Commissioner of Income Tax vs Rajendra P. Bhow

S.A. Shah, J.—This reference arises at the instance of the revenue for our opinion. The questions of law that arise out of the order dated 24-1-1978 of the Tribunal, Ahmedabad Bench ''A'' are as under:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that: (i) the assessee''s interest in the partnership firm styled as Public Construction Co., and (ii) the amount of Rs. 5,000 standing in the said firm''s books to the assessee''s credit as accumulated profit stood converted into joint property of the HUF headed by the assessee as karta?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that conversion of the said properties into joint property of the HUF did not involve a transfer within the meaning of section 60 read with section 63(b) of the income tax Act, 1961?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that only a portion (namely, one-seventh portion of the share income earned by partner Rajendra P. Bhow from the said firm was includible in the computation of assessee-individual''s total income?

In order to appreciate the contention raised by the revenue, short facts are required to be stated. The year concerned is the assessment year 1973-74. Assessee Shri Rajendra P. Bhow is an individual. The previous year is Samvat year 2028 - the period from 28-10-1971 to 6-11-1972. The assessee''s share in the profit and losses of the partnership firm styled as Public Construction Co. was 15 naya paise. He also had in the said firm some amount lying to his credit that amount being accumulated profits and the interest thereon. On 20-10-1972 the assessee made a declaration throwing his interest in the said partnership firm into the common stock of the HUF and also the amount of Rs. 5,000 out of the accumulated profits as aforesaid. In the return of total income furnished by the assessee, he included only one-seventh portion of the share income earned by him during the previous year under consideration. The ITO, however, included the entire share income amounting to Rs. 8,112, in the assessment completed on 23-10-1975. The ITO took the view that a partner''s interest in a partnership firm is not always beneficial inasmuch as sometimes the partnership firm may be running into losses, and that under Hindu law it is not open to a coparcener to blend his separate property is of an onerous character. Further, the ITO held that even if blending purported to be effected in the assessee''s case is valid under Hindu law, section 60 of the income tax Act, 1961 (''the Act'') would come into play, inasmuch as the assets giving rise to the share income did not stand transferred to the HUF in whose favour the overriding title was intended to be credited. Copy of the declaration dated 20-10-1972 is Annexure ''A'' and copy of the ITO''s order is Annexure ''B'' to this reference.

Being aggrieved by the said order of the ITO, the assessee took the matter in appeal to the learned AAC, where he urged that the HUF consisted of his father, mother and five major brothers (including himself) and his interest was only one-seventh portion which was taxable in the assessment of the assessee as an individual. The AAC accepted the contention of the assessee and directed the ITO to exclude six-seventh portion of the share income from the computation of the assessee-individual''s total income.

In the appeal before the Tribunal filed by the revenue, the Tribunal agreed with the view taken by the AAC and held that entire interest in the firm had been thrown into the common stock of the HUF, relying upon the decision of this Court in ADDL. COMMISSIONER OF Income Tax AND OTHERS Vs. CHANDULAL C. SHAH AND OTHERS., . With regard to the question of applicability of the provisions of section 63(b) of the Act, the Tribunal rejected the argument by stating that the revocability of a transfer is to be traced in the very terms of the transfer, and not anywhere else outside the transfer. With regard to the question u/s 60, the Tribunal held that in the instant case it cannot be said that the transaction comprised by the coparcener''s act of throwing his separate property into the common stock of the HUF involved a bilateral transaction as such. It is well settled that such act of impressing a coparcener''s separate property with the character of coparcenary property does not tantamount to a transfer in the general sense. In view of its findings as aforesaid, the Tribunal dismissed the appeal. Hence, this reference.

Mr. B.R. Shah, the learned advocate for the revenue, has contended, as was contended before the Tribunal, that the possibility of the partnership firm suffering losses could not be ruled out; in such circumstances, throwing of his share of partnership into the HUF can be said to be onerous. Such a question has been decided by a Division Bench of this Court, to which one of us was a party, in the case of Commissioner of Income Tax, Gujarat-I Vs. Keshavlal Prabhudas Shah, . It has been observed therein:

...It is not disputed, and indeed it cannot be, that the share in a partnership firm is an asset. It was not shown that there were outstanding debts or losses which in reality meant that it was a debt which was being impressed with the character of HUF and not assets. Now, a share in a partnership firm having assets is property. In other words, the share which the assessee had in the firm was one of the properties held by him. This property admittedly was the self-acquired property of the assessee. It is open to a coparcener or a member of the HUF to impress his self-acquired property with the character of HUP property. The share in the firm being one of the self-acquired properties of the assessee, he could certainly have impressed it with the character of HUP property, if he chose to do so. There is no legal bar or impediment, and none is pointed out to us against conversion of the share in a partnership firm into HUP property. There was, therefore, nothing to prevent the assessee from impressing his share in the firm with the character of HUF property. A mere risk or possibility of the firm suffering losses in the future will not and cannot convert the share in the firm from an asset to a liability.... (p. 232)

We are in complete agreement with the aforesaid observations made by the Division Bench of this Court. Hence, we answer the first question in the affirmative.

