath's case [1969] 74 ITR 190 (SC). Where, however, there is physical absence of female members entitled to maintenance on the property, the sole surviving coparcener in possession of the abovementioned property has to be assessed as an individual till such time that he gets married. That is the exception to the rule in Gowli Buddanna's case [1966] 60 ITR 293 (SC), made in Krishna Prasad's case [1974] 97 ITR 493 (SC).
(2) But where the property was not owned by a HUF before it came to be owned by a sole surviving coparcener living with female members of the family entitled to maintenance, the assessment has to be made as individual. The reason is that before it got converted as joint family property it was not owned by coparceners of a HUF. After conversion too the assessment remains so till a son is born. Such a conversion as joint family property occurred for the first time in the hands of the sole surviving coparcener by reason of the gift by the father in Kalyanji's case [1937] 5 ITR 90 (PC) and by reason of the sole coparcener throwing his separate property into family hotchpot in Chhabda's case [1975] 101 ITR 776 (SC). The property would have to be assessed as individual even in spite of the existence of female members, until a son was born who could have a right by birth. That is the rule in Kalyanji's case [1937] 5 ITR 90 (PC)." (p. 447) As can be seen from the second proposition stated above when the property was not owned by a HUF before it came to be owned by a sole surviving coparcener living with female members of the family entitled to maintenance, the assessment has to be made as individual. Now in this case the wife and two daughters of Shri S.V. Anandmohan are only persons entitled to maintenance. Marriage expenses to which the daughters are entitled to, amount to meeting one sort of the right of maintenance vested in them only. For applying this proposition we have to know what is the origin of the investment in the impugned company held by Shri S.V. Anandmohan. Was it HUF's income prior to his coming into possession of the same as sole surviving coparcener ? However, no investigation of any sort in this regard seemed to have been made by either of the lower authorities. Therefore, there is no material to dispose of the appeals on this point.
8. The only point on which the revenue wanted heavily to rely upon is that the funds of the assessee-HUF were continued to be invested and, thus, the earning of profits by the impugned company has got direct nexus with the utilisation of the funds of the assessee-HUF and, therefore, the share income derived from the impugned company should be assessed only in the hands of the assessee-HUF but not in the individual hands of Shri S.V. Anandmohan. This position taken by the revenue holds good despite the recitals in the partnership deed dated 1-4-1979 and despite the fact that in the order granting registration to the impugned company the ITO found that Shri S.V. Anandmohan became partner in the impugned company only in his individual capacity with effect from 1-4-1979. This fundamental argument of the learned departmental representative is sought to be disputed factually by Shri M.S. Swamy, the learned counsel for the assessee. According to him there was no nexus between the share income derived by Shri S.V. Anandmohan in his individual capacity and that of HUF income. He contends that the capital standing in the name of Shri S.V. Anandmohan's HUF is not that of capital contributed by a partner. The credit balance is nothing but money advanced to the firm. The HUF is not a partner in the firm but only a creditor. The assessee-HUF was also assessed to gift-tax vide order of the GTO dated 4-7-1981 for the assessment year 1980-81 for the deemed gift. The GTO took the share of interest forgone in favour of Shri Anandmohan at Rs. 7,000 and assessed it to gift-tax as the HUF gone out of the firm whereas individual came in as a partner. Therefore, it can be seen that it is the case of the assessee that for the assessee to come out as a partner of the impugned company giving its place to Shri S.V. Anandmohan gift-tax was levied. The orders of the GTO dated 4-7-1981 were completed against Smt. Vijayalaxmi and Kumari Sridevi and the gift was not completed against the assessee-HUF. So, it is factually incorrect to contend that for giving place to Shri S.V. Anandmohan the assessee-HUF was assessed to gift-tax.
