1990 (8) TMI 24 - HC - Income Tax

Court rules income from partnership firms by Hindu undivided family not assessable in individual's hands

The court ruled in favor of the assessee, determining that income derived from partnership firms by the Hindu undivided family is not assessable in the ... Assessment, Income Issues:Assessment of income derived from partnership firms in the hands of an individual under section 64(2)(b) of the Income-tax Act, 1961.Analysis:The judgment pertains to an application related to the assessment year 1981-82 under section 256(2) of the Income-tax Act, 1961. The case involves the assessment of income derived by an individual from partnership firms, specifically regarding the taxability of the share of profits from the firms in the hands of the individual under section 64(2)(b). The individual, originally a partner in two firms, impressed a sum of money with the character of his Hindu undivided family property before retiring and rejoining the firms as the karta of his Hindu undivided family. The Department contended that the income should be taxed as the individual's under section 64(2)(b), but the Tribunal held otherwise, stating that the income should not be included in the individual's assessment.The key legal issue revolves around the interpretation of section 64(2)(b) of the Income-tax Act, particularly determining whether the income derived by the Hindu undivided family from the partnership firms can be considered as income derived from the converted property. The court analyzed relevant precedents, including the Supreme Court's decision in CIT v. Prem Bhai Parekh, where it was held that the income must have a direct or indirect nexus with the transferred assets to be considered as derived from the converted property. The court also considered the decision in Bhaichand Jivraj Muchhala v. CIT, which emphasized the necessity of a connection between the transferred assets and the income generated.Moreover, the court referred to a Kerala High Court decision in CIT v. Cochin Refineries Ltd., highlighting the requirement of a direct connection between the business and the income generated. The court emphasized that section 64(2)(b) contains a deeming provision and should be strictly construed, stating that income derived from profits and not from the contributed capital cannot be considered as derived from the converted property. The court rejected the argument that Hindu undivided families in partnerships should be treated differently, asserting that the income must be directly linked to the converted property to fall under section 64(2)(b).Ultimately, the court answered the question referred to it in the affirmative and in favor of the assessee, concluding that the income derived from the partnership firms by the Hindu undivided family is not assessable in the individual's hands under section 64(2)(b). As a result, the Income-tax Application was dismissed, and the rule was discharged, with no order as to costs.