1. This is an appeal against the action of the Commissioner (Appeals), wherein he has upheld the order of the ITO rejecting the assessee's stand of partial partition and enhancing the assessment.
2. The assessee is an HUF. The assessment year is 1980-81 and the relevant previous year is Samvat year 2035 (ending on 21-10-1979).
(a) The assessee-HUF consisted of five members, viz., Shri Pujalal Lallubhai Shah, Atulkumar Pujalal Shah, Sharadkumar Pujalal Shah, Pradeep Pujalal Shah (minor) and Smt. Indumatiben Pujalal Shah.
(b) The assessee-HUF is a partner in three firms, viz., Pipe Dealers, Ahmedabad, Tube Dealers, Bombay and Pipe Distributors, Jaipur, having 32 per cent, 30 per cent and 39 per cent share, respectively.
(c) The said three firms came into existence under the deeds of partnership, dated 29-3-1979, 5-4-1979 and 12-4-1979, respectively.
(d) By a deed of partial partition, dated 29-9-1979, Shri Sharadkumar Pujalal Shah took 5 per cent share out of 32 per cent share of the assessee-HUF in Pipe Dealers along with a part of money standing in the account of the assessee-HUF in the said firm.
(e) By a deed of partial partition, dated 3-10-1979, Shri Atulkumar Pujalal Shah took 5 per cent share out of 30 per cent share of the assessee-HUF in Tube Dealers along with a part of money standing in the account of the assessee-HUF in the said firm.
(f) By a deed of partial partition, dated 4-10-1979, Shri Pujalal Lallubhai Shah took 4 per cent share out of 39 per cent share of the assessee-HUF in Pipe Distributors along with a part of money standing in the account of the assessee-HUF in the said firm.
(g) Consequent upon the aforesaid partial partitions, fresh deeds of partnerships were executed in respect of the aforesaid three firms on 3-10-1979, 5-10-1979 and 5-10-1979, respectively, incorporating necessary changes.
(h) The family consisting of four members filed returns declaring Rs. 29,150 being 27 per cent share from Pipe Dealers, Rs. 31,250 being 25 per cent share from Tube Dealers and Rs. 45,679 being 35 per cent share from Pipe Distributors and the ITO framed the assessments (on protective basis) on 2-3-1983, 31-3-1983 and 23-2-1983, respectively.
4. On the aforesaid facts, the assessee-HUF took a stand before the ITO that due to the aforesaid partial partitions, it no longer remains a partner in any of the said three firms, therefore, share of profit from each of the said three firms was not includible in its total income.
5. In the draft assessment order framed under Section 143(3)/144B of the Income-tax Act, 1961 ('the Act'), the ITO invited the assessee-HUF's objections in respect of its claim of partial partitions as well as the inclusion of share of profits from each of the said three firms which was rejected in the following manner: 12. The contention of the assessee cannot be accepted as according to Hindu law, there cannot exist more than one HUF. In addition to that Sub-section (9) is added to Section 171 of the Income-tax Act, 1961, by which partial partition of a HUF effected after 31-12-1978 will not be recognised for the Income-tax purposes. Where a HUF has been taxed in the status of 'HUF', it will continue to be taxed as such unless there has been a total partition of the family properties by metes and bounds and findings to that effect has been recorded by the ITO. 13. In view of the amendment made in the Section 171, it will not be competent for the ITO to inquire into said partial partition having been taken place. According to Clause (b) of Sub-section (9) of Section 171, as per the amendment made, the family will continue to be liable to be taxed as 'HUF' as if no partial partition has taken place.
14. In view of the facts stated above and in view of the amendment made to Section 171, which came into existence from 31-12-1978, the partial partitions made by the assessee on 29-9-1979, 4-10-1979 and 3-10-1979 between the members of the HUF and separate members are not recognised for partial partition and the family will continue to be treated as joint and the income arising from various partnership firms are treated as belonging to the original HUF. 75. The contention of the assessee that income from various partnership firms, viz., Pipe Dealers, Ahmedabad, Tube Dealers, Bombay and Pipe Distributors, Jaipur, belongs to different groups of HUF is rejected and income from these partnership firms is added in the total income of the assessee, as belonging to the HUF. (1) That you have not given a due consideration to the decision of the Gujarat High Court delivered in the case of CIT v. Shantikumar Jagabhai [1976] 105 ITR 795 inasmuch as their Lordships have crystally held that there can be an existence of the HUF more than one.
