RATILAL KHUSHALDAS PATEL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under S. 66(1) of the IT Act at the instance of the assessee. The assessee is one Ratilal Khushaldas Patel, who has been assessed as an individual. The assessment year with which we are concerned is the asst. year 1957 58 for which the corresponding previous year is the financial year ending 31st March, 1957. Prior to the 1st April, 1958, the assessee was a partner in the firm of M/s Yogendra (P.) and Co. The partnership consisted of the assessee and one other person with three minors admitted to the benefits of the partnership and it was constituted under a deed of partnership dated 8th April, 1954. The assessee had a five annas share in the partnership. This share was held by him as an individual, and up to and including the asst. year 1956 57, the assessee was assessed as an individual in respect of this five annas share. On 1st April, 1956, the assessee got the partnership to transfer a sum of Rs. 25,000 from the account of the assessee to the account of the HUF of the assessee. Entries in connection with the transfer were made in the books of account of the partnership on 1st April, 1956, and corresponding entries were also similarly made in the books of account of the assessee as an individual and in the books of account of the HUF of the assessee. The assessee also at the same time threw his five annas share in the partnership into the common hotchpot of the HUF and impressed the same with the character of joint family property. On 7th April, 1956, a new deed of partnership was made between the assessee and his other partner in which it was made clear that the assessee held five annas share in the partnership as representing the HUF as from 1st April, 1956, and that as from that date he was a partner in the partnership as representing the HUF. The assessee also made a declaration on

(2.) ND July, 1956, affirming that as from 1st April, 1956, the HUF was the absolute owner of the five annas share held by the assessee in the partnership as also of the amount of Rs. 25,000 transferred from the account of the assessee to the account of the HUF in the books of account of the partnership. In the course of the assessment of the assessee for the asst. year 1957 58, the ITO sought to include the five annas share standing in the name of the assessee in the partnership in his individual assessment. The assessee contended that the five annas share was held by him as representing the HUF as from 1st April, 1956, and that the income from the partnership in respect of the five annas share was, therefore, not liable to be included in his individual assessment but could be included only in the assessment of the HUF. The ITO took the view that the transfer of the five annas share by the assessee to the HUF was hit by S. 16(3) (b) and that the income arising from that share was, therefore, liable to be included in the individual assessment of the assessee. The ITO was also of the view that, in any event, S. 16(1) (c) applied, since the partnership was a partnership at will and the assessee had, therefore, a right to reassume power directly or indirectly over the income of the partnership and that the income arising from the five annas share was, therefore, includible in the individual assessment of the assessee under S. 16(1) (c). The ITO accordingly included the income arising from the five annas share in the partnership in the individual assessment of the assessee. The assessee, being aggrieved by the order of the ITO, carried the matter in appeal before the AAC. The AAC took an entirely erroneous view of the case and held that the assessee had ceased to be a partner and in his place introduced the HUF as a partner in the partnership for the purpose of diverting the legitimate income belonging to him and that the said alleged change of partner was a sham transaction and that the assessee had, therefore, in his view not ceased to be a partner in the partnership. The AAC thought that there was a change so far as the partner was concerned, namely, that the assessee had ceased to be a partner and that the HUF had become a partner in the place of the assessee, and this, in the opinion of the AAC, was a sham transaction which he was entitled to ignore and, in this view of the matter, he treated the income arising from the five annas share in the partnership as income belonging to the assessee as an individual. The AAC accordingly held that this income was rightly included in the assessable income of the assessee. The assessee thereupon preferred an appeal before the Tribunal. The Tribunal, it appears, completely overlooked the deed of partnership dated 7th April, 1956, and thought that the first declaration of the intention of the assessee to convert his five annas share in the partnership into joint family property was made on 2nd July, 1956, when he made the declaration of that date and that such declaration of intention could not be given a retrospective effect so as to convert the five annas share from his separate and self acquired property into joint family property w.e.f. 1st April, 1956, and that consequently he was a partner in his individual capacity on 1st April, 1956. The Tribunal took the view that if the assessee was a partner in the partnership in the individual capacity on 1st April, 1956, which was the commencement of the year of account, the income arising from the five annas share was liable to be regarded as the individual income of the assessee and could not be treated as the income of the HUF. The Tribunal accordingly confirmed, though on different grounds, the inclusion of the income arising from the five annas share in the partnership in the individual assessment of the assessee. The assessee thereupon applied to the Tribunal under S. 66(1) for referring to this Court the question of law arising out of the order of the Tribunal and, on such application, the Tribunal referred to us for our opinion the following question of law :

(3.) BUT the learned Advocate General contended that, even if the five annas share in the partnership was impressed by the assessee with the character of joint family property, it was still hit by S. 16(3) (b) and the income arising from the said five annas share was liable to be included in the individual assessment of the assessee. Sec. 16(3) (b) is in the following terms :