P.V. THAKAR, C/O.M/S.MUKUND vs. THE COMMISSIONER OF INCOME TAX

ITR/46/1999HC GujaratGJHC24025204199925 June 2008Author: HONOURABLE MR. JUSTICE JAYANT PATEL,HONOURABLE MR. JUSTICE AKIL KURESHI16 pages
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What were the facts?

The assessee, P.V. Thakar, was a Karta of a Hindu Undivided Family (HUF) comprising himself, his wife, and minor son. The HUF held a 75% share in the partnership firm M/s. Mukund. A partial partition of the HUF was effected on 19.4.1977, recognized by the Income Tax Officer (ITO) on 17.3.1979. The partition deed stipulated that each member would receive an equal share from the HUF's 75% profit share, creating an overriding title in favour of the wife and son. This was accepted by the Revenue from Assessment Year (AY) 1978-79 to 1987-88. In AY 1987-88, the firm dissolved, and P.V. Thakar became the sole proprietor. The assessee continued to claim a 2/3rd share for his wife and son. The Assessing Officer (AO) in AY 1988-89 held the entire income as the assessee's individual income, deeming the partition a colourable device. The Commissioner of Income Tax (Appeals) [CIT(A)] directed the AO to exclude 1/3rd share each for the wife and son. The Income Tax Appellate Tribunal (ITAT) held that the wife and son were entitled to 1/3rd share each from the original 75% profit share but not from the remaining 25% share, and the assessee was entitled to a 50% deduction.

What did the High Court hold?

The High Court held that the partial partition of the HUF and the resulting overriding title in favour of the wife and minor son were valid and had been recognized by the Department in earlier assessment years. The Court referred to Apex Court decisions, particularly L. Hirday Narain v. ITO, which established that when a Karta represents an HUF in a partnership, the income belongs to the HUF, not the Karta's individual income, and Section 64 is not attracted. The Court found that the Tribunal, while accepting the overriding title in principle, erred in restricting its application to only 75% of the profits without any factual basis. The Court held that the overriding title should apply to the entire business income. Consequently, each member of the HUF, namely Shri P.V. Thakar, his wife, and his minor son, were entitled to an equal 1/3rd share each in the total income derived from the business. The Court answered the assessee's questions 1 and 2 in favour of the assessee and against the Revenue. Regarding the Revenue's Question 1, it was answered against the Revenue and in favour of the assessee. For the Revenue's Question 2, the Court noted that the Tribunal had not made any specific finding that Section 64 had no application, and therefore, the question did not arise from the Tribunal's judgment and was not answered.

What were the issues?

1. Whether the Tribunal is right in holding that the assessee's wife and son are entitled to receive 1/3rd share each only from 75% of the business profits, and not from the remaining 25% (Question 1 referred by the assessee). 2. Whether the Tribunal is right in holding that the assessee is entitled to a deduction of only 50% and not 2/3rd of the total business income (Question 2 referred by the assessee). 3. Whether the Appellate Tribunal is right in confirming the CIT(A)'s order directing the AO to exclude 2/3rd of the profits from M/s. Mukund as having accrued in favour of the assessee's wife and minor son on account of an overriding title (Question 1 referred by the Revenue). 4. Whether the Appellate Tribunal is right in holding that the aspects of Section 64 have no application in the instant case (Question 2 referred by the Revenue). Assessee's contentions: The assessee argued that following the partial partition and the conversion to a sole proprietorship, the 1/3rd share proportion amongst the three HUF members should continue for the entire business income, and the Tribunal erred in restricting the share of the other two members and assessing the assessee's share at 50% or in considering consequences upon dissolution. The assessee relied on the principle that the Karta represents the HUF, and income of the HUF is not the individual income of the Karta, thus Section 64 is not attracted. The assessee cited L. Hirday Narain v. ITO, CIT v. Harbhajan Lal, CIT v. Jayantilal Prem Chand Shah, and Charandas Haridas & Anr. v. Commissioner of Income Tax. Revenue's contentions: The Revenue contended that an HUF cannot be a partner, and if the Karta joins a firm, the income is taxed in the Karta's individual capacity. The earlier assessment accepting the partition was contrary to legal position. The Revenue relied on Sunil J. Kinariwala, National Wire Manufacturing Co. v. Commissioner of Income Tax, and Rasik Lal & Co. v. Commissioner of Income Tax, arguing that the Karta's capacity as HUF Karta is irrelevant for partnership law and income assessment.

Which sections of the Income-tax Act were involved?

Section 64,Section 171

AI-generated summary — verify with the full judgment below

ITR/46/1999 1/16 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

ITR/46/1999 2/16 JUDGMENT ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE JAY

The order continues below.

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