(2) That in our case, our HUF is consisting of five members and the income which you proposed to be included in our hands belongs to four co-members of three different HUFs from three different partnership firms wherein from all the three firms one member got separated.
(3) That the karta of our present HUF is no longer continued as a partner in the capacity of karta of the present HUF in the partnership firms of whom you proposed to include the income in the hands of our HUF as a new deed of partnership has been executed amongst the partners of the said respective partnership firms and, therefore, at the time of closing of the accounting year of the respective partnership firms, the karta of our HUF has no share income in all the three firms on the date of closing of the accounting year and, therefore, the said income cannot be included in the present HUF consisting of five members.
(4) That the amendment which has been made in Section 171 by inserting a new proviso to Sub-section (9) is made by the Finance Act, 1980 with effect from 1-4-1980, which has been made applicable from retrospective date and is not free from challenging before judicial authorities.
(5) That the fiction made by inserting Sub-section (9) in Section 171 is not at all applicable as Section 171 is a machinery section and not charging section and, therefore, by invoking the proviso of Sub-section (9) of Section 171, you cannot include the income earned by all together three other firms wherein the karta of our HUF is no longer a partner in the capacity of karta of our present HUF at the closing of the accounting year and, therefore, the income whatsoever earned by them and which you proposed to add in our hands is not tenable in law.
(6) That the partition of whatsoever nature effected amongst the coparceners of our HUF after 31-12-1978 is a valid partition under the Hindu law and can be exercisable in the Court of law by any member thereof, if they have any dispute amongst themselves.
(7) That you have mentioned in the order that by invoking the proviso of Sub-section (9) of Section 171, the income which has been assessed in the hands of this present HUF is continued to be added in the present HUF and no partition made is to be recognised under that section affected after 31-12-1978 for which I would like to state you that the income of the three firms, viz., Pipe Dealers, Ahmedabad, of Rs. 29,150, Tube Dealers, Bombay, of Rs. 31,250 and Pipe Distributors, Jaipur, of Rs. 45,679 are not hitherto assessed in the hands of the present HUF and, therefore, though the proviso you have applied, the income stated herein-above does not require to be added in the hands of this present HUF as the income earlier assessed in the hands of the HUF is only to be added in the hands of the present HUF, while the income from the above three partnership firms have arisen for the first time during the year under review.
Thus, for the reasons and submissions stated hereinabove, I strongly object the additions in the present HUF consisting of five members of the following partnership firms while computing the total income of the present HUF. And, therefore, I humbly request you to drop the inclusion of the said income in the hands of my present HUF and my return of income filed should be accepted in toto.
7. Thereafter, the ITO referred the matter to the IAC, who after hearing the assessee and tracing the legislative history regarding Section 171 gave the following directions to the ITO: In view of the foregoing discussion, the ITO's proposed action to include share income from the firm in the total income of the assessee-HUF is confirmed. The ITO is directed to complete the assessment in the case of the assessee, accordingly.
8. On 20-7-1983, the ITO finalised the assessment with the following remarks: 9. It is, therefore, contended by the assessee that income received from Pipe Dealers, Ahmedabad, Tube Dealers, Bombay and Pipe Distributors, Jaipur, does not belong to the HUF of Pujalal L. Shah with the members as stated above.
10. Accordingly, HUF excluding separated members has filed separate returns showing partnership share income of Pipe Dealers, Ahmedabad, Tube Dealers, Bombay and Pipe Distributors, Jaipur, as belonging to the separate entity of the HUF, from which one member has been separated according to the partial partition deed executed as discussed above.
11. It is further stated by the assessee that in view of the decision in the case of Shantikutnar Jagabhai (supra) of the Gujarat High Court, there can multiple HUF, so the assessee has requested to accept the returns of income showing income from various partnership firms excluding income from the stated above, from which members of the HUF has separated and it was contended that HUF excluding members, who have been separated are the partners in the firms referred to above.
