TMI Blog1984 (8) TMI 134X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the business with sundry debtors, sundry creditors, closing stock and cash, etc., of the HUF of Sunkari Venkata Dalappa, Cheepurupalli, as at 31-3-1979. " Regarding capital contribution, there was the further clause : " 5. The capital of the partnership business is as follows : Rs. 1. Sunkari Venkata Dalappa, first partner 14,643.50 2. Sunkari Mohana Rao, second partner 14,643.49 3. Sunkari Jagadeswara Rao, third partner 14,643.49 " The capital was the excess of the value of assets over liabilities divided equally amongst the father and two sons. 2. For the assessment year 1980-81, the assessee sought for registration. Originally, registration was refused but there were appeals and eventually the matter came to be decided by the Tribunal in IT Appeal No. 1309 (Hyd.) of 1982, dated 27-7-1983, wherein the facts were elaborated upon. The Tribunal concluded that notwithstanding the provisions of section 17J(9), introduced with effect from 1-4-1980, since the provisions did not invalidate partial partitions under the general Hindu law, but only deemed that the partial partition did not take place for certain purposes enumerated in the said sub-section, there was no b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the fiction in the hands of the HUF would not, according to him, arise. He also submitted that in the case relied on by him, the Supreme Court had held that the connection between gifts made by the assessee and the income earned by the minors was a remote one and it could not be said to arise directly or indirectly from the transfer of assets. So, also, in the present case, the income of the firm could not be said to have arisen directly or indirectly out of assets transferred by the HUF to the firm. The income arose because the partners were working full time. The other salary payments were only in the region of Rs. 3,000. The firm derived income, he stated, primarily because of personal exertions of the partners and, therefore, the income could not be considered as having been earned by utilisation of HUF funds. In any view of the matter, he, therefore, submitted that the income had to be eluded from the hands of the assessee-HUF. He also relied on the order expressing minority view in ITO v. R. Brahadeeswaran [1983] 6 ITD 798 (Mad.)(TM). 5. The learned departmental representative, in reply, submitted that following the ratio of the judgment of the Supreme Court in CIT v. S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a physical division, a physical division of the property, but a physical division of the income without a physical division of the property producing the income shall not be deemed to be a partition ; or (ii) where the property does not admit of a physical division, then such division as the property admits of, but a mere severance of status shall not be deemed to be a partition ; (b) 'partial partition' means a partition which is partial as regards the persons constituting the Hindu undivided family, or the properties belonging to the Hindu undivided family, or both. " By virtue of the provisions of section 171(9)(a), the order recording that there was a partial partition which was made by the ITO, dated 29-11-1979, has become null and void. The partition, according to the assessee, had taken place on 31-3-1979 and, therefore, in terms of section 171(9)(a), no finding was to be recorded that there was partial partition and even such a claim was not to be enquired into. The result is that the claim of partial partition made by the assessee becomes, as far as the provisions of section 171 are concerned, non est on the facts. 7. Under the provisions of section 171(9)(a), a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the 1922 Act which had been construed as not being applicable to partial partitions. We have already held that section 171 of the Act applies to all partitions--total and partial--and that unless a finding is recorded under section 171 that a partial partition has taken place the income from the properties should be included in the total income of the family by virtue of sub-section (1) of section 171 of the Act. To put it in other words, what would have been the position of an HUF, which had claimed in assessment proceedings under the 1922 Act that a total partition had taken place and had failed to secure a finding to that effect in its favour under section 25A thereof, would be the position of an HUF, which has failed to substantiate its plea of partial partition as regards property under section 171 of the Act. The property which is the subject-matter of partial partition would continue to be treated as belonging to the family and its income would continue to be included in its total income until such a finding is recorded. That is the true effect of section 171(1). It was, however, urged on the analogy of the income from a family property alienated by a karta in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n recognised under section 171 and in view of the ratio of the judgment of the Supreme Court, referred to above, the HUF has to be deemed to be the owner of all the property it was possessed of which was the subject-matter of partition and has also to be deemed to be the recipient of the income from such property. 9. Notwithstanding the partial partition being non est in view of the provisions of section 171(9), the members were not prohibited from entering into a partnership and such partnership has also been recognised in IT Appeal No. 1309 (Hyd.) of 1982 dated 27-7-1983 by this Tribunal. The Supreme Court, in Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33, had set out certain tests to determine whether income could be considered to be that of an HUF or not. These tests are as under : " ...The other tests enumerated are : (1) Whether the income received by a coparcener of a Hindu undivided family as remuneration had any real connection with the investment of the joint family funds ? (2) Whether the income received was directly related to any utilization of family assets ? (3) Whether the family had suffered any detriment in the process of realization of the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apportioned to the father and two sons. At this stage, the question arises as to in whose hands, the income so apportioned is to be taxed. The learned counsel very fairly placed all relevant facts before us and what we find is stocks worth Rs. 1,43,171, which belonged to the family business, were taken over and traded in by the father and two sons who became partners of the firm. The aggregate turnover came to Rs. 4,02,000. No doubt, they worked full time because salary paid to others is only in the region of Rs. 3,000. In this background, we have to apply the tests enumerated in the case of Raj Kumar Singh Hukum Chandji. The income had real connection with the utilisation of joint family funds, because the value of stock was more than one-third of the total turnover. It was directly related to the utilisation of family assets and the family assets had suffered detriment in the process of realisation of income, because the stock was sold and the income was received with the aid and assistance of family funds. Once the partial partition is non est, in the aforesaid background, and in view of the ratio of the judgment of the Supreme Court in the case of Kalloomal Tapeswari Prasad (HU ..... X X X X Extracts X X X X X X X X Extracts X X X X
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