Law:

Section:

Section 171 of the income-tax act, 1961 Hindu undivided family - Assessment after partition Four coparceners withdrew HUF funds in equal Amounts and invested in a new partnership practically carrying on same business Withdrawals initially claimed as loans simplicitor without interest but later claim of partition put forward ITO rejected such claim and assessed partnership income in HUF hands which was excluded by tribunal Whether tribunal justified in law Held, on facts, no Facts The assessee-HUF, consisting of the mother, her four sons and their families, had been operating business in spectacles and frames. On 2-11-1961, the four sons withdrew by cheque Rs. 6,250 each from the HUF funds and invested the same as their share of capital in a new partnership firm, floated by them, for manufacture of optical goods and steel furniture. The factory was set up in a site belonging to the HUF on an annual rent of Rs. 1,500. The withdrawals were shown in the HUF books and also the relevant balance-sheet as on 31-3-1963, as loans simpliciter without interest. During the course of assessment proceedings for the assessment year 1963-64, it was initially claimed that these were only loans. Later, it was pleaded that the said withdrawals were the result of partial partition of the family and the income from the new partnership was the individual income of the partners. The ITO rejected the claim of partial partition and held that the funds utilised in the new firm were detrimental to the HUF funds and the income therefrom was, accordingly, attributable to the HUF funds and assessable in the hands of HUF. While upholding the lTO's finding, the AAC observed (i) that, instead of debiting the capital account of HUF for Rs. 25,000, the accounts of the four sons were debited; (ii) that no claim for recognition of partial partition under section 171(2), which was mandatory, was made to the ITO; and (iii) that the rent for site taken on lease from HUF was inadequate. The Tribunal allowed the appeal, holding that no detriment to the interest of individual co-heirs had resulted. On reference: Held 1. Unlike her four sons, the mother was neither given any share nor did she file…

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