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Andhra Pradesh High Court
Pannabai - Appellant
Versus
Income tax, A.P., Hyderabad - Respondent
Decided On : 04-22-85
INCOME TAX - Assessment - Status of assessee - Whether the assessee can be taxed as a body of individuals - Held, yes.
Fact of the Case:
The assessee, Smt. Panna Bai, was the wife of one Sri Karodimal, who was a partner in a firm carrying on the business of manufacture and sale of khandasari sugar and other by-products. He had 30 per cent share in the said firm. He died intestate on 16-5-1968 leaving behind him, his wife and six minor children. On his death, his wife, Smt. Panna Bai, entered into a fresh deed of partnership dt. 24-5-1968 with the other partners to continue the business of the firm and she was allotted the same 30 per cent share held by her deceased husband in the firm. Some other changes in the constitution of the firm were also made. The deed of partnership was however given effect to from 17-5-1968.
Finding of the Court:
The Tribunal observed that there is no doubt that after the death of Sri Karodimal, his properties, whatever they are, would devolve on his heirs under S. 8 of the Hindu Succession Act since Karodimal died intestate. S. 19 of the said Act further states that the property inherited by heirs of the deceased under S. 8 would be held by them as tenants-in-common. Therefore, all the properties including the interest of the deceased in the firm of M/s. Mysore Khandasari Sugar Mills had devolved on the legal heirs viz., the wife and the children of Shri Karodimal as tenants in-common. On the death of Shri Karodimal, his heirs could have demanded the interest of Shri Karodimal in the firm. There are well-established principles in regard to determination of the interest of a partner, but that has not been done here. On the other hand, the capital standing in the name of Shri Karodimal has been retained in the business of the firm. At this juncture, we would like to point out that the I. T. O. is not correct in stating that the capital standing in the name of Shri Karodimal has not been taken as the capital of the widow, Smt. Panna Bai From the accounts, it is clear that the balance standing in the account of Shri Karodimal has been transferred to Smt. Panna Bai s account at the beginning of the accounting year, relevant to the year under consideration. In other words, the lady agreed to join as a partner and continue the same business, which was carried on by the firm in which her deceased husband was a partner and after his death by leaving the capital standing in the name of the deceased intact as her capital. She has the same share as her husband was getting. She has thus entered into the partnership agreement for the purpose of carrying on the business specially and evidently with an idea of benefiting her children with profits arising from the business. It is true that there is no agreement between herself and the minors represented by anybody else. Nevertheless, she is entitled to continue the business for the benefit of the minor children and from her conduct it is manifest that she is entitled to continue the business for the benefit of herself and her children and for that purpose left the capital standing in the name of her deceased husband in the firm and it was treated as her capital. It is also true that the minors are entitled to an interest in the firm which includes capital, but no demand has been made and no division of capital took place. From these it could be inferred that the assessee has been continuing the business which her husband carried on earlier with the same rights and obligations and definitely for her benefit and for the benefit of her minor children.
Issues: Whether on the facts and in the circumstances of the case, the share income derived from the firm can be taxed fully in the hands of the assessee or only 1/7 of the share income representing only her share in the said share income be taxed in her individual hands?
Ratio Decidendi: The Tribunal erred in modifying the assessment in the status of a "body of individuals" consisting of Smt. Panna Bai and her minor children. The Tribunal should have annulled the assessment with liberty to the I. T. O. to assess the income in the status of a body of individuals, if emitted by law, after issuing notice to that Jody of individuals to submit a return, as required by S. 139 (2) of the Income-tax Act.
Final Decision: Answered against Revenue.
( 1 ) ONE Sri Karodimal was a partner in the firm M/s. Mysore Khandasari Sugar Mills, Mukthiargunj, Hyderabad, carrying on the business of manufacture and sale of khandasari sugar and other by-products. He had 30 per cent share in the said firm, as evidenced by a deed of partnership dt. 19-8-1966. He died intestate on 16-5-1968 leaving behind him, his wife and six minor children. On his death, his wife, Smt. Panna Bai, entered into a fresh deed of partnership dt. 24-5-1968 with the other partners to continue the business of the firm and she was allotted the same 30 per cent share held by her deceased husband in the firm. Some other changes in the constitution of the firm were also made. The deed of partnership was however given effect to from 17-5- 1968.
( 2 ) FOR the assessment year 1970-71, the entire income representing 30 per cent share in the profits of the firm derived by Smt. Panna Bai was sought to be assessed to tax in her hands. The assessee, Smt. Panna Bai, however, claimed that on the death of her husband, she merely stepped into his shoes as a partner of the firm, that while doing so she represented her six minor children also, all of them being the other legal heirs of her deceased husband, and that only 1/7th of her share in the profits derived by her from the firm was liable to be taxed. The I. T. O. negatived her claim holding that it was not recited in the fresh deed of partnership that the assessee was taken as a partner in the place of her deceased husband or that the capital in his account should be treated as her capital, that there was no sub-contract between the assessee and her minor children for sharing among themselves the income derived by the assessee from the firm, that there was no nexus between the capital that stood in the account of her husband in the firm and her being admitted as a partner of the firm, that there was no overriding title on the income derived by the assessee in favour of her children.
( 3 ) ON appeal preferred by the assessee, the Appellate Assistant Commissioner confirmed the findings of the I. T. O. While dismissing the appeal, the Appellate Assistant Commissioner added that the income derived by the assessee from the firm represented her share of profits therein on account of privity of contract between her and other partners, that she did not receive the income derived from the firm on behalf of her minor children and the provisions of Ss. 160 and 161 of the Income-tax Act had no application.
( 4 ) ON further appeal, the Income-tax Appellate Tribunal observed:"there is no doubt that after the death of Sri Karodimal, his properties, whatever they are, would devolve on his heirs under S. 8 of the Hindu Succession Act since Karodimal died intestate. S. 19 of the said Act further states that the property inherited by heirs of the deceased under S. 8 would be held by them as tenants-in-common. Therefore, all the properties including the interest of the deceased in the firm of M/s. Mysore Khandasari Sugar Mills had devolved on the legal heirs viz. , the wife and the children of Shri Karodimal as tenants in-common. On the death of Shri Karodimal, his heirs could have demanded the interest of Shri Karodimal in the firm. There are well-established principles in regard to determination of the interest of a partner, but that has not been done here. On the other hand, the capital standing in the name of Shri Karodimal has been retained in the business of the firm. At this juncture, we would like to point out that the I. T. O. is not correct in stating that the capital standing in the name of Shri Karodimal has not been taken as the capital of the widow, Smt. Panna Bai From the accounts, it is clear that the balance standing in the account of Shri Karodimal has been transferred to Smt. Panna Bai s account at the beginning of the accounting year, relevant to the year under consideration. In other words, the lady agreed to join as a partner and continue the same b
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