1987 (10) TMI 83 - AT - Income Tax

Summary

Issues Involved:
1. Determination of whether the share of profits from the firm M/s. Chhaganlal Keshavji belongs to Bharat B. Shah in his capacity as the karta of his HUF or in his individual capacity.
2. Validity of the gift of Rs. 6,000 received by Bharat B. Shah and its impact on the assessment of income.
3. Assessment of income in the hands of HUF or individual based on the source of funds.

Detailed Analysis:

Issue 1: Determination of Capacity (Karta of HUF vs. Individual Capacity)
The primary issue in both appeals is whether the share of profits from the firm M/s. Chhaganlal Keshavji belongs to Bharat B. Shah as the karta of his HUF or in his individual capacity. The Income-tax Officer initially rejected the claim that Bharat B. Shah was a partner in the status of HUF and assessed the income in his individual capacity. The AAC, however, agreed that Bharat B. Shah constituted an HUF with his wife and allowed the assessee's appeals. The Tribunal, in its earlier order, directed the AAC to determine whether the income earned by the assessee as HUF in the partnership is to be assessed in the hands of HUF or individual.

Issue 2: Validity of the Gift
The gift of Rs. 6,000 received by Bharat B. Shah from Manubhai Amrutlal Desai was a crucial factor. The Tribunal previously held that the gift made on 23-4-1975 was validly made in favor of the HUF of Bharat B. Shah and his wife, relying on the Supreme Court decision in Pushpa Devi v. CIT [1977] 109 ITR 730. However, the Tribunal remanded the case to the AAC to determine if the income from the firm was earned after investing ancestral funds or funds from the gift.

Issue 3: Assessment of Income Based on Source of Funds
The AAC, upon reconsideration, found that Bharat B. Shah entered into the partnership agreement in his capacity as the karta of his family and invested capital from joint family funds. However, the Tribunal noted that the Rs. 6,000 gift was received as a cheque and not from ancestral property. The Tribunal emphasized that Bharat B. Shah had full control over the amount as he was the only coparcener, similar to the case of Surjit Lal Chhabda v. CIT [1975] 101 ITR 776, where the Supreme Court held that income from self-acquired property thrown into the family hotchpot is assessable in the individual's hands if there is no son to take an interest by birth.

The Tribunal also referred to the Privy Council decision in Kalyanji Vithaldas v. CIT [1937] 5 ITR 90, which held that income received from a firm by a partner who is the head of a joint family but without a son is assessable in the individual's hands. The Tribunal concluded that since Bharat B. Shah and his wife constituted the HUF, and the source of the partnership income was the gift over which he had complete control, the income should be assessed in his individual capacity.

Conclusion:
The Tribunal held that the income by way of share of profits from the partnership firm should be assessable in the hands of Bharat B. Shah in his individual capacity. The AAC's order was found to be lacking in consideration of the Tribunal's directions, and thus, the departmental appeals were allowed.