1986 (7) TMI 178 - AT - Income Tax

Summary

Issues Involved:
1. Validity of partial partition of the assets of the undivided family.
2. Date on which such partition took place.
3. Inclusion of Rs. 21,000 in the total income of the family based on the finding that the partial partition was not recognisable under the law.

Issue-wise Detailed Analysis:

1. Validity of Partial Partition of the Assets of the Undivided Family:
The primary issue addressed is whether the partial partition declared by Shri Sohan Singh Dhingra on 30-12-1978 was valid under the Income-tax Act, 1961. The declaration indicated that Rs. 50,000 was allotted to his minor son and Rs. 1,00,000 was allotted jointly to himself and his wife. The ITO found that the physical division of these amounts did not occur, and only book entries were made. The ITO concluded that the partition was effective from 2-4-1979, when the investment in UK Paint Industries was divided among the family members. The Tribunal confirmed that the books of account were maintained in the normal course of business, but emphasized that for a partition to be valid under Section 171, the property must be physically divided or, if not possible, divided in a manner the property admits. The Tribunal held that the creation of debts against the net wealth did not constitute a valid partition of any family property. The partition was recognized only when the family's interest in UK Paint Industries was divided on 2-4-1979.

2. Date on which such Partition Took Place:
The Tribunal examined the facts and concluded that the partial partition did not occur on 30-12-1978, as claimed by the assessee, but on 2-4-1979. The ITO's observation that the entries for division were made in the books of UK Paint Industries on 2-4-1979 was upheld. The Tribunal emphasized that the definition of partition under Section 171 requires the physical division of property or an alternative division if physical division is not possible. The Tribunal found that the family did not specify the property to be divided on 30-12-1978 and only created debts against the net wealth, which did not meet the criteria for a valid partition under the Act.

3. Inclusion of Rs. 21,000 in the Total Income of the Family:
The ITO included Rs. 21,000 in the total income of the family, concluding that the partial partition was not recognisable under the law. The Tribunal reversed the AAC's finding that the partial partition on 30-12-1978 was valid, thereby supporting the ITO's inclusion of the income derived from the partitioned assets in the family's total income. The Tribunal directed the ITO to ascertain the exact income derived from the partitioned amounts by examining the books of account of the parties where the money was deposited. The Tribunal set aside the ITO's order for the assessment year 1981-82 and instructed a fresh assessment to determine the real income earned from the divided assets.

Conclusion:
The Tribunal upheld the ITO's finding that the partial partition took place on 2-4-1979, not 30-12-1978, and reversed the AAC's decision. The Tribunal directed a fresh assessment to ascertain the actual income derived from the partitioned assets, emphasizing the need for a valid partition under Section 171 of the Income-tax Act, 1961. For statistical purposes, the appeal was treated as allowed.