12. The contention of the assessee cannot be accepted as according to Hindu law, there cannot exist more than one HUF. In addition to that, Sub-section (9) is added to Section 171 by which partial partition of HUF affected after 31-12-1978 will not be recognised for the Income-tax purpose. Where a HUF has been taxed in the status of 'HUF', it will continue to be taxed as such unless there has been total partition of the family properties by metes and bounds and a findings to the effect has been recorded by the ITO. 13. In view of the amendment made in Section 171, it will not be competent for the ITO to inquire into said partial partition having been taken place. According to Clause (b) of Sub-section (9) of Section 171, as per the amendment made, the family will continue to be liable to be taxed as 'HUF' as if partial partition has taken place.
14. In view of the facts stated above, partial partition made by the assessee on 29-9-1979, 3-10-1979 and 4-10-1979 between the members of 'HUF' and separated members are not recognised for partition and the family continue to be treated as joint and the income arising from various partnership firms are required to be considered as belonging to the bigger HUF. Since the income to be added and included as belonging to the HUF, which was prejudicial to the assessee exceeded a sum of Rs. 1 lakh, a draft of the assessment order was forwarded to the assessee as per this office Letter No. IV-D/HT-2461/ 202-P of 1982-83, dated 30-3-1983 and the assessee filed his reply to the variation proposed in the income as per his letter dated 6-4-1983. The objections received from the assessee were forwarded to the IAC A.R., Ahmedabad as per this office Letter No. IV-D/HT-2461/202-P of 1982-83, dated 14-4-1983. The IAC, A.R IV, Ahmedabad vide his Letter No. 144-B/S/IV of 1983-84, dated 19-7-1983, has after hearing the assessee's representative and after considering the draft assessment order and the assessee's objection, etc., issued directions under Section 144B(4) of the Act, and a copy of which is also enclosed with this order, a copy of which was forwarded to the assessee also. In view of the directions contained in the letter of the IAC, referred to above, contention of the assessee that the income from various partnership firms, viz. Pipe Dealers, Ahmedabad, Tube Dealers, Bombay and Pipe Distributors, Jaipur, belongs to different group of HUF is rejected and income from these partnership firms is added in the total income of the assessee, as belonging to HUF.However, in computing the total income of the assessee, the ITO included Rs. 29,150, Rs. 31,250 and Rs. 45,679 being 27 per cent, 25 per cent and 35 per cent, respectively, share of profit from Pipe Dealers, Tube Dealers and Pipe Distributors instead of 32 per cent, 30 per cent and 39 per cent, respectively, in the total income of the assessee-HUF.9. In appeal before the Commissioner (Appeals), the assessee once again urged that its stand regarding partial partitions of the shares in each of the said three firms should be accepted and that the addition of Rs. 29,150, Rs. 31,250 and Rs. 45,679 should be deleted. In view of the insertion of Sub-section (9) in Section 171 by the Finance (No. 2) Act, 1980, the Commissioner (Appeals) upheld the ITO's action regarding the issue of partial partitions.
10. However, the Commissioner (Appeals) noticed that instead of 32 per cent, 30 per cent and 39 per cent share of profit, respectively, from the said three firms, the ITO had considered 27 per cent, 25 per cent and 35 per cent, respectively (i.e., as per the deeds of partial partition) as the share of the assessee-HUF. He, therefore, enquired of the assessee-HUF as to why the assessment should not be enhanced. As the assessee-HUF challenges the enhancement done by the Commissioner (Appeals), it would be necessary to reproduce below the letter dated 28-11-1983 of the Commissioner (Appeals) addressed to the assessee-HUF: You have filed an appeal against the Income-tax Officer's order dated 20-7-1983 for the assessment year 1980-81 challenging the inclusion of the following income in your hands: (i) Rs. 29,150 being share of profit from partnership firm of Pipe Dealers, Ahmedabad; (ii) Rs. 31,250 being share of profit from partnership firm of Tube Dealers, Bombay; and (iii) Rs. 45,679 being share of profit from partnership firm of Pipe Distributors, Jaipur.
2. From the discussion of the case with your learned representative, Shri J.P. Shah, Advocate and Shri Dhirubhai Shah, Chartered Accountant, it appears that share income from the above mentioned three partnership firms has been assessed by the Income-tax Officer at 27 per cent, 25 per cent and 35 per cent, respectively. It appears that after the execution of partial partition deeds dated 29-9-1979, 3-10-1979 and 4-10-1979, copies of which were filed before me by your learned representative on 26-11-1983, 5 per cent of profit of Pipe Dealers has gone to Sharadkumar Pujalal Shah.
