1979 (12) TMI 19 - HC - Income Tax

Court rules in favor of assessee on tax issues, confirms HUF status. Salary from Legislative Council excluded.

The court ruled in favor of the assessee on all three issues. The ad interim payments were considered capital receipts and not taxable as revenue. The ... HUF, Income Issues Involved:1. Taxability of ad interim payments.2. Determination of the assessee's status as Hindu Undivided Family (HUF).3. Exclusion of income from salary earned as a Member of the Legislative Council (M.L.C.) from the total income of the assessee.Issue-wise Detailed Analysis:1. Taxability of Ad Interim Payments:During the assessment year 1970-71, the assessee received Rs. 29,922 as interim payment from the State Government of Bihar. The assessee claimed this amount as exempt from taxation, arguing it was a capital receipt, citing the Supreme Court's decision in S. R. Y. Sivaram Prasad Bahadur v. CIT [1971] 82 ITR 527. The Income Tax Officer (ITO) rejected this claim, treating it as a revenue receipt, and the Appellate Assistant Commissioner (AAC) upheld this decision. However, the Income-tax Appellate Tribunal accepted the assessee's claim, considering the interim payment as a capital receipt based on the Supreme Court's ruling.The court analyzed the nature of interim payments under the Bihar Land Reforms Act, comparing it with similar provisions in the Madras Estates (Abolition and Conversion into Ryotwari) Act, 1948. It was determined that the interim payments were meant to compensate for the loss of income due to the abolition of the estate, not as interest on compensation. Thus, the court concluded that these payments were capital receipts, not taxable as revenue. Consequently, the Tribunal's decision to treat the interim payments as capital receipts was upheld.2. Determination of the Assessee's Status as HUF:The assessee succeeded the late Maharaja of Chotanagpur, who was assessed as an individual. Post the Hindu Succession Act, 1956, the assessee claimed to be assessed as an HUF, arguing that the rule of primogeniture had been rendered ineffective. The ITO rejected this claim, but the AAC accepted it for the assessment years 1965-66 to 1969-70, a decision upheld by the Tribunal.The court considered the implications of the Hindu Succession Act, 1956, which nullified customs or usages in force before its enactment. The assessee's declaration of his status as an HUF from 1965-66 onwards was accepted by the AAC and the Tribunal. The court noted that the assessee had unequivocally declared his intention to impress his individual income with the character of joint family income, a declaration accepted by the tax authorities. Therefore, the court concluded that the status of the assessee for tax purposes should be HUF, except for income from house property, which, by virtue of the fiction created by the Income Tax Act, 1961, should be assessed as individual income.3. Exclusion of Income from Salary Earned as M.L.C.:The assessee received remuneration as a member of the Legislative Council, which he did not include in the HUF's income, claiming it as his individual income. The ITO included this amount in the assessee's individual income, but the AAC and the Tribunal excluded it from the HUF's assessment.The court acknowledged that the income earned as a member of the Legislative Council was the individual income of the assessee. Since the assessee's status as an HUF was accepted for other income, this individual income could not be assessed as part of the HUF's income. Thus, the court upheld the Tribunal's decision to exclude the salary income from the HUF's total income.Conclusion:The court answered all three questions in the affirmative, favoring the assessee and against the department. The ad interim payments were deemed capital receipts, the assessee's status as an HUF was confirmed, and the salary earned as an M.L.C. was excluded from the HUF's income. Each party was ordered to bear its own costs.