9. Now let us see whether any amount of the assessee-HUF was invested in the capital account of the impugned company after 1-4-1979. It is the case of the assessee that the amounts standing in the name of the assessee-HUF in the impugned company did not represent capital contribution of the partner but represents only money advanced to the said firm and in support of that contention the interest payments made for the period from 1-4-1980 to 31-3-1981 was filed. The truth of the extract now filed before us in the paper compilation regarding the interest payment was never disputed by the learned departmental representative. As can be seen from the date of interest payment the assessee-HUF was paid an amount of Rs. 3,457.77 on 31-3-1981 by the impugned company towards interest on the advance made to it. So also on the same day an amount of Rs. 1,611.68 was found credited in the account of the partner Shri S.V. Anandmohan in his individual account. According to Shri M.J. Swamy, the learned counsel for the assessee, this would clearly show that the amounts standing to the credit of the assessee-HUF in the impugned company did not represent the capital invested but only represents advances made to the impugned company over which it was regularly receiving interest payment. Further the fact that some amount of interest was paid to the individual partner Shri S.V. Anandmohan also clinchingly proved that he had invested his own moneys in the impugned company and they have nothing to do with the assessee-HUF's moneys. Thus, the pivotal argument that there is a close nexus between the investment made by the assessee-HUF in the impugned company and the earning share income is anything but true. There are several clinching pieces of evidence to show that Shri S.V. Anandmohan became individual partner in the impugned company. Firstly, the declaration of other members of HUF that they do not want to risk themselves or the assessee-HUF with the business of the impugned company and their allowing Shri S.V. Anandmohan to carry on business on his own in the impugned company is one such piece of evidence which is already adverted to. The second piece of evidence is the partnership executed between Shri S.V. Anandmohan and one Shri Subbaguruvaiah. The preamble of the partnership deed gives an idea which is as follows :
We both the partners were carrying on business in Shroff and etc., in the name any style of Segu Venkata Narayana Setty & Co. on the strength of a partnership deed executed on 18-4-1972 at Nandyal till 31-3-1979 and whereas partner S.V. Anandmohan ceased to be a partner in his HUF capacity with effect from 31-3-1979 and whereas S.V. Anandmohan wanted to become a partner in his individual capacity with effect from 1-4-1979 and onwards, this deed is executed with the following terms and conditions.
They agreed to carry on business in Shroff and etc., in the name and style of Segu Venkata Narayana Setty & Co. at Nandyal. The investments made by the partners were agreed to carry interest at the rate mutually agreed upon by the partners. The profit sharing ratio should be : S.V. Anandmohan 60 per cent and G. Subbaguruvaiah 40 per cent. The books of account of the firm should be closed to profit and loss for the first time by 31-3-1980 and later on by 31st March every year and the resultant profit and loss should be shared along with partners in the profit sharing ratio mentioned above. Nowhere in the partnership deed it was found that the amount standing in the name of the assessee-HUF should be treated as the capital brought in by Shri S.V. Anandmohan. If it were to be so then the amount standing to the credit of the assessee-HUF was an ascertained sum and it would have been mentioned in the partnership deed specifically. Further this deed of partnership dated 1-4-1979 was filed along with Form No. 11A before the same ITO and he had granted registration to the firm. In the registration order dated 24-5-1981, copy of which is furnished to us. it is stated that Shri S.V. Anandmohan ceased to be a partner in his HUF capacity with effect from 31-3-1979 and became a partner in his individual capacity with effect from 1-4-1979. Thus, even a reading of the partnership deed suggested to the ITO that Shri S.V. Anandmohan became a partner in his individual capacity in the impugned company and he ceased to be a partner in his HUF capacity.
10. We have considered the various arguments and also the records produced before us. We are of the opinion that the share income derived from the impugned company for these four assessment years should be rightly included in the hands of S.V. Anandmohan. Firstly, we have to hold that there is no nexus established between the investment of funds of the assessee-HUF and the share income derived from the impugned company. Neither the income nor the assets of the assessee-HUF went into the earning of the share income from the impugned company. We have to further hold that the amount standing in the name of the assessee-HUF in the books of the impugned company was only in the capacity of a creditor from 1-4-1979 but not as contribution of share capital. This finding of ours is supported by the fact that the assessee-HUF derived interest income from the impugned company for the period from 1-4-1979 to 31-3-1980. So also, for the same period Shri S.V. Anandmohan also derived interest income on his own individual investment. That very fact goes to show that the assessee-HUF as well as Shri S.V. Anandmohan had invested amounts in the impugned company and two separate accounts were maintained for such investments and separate interest amounts were credited to each of them go to prove that Shri S.V. Anandmohan must have invested his funds in the impugned company. Further there is no stipulation in the partnership deed as to how much share capital should be brought by each of the partners.