Similarly, 4 per cent share of profit from Pipe Distributors has gone to Pujalal Lallubhai Shah. Similarly, 5 per cent share of profit of Tube Dealers has gone to Shri Atulkumar Pujalal Shah. In other words, as against the 32 per cent share of profit from Pipe Dealers, Ahmedabad, 39 per cent share from Pipe Distributors, Jaipur and 30 per cent from Tube Dealers, Bombay, the ITO has assessed the share of profits at 27 per cent, 37 per cent and 25 per cent respectively, in your hands for the assessment year 1980-81. As all the three partial partitions of 29-9-1979, 3-10-1979, and 4-10-1979 have not been recognised by the Income-tax Officer principally because of Sub-section (9) of Section 171 of the Income-tax Act, 1961, the Income-tax Officer appears to have made a mistake in not assessing the entire share income from the above firms, namely, 32 per cent, 35 per cent and 39 per cent. The result of non-recognition of the factum of partial partition, in your case, would be that the entire share income from the abovementioned three firms as it stood prior to the execution of the partial partition deeds shall have to be assessed in your hands. By not assessing the entire share income from the aforesaid firms in your hands, the Income-tax Officer has committed a mistake. I, therefore, propose to enhance your income by adding 5 per cent of share of profit from Pipe Dealers, Ahmedabad, 5 per cent share of profit from Tube Dealers, Bombay and 4 per cent share of profit from Pipe Distributors, Jaipur. Before I do so, I hereby give an opportunity of being heard to you. You are requested to please show cause why the proposed enhancement to your income for the assessment year 1980-81 may not be made.
3. Your case is, accordingly, fixed for hearing on 17-12-1983 at 11 a.m. in my office at First Floor, Aayakar Bhavan, Ashram Road, Ahmedabad-380009. If no reply is received nor any oral or written representation is made then it will be presumed that you agree to the proposed enhancement of income.
11. Vide its letter dated 7-1-1984, the assessee-HUF submitted before the Commissioner (Appeals) that he cannot enhance the assessment. Here also, it would be necessary to reproduce below the said letter: We are in receipt of your enhancement notice dated 28 November, 1983. We are thankful to you for granting to us extension of time for replying the above notice. Our respectful reply thereto is as follows: 1. You will kindly appreciate that partnership is a matter of agreement between the partners. It is never a thing which follows as a consequence from partition like the partition of any immovable property or movable property. Now diminution of a share of an HUF of which the karta is a partner and the increase of a share of any other partner is a result of an agreement between the partners and not a result of a mere partition. We submit that the above is a well settled position at law. Nonetheless we may draw your kind attention to the Supreme Court's decision in CIT v. Prem Bhai Parekh [1970] 77 ITR 27 to support the above well settled position at law.
2. If this is so, we submit that the increased share of the partner which made you propose to enhance by the above notice will not be sustainable in law.
3. Without prejudice to the above, please note that your above enhancement notice tries to add the income from a source which is not processed by the Income-tax Officer and, therefore, we submit that the enhancement notice is beyond your jurisdiction. Further, please note that the appellant in this matter is not the HUF which is a partner in the above firms. The appellant in this matter consists of (i) Shri Pujalal L. Shah, (ii) his wife Smt. Indumatiben and his three sons Atul, Sharad and Pradeep. Whereas the HUF which is a partner in the above firms is different because of the different membership than the above and such different HUF is a partner as a result of the agreement of partnership and what we submitted in para 1 above and the above decision of Prem Bhai Parekh's case (supra) will apply with equal force to this point also, though it may be clarified that this paragraph is not in respect of your enhancement notice but is in respect of the original grounds of appeal.
4. We have refrained from stating here the arguments advanced before you orally at the time of the hearing of the appeal by your goodself, so please note.
