1950 (1) TMI 22 - HC - Income Tax

Court rules sum withdrawn from family business not taxable as profit. Clarifies HUF partition vs. partnership dissolution.

The Court ruled in favor of the assessee, holding that the sum withdrawn from the partitioned family business should not be treated as his share of ... - Issues:Assessment of Income Tax on a sum withdrawn by the assessee from a partitioned family business.Analysis:The case involved the assessment of Income Tax on a sum withdrawn by the assessee from a partitioned family business. The elder brother took over the entire assets of the Colombo business in a partition arrangement, paying the younger brother a specified sum as his share. The assessee invested his share in his elder brother's firm, and the interest earned was subjected to income tax. The Income Tax Officer treated a portion of the sum withdrawn by the assessee as his share of profits accrued at the time of partition and taxed it under Section 4(1)(b)(iii) of the Income Tax Act. The Appellate Assistant Commissioner set aside the order, but the Tribunal reversed it, relying on a previous court decision.The main argument was whether the sum withdrawn by the assessee constituted his share of profits from the family business at the time of partition. The Revenue authorities contended that profits received by the family business before partition should be deemed divided among the brothers, and the sum withdrawn by the assessee represented his share of profits. However, the Court disagreed, distinguishing the case from partnership dissolution scenarios.The Court highlighted the distinction between partnership dissolution and Hindu undivided family partition. In a partnership, each partner has a definite share in capital and profits, making it possible to ascertain individual interests. In contrast, until a Hindu undivided family partitions, no member can claim a specific share in the family property or income. On partition, members are entitled to a share of existing assets without a detailed account of past transactions. The Court emphasized that the sum withdrawn might have been entirely from capital, and there was no legal basis to attribute it solely to profits.Regarding a previous court decision cited by the Tribunal, the Court noted the differences in the factual circumstances. The previous case involved the family being in receipt of profits before partition, whereas the present case dealt with the division of assets at partition without a clear allocation of profits. The Court concluded that the sum withdrawn by the assessee should not be considered his share of profits, ruling in favor of the assessee and awarding costs.In conclusion, the Court held that the sum withdrawn by the assessee from the partitioned family business should not be assessed as his share of profits for Income Tax purposes. The decision was based on the principles governing Hindu undivided family partitions and the lack of explicit profit allocation in the partition deed. The assessee was granted costs for the reference.