11. Now let us see what is the significance of the recitals specifically made in the partnership deed dated 1-4-1979. In Satinder Kumar (HUF) v. CIT [1971] 106 ITR 64 (HP) the facts were that the assessee was a HUF. S was its karta. He was a partner in the firm R carrying on business in Lower Bazar, Simla, from the assessment year 1963-64. On 14-1-1966 S along with some others started another partnership firm V at Lower Bazar. Simla, itself and began doing the same business as that of the firm R for the assessment years 1967-1968 and 1968-69. The assessee-firm returned losses derived from the firm V. However, for assessment year 1968-69 the HUF filed a revised return in which the share income derived by S from the firm V was omitted. The said share income derived by S from the firm V was included in his individual return for assessment year 1968-69 and also in the returns for 1969-70 and 1970-71, the ITO accepted individual returns of S. The Addl. CIT wanted to revise the orders of the ITO under Section 269. In the reference to the High Court it was held that the mere circumstance that S was the karta of the assessee-family and at the same time a partner in a firm would not lead to a presumption that he represented the assessee family in the partnership firm. If a karta declares that he is acting for himself alone, no such presumption can be raised. Whether he is acting for himself alone or on behalf of family is a matter governed by very different considerations. If he does not claim to act on behalf of the assessee, there must be clear and definite material, if the contrary is to be proved, linking the family with the business carried on by the karta. In that case their Lordships held that there is no evidence to show that S drew on the family funds or acted to the detriments of the family assets in carrying on of such business and there is no material concerned indicating that S was representing the family in the firm V.
12. Another decision which we came across in support of our decision is found in CIT v. Ram Narain [1980] 126 ITR 267 (Punj. & Har.). In that case it was held that it is a fundamental principle of law of partnership that the relation of partnership arises from contract and not from status. It is clear in law that as a consequence of partition between the members of a HUF, each member of the HUF gets the share in his own right. In that case the HUF consisted of the karta, his wife and three sons. The HUF used to be a partner in a firm having one-fourth share. The karta used to represent the HUF in the firm. There was a partial partition in the family as a result of which the one-fourth share in the firm was divided equally between the five members of the family each taking one-fifth share. A memorandum of partition was drawn up according to which the capital standing to the credit of the family in the books of the firm was also divided into five shares and, thenceforward the amount which fell to the share of four members other than the assessee were treated as loans from them. The ITO recognized the partial partition. The four members filed separate returns showing the income in their individual capacity in respect of one-fifth share of the one-fourth share of income derived from the firm. The Tribunal held that each assessee should be treated as an individual. The Punjab and Haryana High Court upheld the correct status determined by the Tribunal.
13. Further, according to the Indian Partnership Act, 1932, partnership is a question of contract. Nothing prevents a firm to be reconstituted. If it is a partnership at will nothing prevents a partner to retire. Therefore, the agreement on 31-3-1979 by other members of the HUF may as well be taken to be a date of retirement. It is no doubt true that for all practical purposes of partnership law only the karta used to represent his family and he can only be recognised as a partner. A partner may be representing his own family or he may be a benamidar or trustee for others. The relationship of the partner with third parties does not bind the partners. On 1-4-1979 the partnership which came into existence on 18-4-1972 came to an end and in its place a fresh partnership came into being and in the said partnership the assessee-HUF is not a partner and, therefore, apart from all other considerations on facts that the assessee-HUF did not continue as a partner from 1-4-1979 the share incomes for these four assessment years cannot be held to belong to the assessee-HUF. Under the circumstances the order of the AAC is legally and factually correct and, therefore, it needs no interference from us.
14. The appeals of the department fail and are dismissed.