12. In his order under appeal, the Commissioner (Appeals) overruled the assessee-HUF's contentions and directed the ITO to include 32 per cent, 30 per cent and 39 per cent share of profit, respectively, from the said firms in the total income of the assessee-HUF, in the following manner: 18. I have given a careful thought to the submissions made in the appellant's reply dated 7-1-1984. It may be mentioned that the Supreme Court's decision in the case of Prem Bhai Parekh (supra) was rendered under Section 16 of the Indian Income-tax Act, 1922, which is in pari materia with Section 64 of the Income-tax Act, 1961. In the said decision the Supreme Court had to interpret the provisions of Section 16 and to decide whether any income of a minor child arose directly or indirectly from the assets transferred by the assessee to those minors. In that case the assessee had transferred to each of his minor sons a sum of Rs. 75,000. The amount contributed by those minors as their share in the firm came from those amounts. The Supreme Court held that the connection between the gifts made by the assessee and the income earned from the firm was a remote one. It was further held that the income of the minors arose as a result of their admission to the benefits of the partnership. It was emphasised by the Supreme Court that Section 16(3) created an artificial liability and so the section must receive strict construction.
19. As already pointed out above, the Supreme Court decision in the case of Prem Bhai Parekh (supra) was rendered in the context of Section 16. In the instant case, we are not concerned with Section 16 of the 1922 Act or Section 64 of the 1961 Act. The question in the instant case is very simple. If a member of the HUF becomes a partner in a particular firm then by virtue of an overriding title, the share income of the partner has to be assessed in the hands of the HUF. In the instant case, a member of the appellant-HUF became a partner in Pipe Dealers, Tube Dealers and Pipe Distributors. The funds of the HUF were invested in those firms. The partnership deeds referred to the fact that the appellant-HUF had become a partner. At that time, the HUF consisted of five members as mentioned in para 1 above. If no partial partitions had taken place then the share income from the aforementioned three firms would have been assessed in the hands of the appellant-HUF. Now the partial partitions took place and as a result of partial partitions, a part of the share income from the aforesaid firms and certain other amounts were taken away by the separating members. Section 171(9) read with Explanation (b), makes it very clear that partial partition can be as regards the persons constituting the HUF or the property belonging to the HUF or both. In the instant case, when certain members separated as regards certain properties, a partial partition automatically took place. Now partnership deeds in respect of the aforementioned three partnership firms had to be drawn up essentially as a consequence to the partial partitions that had taken place in the appellant HUF. As a result of partial partitions, the appellant HUF which had 32 per cent share in Pipe Dealers came to have 27 per cent share in the said firm and the remaining 5 per cent share went to Shri Sharadkumar P. Shah. Similarly, in the case of Tube Dealers, the original share of 30 per cent was substituted by 25 per cent share for the HUF and 5 per cent share for Shri Atulkumar P. Shah. In the same manner, the original share of 39 per cent in Pipe Distributors was reduced to 35 per cent in the hands of the HUF and 4 per cent went to Shri Pujalal Lallubhai Shah. When the law says that partial partitions have not to be recognised after 31-12-1978, then the natural consequence would be that the partial partitions effected after that date shall have to be ignored for the purpose of Income-tax assessments. Whether the old manner representing the HUF in the aforementioned partnership firms continues to represent the appellant-HUF or not after reconstitution of the firms as a result of partial partitions to my mind would not be relevant for the purposes of Section 171(9).
20. It is also not. correct to say that the ITO has not processed the source of income which is the subject-matter of enhancement in this case. The ITO has already assessed 27 per cent share income from Pipe Dealers, 25 per cent share income from Tube Dealers and 35 per cent share income from Pipe Distributors, what was proposed to be done as a result of enhancement notice was to direct the ITO to assess 32 per cent share income from Pipe Dealers, 30 per cent share income from Pipe Distributors. These sources had already been processed by the ITO and enhancement notice is, therefore, within my jurisdiction.
21. Having regard to all facts and circumstances of the case, I am of the opinion, that in view of Section 171(9), the entire share income from the aforesaid three firms has to be assessed in the hands of the appellant-HUF. The action of the ITO in assessing 27 per cent share income from Pipe Dealers, 25 per cent share income from Tube Dealers and 35 per cent share income from Pipe Distributors is confirmed. In addition, the ITO is directed to take additional share income of 5 per cent from Pipe Dealers, 5 per cent from Tube Dealers and 4 per cent from Pipe Distributors and assess it in the hands of the appellant-HUF. 22. The upshot of the above discussion is that the following share incomes would be assessable in the hands of the appellant-HUF As copies of the assessment orders of the aforesaid firms and copies of share income as per books are not available on record, the ITO shall take the share income as discussed above.
