Hemantkumar Chimanlal vs Commissioner of Income Tax

Bhatt, J.—The present reference u/s 256(1) of the income tax Act, 1961 (''the Act'') raises the following question for our consideration:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the income from the partnership share in the firm of Hemant Bros, was includible in the total income of the assessee in his individual capacity and not in the total income of the Hindu undivided family?

The relevant and pertinent facts which are required to be considered and on which there is no controversy are as under:

One Hemantkumar Chimanlal was a partner in a firm by the name of Hemant Bros, in his individual capacity up to 30-10-1970. On 31-10-1970, havala entries were passed in the books of account of three separate entities, viz., in the account books of Hemant Kumar Chimanlal as an individual, in the account books of Hemantkumar Chimanlal HUF, and in the account books of Hemant Bros., i.e., the firm. It may be noted that 31-10-1970 the day on which these havala entries were passed was the first day of Samvat year 2027.

We find that all the entries are consistent and permit only one conclusion, viz., that Hemantkumar Chimanlal who had a share of 0.38 paise in a rupee in the firm of Hemant Bros, in his individual capacity, closed the same and introduced in his place as partner of the firm, himself in the capacity of karta of the HUF. This was done by withdrawing the amount of Rs. 43,645 standing to his credit (by a debit entry passed in the account books of the firm). By an almost identical entry passed in the books of account of the HUF, this amount of Rs. 43,645 was credited to the account of Hemantkumar Chimanlal, which in fact went to reduce his debt due and payable to the HUF. By a further and almost identical entry, the firm credited in its own books, the account of the HUF by this amount of Rs. 43,645, whereas the HUF in its own books of account, debited the account of the firm by the same amount.

Perhaps the concept of detriment to the HUF and throwing into the hotchpotch has been unnecessarily brought in or has been considered by the Tribunal merely because the entries in question were havala entries. We have no doubt whatsoever that had these transactions been in cash and had the said entries reflected such cash transactions, the said concepts would not have entered into the picture at all.

It may also be noted here that the amount of Rs. 43,645 withdrawn by Hemantkumar Chimanlal (as an individual) from the firm by the debit entry represented his capital, share in the firm, interest due and other sundry amounts. On the other hand, the identical amount credited in the books of account in the name of the HUF represented only the capital brought in by the HUF.

It may also be noted that, by an agreement dated 1-4-1971, which was a tripartite agreement between the individual, the HUF and the firm, the HUF brought in further assets to the tune of about Rs. 1.63 lakhs in the form of land and buildings, which were not only to be treated as assets of the firm, but the income thereof was also to be treated as income of the firm. This was not an independent transaction which took place on 1-4-1971, but was in furtherance of the fact that all the parties concerned had understood the havala entries of 31-10-1970, in their correct perspective, and had acted upon the said havala entries, as the karta of the HUF had become a partner in the firm of Hemant Bros, with effect from 31-10-1970. In other words, the agreement dated 1-4-1971, and the action of the HUF in bringing in further assets to the firm by way of additional capital only add further corroboration to the intention of the parties to replace the individual, as a partner, by the karta of the HUF.

Keeping in mind the fact that the entries have not been doubted and have been accepted, there cannot be any doubt that on 31-10-1970, viz., the first day of the Samvat year 2027, Hemantkumar Chimanlal as an individual, was replaced as a partner in the firm of Hemant Bros, by Hemantkumar Chimanlal representing the HUF as karta thereof.

In short, the net outcome of these transactions can be regarded in fact and in law in only one manner, i.e., the karta representing the HUF became a partner in the firm with effect from 31-10-1970, replacing the individual. Obviously, therefore, the share of Hemantkumar Chimanlal in the net income of the firm would be in his capacity as karta of the HUF and not in his individual capacity. In this view of the matter, the share in the taxable profit of the firm in respect of Samvat year 2027 (the accounting period beginning 31-10-1970) cannot be treated as the income of Hemantkumar Chimanlal as an individual. The question presented to us is, therefore, answered in the negative and against the revenue. The reference stands disposed of, accordingly, with no order as to costs.