TaxTMI 
TaxTMI 
1988 (8) TMI 146
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....mber, which would be the normal procedure, but was divided among ten different groups which were the permutation and combination of five members. The assessee is one such group. Only four of the five members are in his group. Each of the ten group was allotted one tenth (1/10th) of the sum, i.e. Rs. 1100 each. 4. These groups later had borrowed some funds from the parent HUF which was still existing. They had also received some gifts. The resultant funds were invested in acquiring debentures of Reliance Textile Industries. 5. As we mentioned the main HUF still continued to exist. What has happened in Feb., 1983 is a partial partition and under s. 171(9) such a partial partition cannot be recognised if effected after 1st Dec., 1978. Therefore, the income arising on the investments of Rs. 11,000, the subject-matter of partial partition was shown in the returns of the main HUF. However, the income arising from the investments of the borrowed funds and gifted funds were considered as the income of the ten minor groups and these were shown by the separate groups in their respective returns. They also claimed to have a status of HUF. 6. During the accounting year concerned, the ....
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....tax and is a colourable device. (3) There is an "exchange" for the purpose of s. 2(47) when the debentures were converted to ordinary shares giving rise to capital gains. 11. The CIT first dealt with the issue of status. She held that : (1) s. 171(9) introduced by the Finance Act, 1980 was brought in specifically to curb the creation of multiple HUF by means of partial partition. Partial partitions would no longer be recognised if it was effected after 31st Dec., 1978. (2) It is not correct to say that the intention behind the introduction of s. 171(9) is not clearly brought out in the section, or, in other words, the amendment has failed to achieve this object. The type of partial partitions attempted by the Main HUF, here is peculiarly a creation of IT Act because this "Act contemplated that a partial partition could either in respect of individuals of in respect of property." For this proposition, she referred to the Expln. (b) to s. 171(9) which reads :partial partition means a partition which is partial as regards the person constituting the HUF or both" Entities springing from a partial partition cannot be taken note of by the IT Act. So the Major HUF which has suffered pa....
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.... made with the single view of avoidance of tax in the hands of the major HUF and it is a colourable device and a subterfuge for the avoidance of tax. Assessment under s. 143(1) of the IT Act for the assessment years under consideration has resulted in orders prejudicial to the Revenue and are erroneous in law. The assessments are, therefore, annulled with direction to ITO to examine the issues of computation of total income as well as identify the assessee in whose hands the income has to be assessed." Shri Kaji, appearing for the assessee, made a preliminary submission that the CIT has annulled the proceedings and, therefore, there could not be any further action in respect of the same assessment. If the ITO wanted these income to be assessed in the hands of another assessee, then, s. 263 would not apply. Further submitted that an annullment cannot be followed by a direction. In our opinion, the expression "annulled" has been used by the CIT, not in the technical sense of total want of jurisdiction, but in a loose sense, almost equal to 'setting aside" the order. The CIT has given a direction to find out on whom the assessment could be made in respect of this income. It could b....
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.... she has her own reservations about the validity of such partition. But she does not make that as the basis of her order. In any case, she concedes that this type of partition would be hit by Expln. (b) to s. 171(9) which means that she agrees that such partitions were known and existed before the introduction of s. 171(9). So, we have to consider only this issued; whether the sweep of s. 171(9) is such that an entity coming into existence as a result of the partial partition cannot be assessed at all to income-tax and the income arising to that entity must be assessed in the hands of some one else. That is the issue. That is why she had directed the ITO to find out in whose hands this income is to be assessed. 15. In our opinion, s. 171(9) cannot and does not control the rights of the members of the HUF to claim partition and the manner of effecting the partition. That would be governed purely by the Hindu Law. This is a well settled proposition which do not require any authority. But, if an authority is to be cited, we will refer to the decision of the Supreme Court in the case of Charan Das Haridas and Anr. vs. CIT (1960) 39 ITR 202 (SC). At p. 208, the Supreme Court has obse....
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....f the HUF itself. As far as that income is concerned arising from the partitioned asset, the Department is justified in including it in the hands of the HUF. In fact, the assessee has also done so. What we are concerned in this appeal is not the income accruing or arising on the partitioned assets. What we are concerned is the income accruing to the joint family created as a result of the partial partition from assets which were acquired by them de hors of the partitioned assets. Such income, which has nothing to do with the joint family property, cannot be said to be accruing to the joint family. An individual member of an undivided family can certainly have income of his own either from his efforts or from his separate business or profession. The joint family cannot claim such income to be its income nor can the IT Department assess it in the hands of the joint family. If that is so, we do not see why a similar income accruing to two or more members of the joint family should be treated differently. The income accruing or arising to them from assets which has nothing to do with joint family to be their own income. It is thus clear that the right for partial partition is a right g....
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.... and appropriation in full of the present face value of the said debentures in exchange and in complete satisfaction thereof and that I/we are agreeable to subscribe to the new equity shares of the company in the ratio 1.4 Equity shares of the face value of Rs. 10 each of the Company credited as fully paid up for the footing that upon issued and allotment of new equity shares the present face value of each of the debentures as are exchanged in the manner aforesaid shall stand fully extinguished upon redemption by such satisfaction and exchange." This statement was given along with surrender of the debentures in the month of May, 1984. The assessee was given shares of face value of Rs. 4,200. On the date of receipt of these shares, they had a market value of Rs. 54,600. The question is whether any capital gains accrues on the surrender and issued of equity shares. 19. Shri Kazi submitted that there are 3 ways of looking to the transaction. The first is that the debenture holder had surrendered their debentures and are given the unredeemed part in money or money's worth. The assessee agree to subscribe to the new shares with this amount. Second is to consider that two transacti....
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....hri Kaji has pointed out that the consideration for surrendering the debentures is the same as the value of the debentures and it cannot be said that the assessee had received something extra. He referred to the entries in the books which would show the issue of an equivalent amount of the equity shares of the surrender face value of debentures. 20. It is the case of the CIT that the allotment of shares followed by the surrender value would amount to an "exchange" within the meaning of s. 2(47). The Supreme Court had an occasion to consider the meaning of the word "exchange" in the case of CIT vs. R.R. Ramakrishna Pillai (1976) 66 ITR 725 (SC). The Supreme Court observed that a person carrying on business may agree with a company floated by him that the assets belong to him shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay that money consideration, shares of a certain face value shall be allotted to the transferor. In that case there are in truth two transactions, one transaction of sale and the other a contract under which the shares are accepted in satisfaction of the liability to pay the price. In our opinio....