23. In the result, the appeal filed by the appellant is dismissed.
On the other hand, there would be enhancement of income to the extent indicated above.
13. Being aggrieved by the order of the Commissioner (Appeals), the assessee-HUF has come up in appeal before the Tribunal. At the outset, the learned Counsel for the assessee-HUF was fair enough to state that in view of the insertion of Sub-section (9) in Section 171 by the Finance (No. 2) Act, 1980, he would not like to make any fresh submissions than that already made before the Income-tax authorities in respect of the claim for partial partition. However, he stated that it would be his endeavour to impress upon the Tribunal that the Commissioner (Appeals) had exceeded his jurisdiction in enhancing the assessment. Apart from reiterating the submissions which were made before the Commissioner (Appeals), the learned Counsel for the assessee vehemently argued that after the partial partitions, the original HUF consisting of five members no longer remained in existence but a smaller-HUF consisting of four members came into being which, according to him, was entirely different from the 'bigger-HUF', i.e., the original HUF consisting of five members. It was this HUF consisting of four members which became partner in each of the three said firms.
Therefore, even the share of profits of 27 per cent, 25 per cent and 35 per cent, respectively, considered by the ITO in the hands of the assessee-HUF was unwarranted. He further went on to argue that since the share of profits received by each of the separated members was assessed in their individual smaller-HUF hands, the same cannot be touched by the Commissioner (Appeals). In other words, he wanted to impress upon the Tribunal that since the share of profits in each of the said three firms could not be and was not processed by the ITO, the Commissioner (Appeals) clearly had no power to enhance the assessment in the manner he did. In this connection, he invited the attention of the Tribunal to the deeds of partial partition as well as the deeds of partnership executed after the partial partitions and submitted that the assessee-HUF is entirely a different entity than the HUFs consisting of four members which came into being as a result of the partial partitions which he preferred to call 'truncated HUFs'.
According to the learned Counsel for the assessee, we have to give due consideration to various documents executed by the parties in their proper perspective. Reliance was placed on the decision of the Hon'ble Supreme Court in the cases of CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891 and CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 to urge that the Commissioner (Appeals) has no power to enhance the assessment by searching new source of income not processed by the ITO. He, therefore, submitted that the order of the Commissioner (Appeals) should be set aside insofar as his directing the ITO to include the entire share of profit of 32 per cent, 30 per cent and 39 per cent, respectively, from the said three firms in the total income of the assessee.
14. The learned representative for the revenue, on the other hand, strongly supported the action of the Commissioner (Appeals). In view of the insertion of Sub-section (9) in Section 171 by the Finance (No. 2) Act, 1980 he submitted that the assessee-HUF's claim for partial partitions has been rightly rejected by the Income-tax authorities. As regards the assessee-HUF's contentions in respect of the Commissioner (Appeals)'s power of enhancement, he submitted that they should not be accepted as they are devoid of any merits. In this connection, he submitted that prior to the partial partitions, the assessee-HUF was a partner in the said three firms. Thus, having an established source of income by way of share of profits of 32 per cent, 30 per cent and 39 per cent, respectively. By the deeds of partial partition, this source of income was split into two in each of the said three firms. The assessee-HUF retained 27 per cent, 25 per cent and 35 per cent, respectively, while the separating members took away 5 per cent, 5 per cent and 4 per cent, respectively. This aspect of the matter becomes clear if we read together and as a whole the three deeds of partial partitions as well as the three deeds of partnership drawn after the partial partitions. He. therefore, urged that the submissions made on behalf of the assessee-HUF that three new and different 'truncated HUF's came into being should be rejected outright. According to the learned representative for the revenue, there was only one source of income and not more than one or different sources of income as contended on behalf of the assessee-HUF. Thereafter, he invited the attention of the Tribunal to the relevant portions of the order of the ITO (reproduced above) and highlighted the fact that in view of the provisions of Section 171(9), he had rejected the claim of partial partitions. Consequently, the ITO should have considered the assessee-HUF's share of profit of 32 per cent, 30 per cent and 39 per cent, respectively, from the said three firms. But inadvertently, he considered 27 per cent, 25 per cent and 35 per