The second question of the revenue that throwing of the assets of the partnership belonging to the assessee into the common stock of the HUF through a set of impressing such separate property with the character of the HUF property involves ''transfer'' within the meaning of section 60, read with section 63(b), has also no merit. It is settled position of law that...when a coparcener throw his individual property into the common stock or common hotchpot of the HUF and thereby converts that property into a joint family property, with a desire to blend his separate property with the coparcenary property, separate property of the member is said to be impressed with the character of joint family property and thereafter he cannot make a separate claim over the said property. The separate property of a Hindu coparcener thus acquires the characteristic of a joint family property not by any physical mixing with his joint family property but by his own volition he has waived or surrendered his separate rights in it as separate property. This is a unilateral act of the coparcener and also there will be no question of the family either rejecting or accepting the said property. In other words, the individual by his own act and volition renounces his individual right and treats his individual property as a property of the family. This doctrine of throwing the individual property into the common stock is peculiar to Mitakshara School of Hindu law. It has been held by the Privy Council in the case of AIR 1923 57 (Privy Council) , that where a member of a joint Hindu family blends his self-acquired property with the property of the joint family by bringing his self-acquired property into a joint family account, the effect is that all the property so blended becomes a joint family property.

Now, in the case of Goli Eswariah Vs. Commissioner of Gift Tax, Andhra Pradesh, , the question arose before the Supreme Court whether the declaration by which the assessee has impressed the character of joint Hindu family property on the self-acquired properties owned by him amounts to a ''transfer'' so as to attract the provisions of the Gift-tax Act, 1958 (''the 1958 Act'')? Section 2(xxiv) of the 1958 Act defines, ''transfer of property'' and, therefore, question arose whether throwing of the individual property into the common hotchpot amounted to a transfer within the meaning of the said section. Reference has been made to the case of Commissioner of Income Tax, Madras Vs. M.K. Stremann, Madras, , wherein the assessee first threw his private properties into the common stock and afterwards there was a partition amongst the members of the family which included his two minor sons and a minor daughter represented by their mother. The question arose whether the partition in question amounted to a transfer of assets by the assessee to the three minor children so as to attract the provisions of section 16(3)(a)(iv) of the Indian income tax Act, 1922. In that case, the revenue did not contend in the Supreme Court that the act of the assessee throwing into common stock his self-acquired properties amounted to transfer of assets by the assessee to his three minor children. On the other hand, it contended that the partition that took place subsequently amounted to a transfer of assets of the assessee to his minor children. The Supreme Court overruled that contention of the revenue. In that very case the Supreme Court has approved the observations of the High Court which are as under:

...The High Court observed that when the separate property of a coparcener ceases to be his separate property and becomes impressed with the character of coparcenary property, there is no transfer of that property from the coparcener to the ooparcenary; it becomes joint family property because the coparcener who owned it up till then as his separate property has, by the exercise of his volition, impressed it with the character of joint family or coparcenary property, to be held by him thereafter along with other members of the joint family; it is by his unilateral action that the property became joint family property; the transaction by which a property ceased to be the property of a coparcener and became impressed with the character of coparcenary property, does not itself amount to a transfer; no transfer need precede the change and no transfer ensues either- M.K. Stremann, Madras Vs. Commissioner of Income Tax, Madras, . We are in agreement with those findings. (p. 681)

In view of the aforesaid settled legal position, we agree with the findings of the Tribunal, and answer question No. 2 in the affirmative.

So far as question No. 3 is concerned, in view of our answer to question No. 2, the Tribunal is right in law in holding that only a portion, viz., portion of the share income earned by partner Rajendra P. Bhow (assessee) from the said firm was includible in the computation of the assessee-individual''s income, in view of the provisions of section 64(2) of the Act, as was in force during the assessment period in question. We, therefore, answer question No. 3 also in the affirmative. In the result, we affirm the view taken by the Tribunal and answer all the questions in the affirmative and against the revenue. Reference is answered accordingly, with no order as to costs.