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1996 Supreme(MP) 402
1997 227 ITR 695 MP
N.K. Jain, A Tiwari J.
Commissioner Of Income-Tax
vs
Oriental Trading Co.
DECIDED ON : 15 April, 1996
The existence of a Hindu undivided family (HUF) should be examined independently of its possession of property or the true nature of such possession, and the true source of capital contribution will not invalidate the claim of the HUF.
Headnote:
INCOME TAX - REGISTRATION OF FIRM - HINDU UNDIVIDED FAMILY - EXISTENCE OF HUF TO BE EXAMINED INDEPENDENTLY OF POSSESSION OF PROPERTY - TRUE SOURCE OF CAPITAL CONTRIBUTION WILL NOT INVALIDATE CLAIM OF HUF.
Fact of the Case:
The assessee applied for registration of a partnership firm for the assessment year 1980-81, claiming that it was constituted by seven partners, including three Hindu undivided families (HUFs). The Income-tax Officer (ITO) refused registration, holding that the firm was not genuine as one of the partners, a minor, had not invested any capital and was a benamidar for his father.
Finding of the Court:
The Income-tax Appellate Tribunal (ITAT) allowed the assessee's appeal and directed the grant of registration, holding that the existence of the HUFs should be examined independently of their possession of property and that the true source of capital contribution would not invalidate their claim.
Issues: Whether, on the facts and in the circumstances of the case, the assessee was entitled for registration?
Ratio Decidendi: The court held that the ITAT was justified in confirming the order of the Appellate Assistant Commissioner allowing registration. The court observed that the existence of the HUFs should be examined independently of their possession of property or the true nature of such possession, and that the true source of capital contribution would not invalidate their claim.
Final Decision: The court allowed the application and directed the ITAT to state the case and refer the question of law to the court for its opinion.
N.K. Jain, J.
1. By this application under Section 256(2) of the Income-tax Act, 1961 (for short "the Act"), the applicant/Department seeks a direction to the Income-tax Appellate Tribunal, Indore, to state the case and refer the undernoted two questions said to be of law to this court, arising out of its order dated February 8, 1991, passed in ITA No. 280/ Ind. of 1986 and its refusal to refer the case by order dated September 23, 1991, passed in R. A. No. 78/Ind. of 1991 for the assessment year 1980-81 :
" (1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in confirming the order of the Appellate Assistant Commissioner allowing registration ?
(2) Whether, on the facts and in the circumstances of the case, the assessee was entitled for registration ?"
For the assessment year 1980-81, the assessee made an application for registration on the basis of a deed of partnership executed on July 5, 1979, by the following persons :
1. Shri Sharadchandra, HUF
2. Shri Navinchandra,
3. Shri Anilchandra,
4. Shri Prabhashchandra, HUF
5. Shri Satishchandra, HUF
6. Master Jayeshchandra s/o Satischandra (Minor)
7. Master Umeshchandra s/o Sharadchandra (Minor)
For the assessment year 1979-80, the business was constituted by following partners :
1. Shri Chandrashankar Jha,
2. Shri Sharadchandra Jha (Indl.)
3. Shri Anilchandra,
4. Smt. Gangabai
5. Shri Navinchandra
6. Shri Jayeshchandra (Minor).
Shri Chandrashankar and Smt. Gangabai retired from the old firm, Shri Sharadchandra was a partner in his individual capacity and he joined the firm as representing his Hindu undivided family. Similarly, Shri Prabhashchandra and Satishchandra have also joined the firm representing their Hindu undivided families. Affer examining the formation of the main Hindu undivided family of Shri Jaswantlal Jha, the Income-tax Officer found that he was assessed as an individual right from the assessment year 1948-49 onwards and died on August 22, 1957, intestate after the coming into force of the Hindu Succession Act, 1956. After his death, the property was divided amongst the three sons, Shri Sharadchandra, Prabashchandra and Shri Satishchandra. According to these persons, they formed a Hindu undivided family on the plea that they had inherited the property on the death of their father, Shri Jaswantlal, who died intestate after the coming into force of the Hindu Succession Act, 1956, and he was assessed as an individual. The Income-tax Officer opined that the property inherited by the sons was individual property of the sons. The Income-tax Officer further asked the assessees to prove all capital investment by new partners and also the status of the Hindu undivided family. Since no evidence was filed and no evidence regarding contribution made by Master Umeshchandra, minor, was adduced, the Income-tax Officer held that the firm was not genuine in terms of Section 185(1) and accordingly refused registration. In appeal, the Appellate Assistant Commissioner directed to grant registration. The Department thereafter filed appeal before the Income-tax Appellate Tribunal. Accepting the assessee's contention, the Income-tax Appellate Tribunal held that the existence of the Hindu undivided family of the parties so claimed should be examined independently of its possession of property or true nature of such possession and that the true source of capital contribution will not invalidate the claim of the Hindu undivided family and accordingly upheld the order of the Appellate Assistant Commissioner directing grant of registration. As the decision of the Tribunal was not acceptable to the Department, it made a reference application under Section 256(1) which too was rejected by the Tribunal by its order dated September 23, 1991. This application is, therefore, filed under Sub-section (2) of Section 256 of the Act to direct the Tribunal to state the case and refer the aforesaid two questions for the opinion of this court.
2. We have