cent, respectively, which the Commissioner (Appeals) was competent to set right by enhancing the assessment in the manner he did. He further submitted that the decision in the cases of Shapoorji Pallonji Mistry (supra) and Rai Bahadur Hardutroy Motilal Chamaria (supra) would not be of much help to the assessee-HUF as the facts and circumstances obtaining in the present case are clearly distinguishable from the facts and circumstances obtaining in those cases. In those cases, the ITO had never considered or processed a particular source of income which the AAC attempted to consider for the first time in the appellate proceedings. On the contrary, in the present case, the ITO had very much considered/processed the source of income, viz., the assessee-HUF's share of profit from the said three firms, which the Commissioner (Appeals) took into consideration, while enhancing the assessment and nothing further. He further submitted that even if the 'truncated HUFs' and the separated members have shown their respective share of profit in their returns and even if the same were accepted by their respective ITO, that would not further the case of the assessee-HUF as the same was based on partial partitions which are not recognised under the Act, with effect from 1-4-1980. According to the learned representative for the revenue, the Commissioner (Appeals) has simply corrected the arithmetical mistake committed by the ITO in considering the assessee-HUF's share of profit of 27 per cent, 25 per cent and 35 per cent instead of 32 per cent, 30 per cent and 39 per cent, respectively, from the said three firms. This mistake could have been rectified by the ITO under Section 154 of the Act. Instead of this, the Commissioner (Appeals), who is equally competent to do so, has done it. In other words, he submitted that since the powers of the Commissioner (Appeals) are coterminous with that of the ITO, the Commissioner (Appeals) had jurisdiction to enhance the assessment. He, therefore, urged that the order of the Commissioner (Appeals) should be upheld by the Tribunal.
15. The learned Counsel for the assessee, in his reply, once again emphasised that the assessee-HUF was quite a different entity and the shares in the three firms belonged to the 'truncated HUFs'. For this submission, he once again referred to the deeds of partnership drawn subsequent to the partial partitions.
16. We have carefully considered the rival submissions of the parties as well as the material already brought on record and we do not find any merit in the submissions made on behalf of the assessee-HUF. In view of the insertion of Sub-section (9) in Section 171 by the Finance (No. 2) Act, 1980, the Income-tax authorities were fully justified in not accepting the partial partitions effected by the assessee-HUF in respect of its share of profits from the aforesaid three firms. Now, the main issue to be considered is whether the Commissioner (Appeals) had exceeded his jurisdiction in directing the ITO to include the entire share of profit of 32 per cent, 30 per cent and 39 per cent, respectively, from the aforesaid three firms in the total income of the assessee. In giving decision on this issue, it would be necessary first to find out whether on the execution of the deeds of partial partition, the assessee-HUF ceased to exist in the eyes of law. Now, when we turn to the deeds of partial partitions, which are more or less similarly drafted, we find that one of the members of the assessee-HUF had 'asked for his separate share in the profit and capital invested' in the firm(s). Further, we find from the recital that 'the remaining parties have agreed to carve out the share of and to hand it over to him and have also further agreed to continue between themselves as the joint Hindu family of them (four) qua the said property to be so partitioned'. Now, in the deeds of partnership executed after the partial partitions, the HUF consisting of four members is mentioned with a view to clarify that the separated member had no right, title and interest in the share of the HUF in the firm. Reading of these documents together and as a whole, it is not possible to accept the submissions made on behalf of the assessee-HUF that it ceased to have any share of profit in the aforesaid three firms. It was no doubt true that the HUF consisting of four members had filed returns of income declaring their respective share of profit in the aforesaid three firms and that the assessments were framed by way of protective measure in their hands. However, this fact by itself, in our opinion, would not: debar of the Income-tax authorities to consider the share of profit of the assessee-HUF in the aforesaid three firms. It may be true that under the Hindu law, the partial partition effected by the members of the assessee-HUF may be possible. However, in view of the specific provisions contained in Sub-section (9) of Section 171, such partial partition is not recognised under the Act and the HUF continues to be the same as if no partial partition had taken place. In this view of the matter, the entire share of profit of 32 per cent, 30 per cent and 39 per cent, respectively, in the aforesaid three firms has to be considered in the hands of the assessee-HUF. From the draft assessment order, the directions of the IAC given under Section 144B and the final assessment order (the relevant portions of which are reproduced above), it is difficult to accept the submissions made on behalf of the assessee that the ITO had only considered the share of profit of 27 per cent, 25 per cent and 35 per cent, respectively, from the aforesaid three firms in the hands of the assessee-HUF. It appears to us that the ITO inadvertently omitted to consider the share of profit of 5 per cent, 5 per cent and 4 per cent, respectively, carved out in favour of the separating members of the assessee-HUF while computing the total income. It is this aspect of the matter, which the Commissioner (Appeals) tried to correct by enhancing the assessment after giving an opportunity of being heard to the assessee in this regard. It is worthwhile to note that the only source of income of the assessee-HUF in the three firms was by way of share of profit of 32 per cent, 30 per cent and 39 per cent. This source of income was split into two in the case of each of the firm by the deed of partial partition. However, as mentioned above, once the partial partitions are held to be not recognised under the Act, the source of income would remain the same as before the partial partition. Therefore, we are not prepared to accede to the submissions made on behalf of the assessee-HUF that in giving direction to the ITO to include the entire share of profit of the assessee-HUF in the aforesaid three firms in the hands of the assessee-HUF, the Commissioner (Appeals) had enhanced the assessment by discovering a new source of income not mentioned in the return of the assessee or considered by the ITO in the order appealed against. We have carefully gone through the aforesaid decision of the Hon'ble Supreme Court in the cases of Shapoorji Pallonji Mistry (supra) and Rai Bahadur Hardutroy Motilal Chamaria (supra). We entirely agree with the submissions made on behalf of the revenue that the facts and circumstances obtaining in the instant case are clearly distinguishable from the facts and circumstances considered by the Hon'ble Supreme Court in those two cases. On the contrary, we are of the view that the discussion and the ratio laid down in the said two cases support the action of the Commissioner (Appeals). With a view to appreciate this conclusion, we reproduce below the head-notes of the said two cases: In an appeal filed by the assessee the Appellate Assistant Commissioner has no power to enhance the assessment by discovering new sources of income not mentioned in the return of the assessee or considered by the Income-tax Officer in the order appealed against.
The Appellate Assistant Commissioner has no jurisdiction under Section 31(3) of the Indian Income-tax Act, 1922, to assess a source of income which is not disclosed either in the returns filed by the assessee or in the assessment order. It is not, therefore, open to the Appellate Assistant Commissioner to travel outside the record, i.e., the return made by the assessee or the assessment order of the Income-tax Officer, with a view to finding out new sources of income and the power of enhancement under Section 31(3) is restricted to the sources of income which have been the subject-matter of Consideration by the Income-tax Officer from the point of view of taxability. In this context 'consideration' does not mean 'incidental' or 'collateral' examination of any matter by the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection.
It is by now a trite law that the powers of the Commissioner (Appeals) are coterminous with the powers of the ITO. In the instant case, the ITO had already considered/processed the assessee's claim for exclusion of the share of profit from the aforesaid three firms, from its total income. In other words, the ITO had considered/processed a source of income of the assessee, which in appeal, the Commissioner (Appeals) had considered without assistance of any fresh facts or materials which are not on record. Therefore, it is difficult to hold that the Commissioner (Appeals) had enhanced the assessment 'by discovering new sources of income not mentioned in the return of the assessee or considered by the Income-tax Officer in the order appealed against'. There is ample evidence on the record to show that the ITO had applied his mind to the source of income of the assessee-HUF in the aforesaid three firms with a view to determine its taxability or not in the hands of the assessee-HUF. Therefore, it is difficult to accept the submissions made on behalf of the assessee that the enhancement made by the Commissioner (Appeals) was on account of 'incidental' or 'collateral' examination of any matter by the ITO in the process of assessment. In other words, once the assessee's claim for partial partition is negatived in view of the insertion of Sub-section (9) in Section 171 by the Finance (No. 2) Act, 1980, the entire case of the assessee falls to the ground like a house built of cards. In this view of the matter, we have no hesitation to hold that the Commissioner (Appeals) had a jurisdiction to enhance the assessment in the manner he did.