The Commissioner Of Income Tax v. Shri M. D. Vora

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICGTION INCOME TAX REFERENCE NO. 31 of 1990 The Commissioner of Income Tax ... Applicant. vs. Shri M. D. Vora ... Respondent Mr. Ashok Kotangale, senior counsel, i/b. K.C. Sidhwa, for Applicant Mr. Asifa Khan for Respondent. CORAM: V. C. DAGAAND A. S. AGUIAR JJ. Date: July 12, 2005. ORAL JUDGMENT: (Per A. S. Aguiar J. ) 1. The question of law referred to under section 256(1) of the Income-tax Act in R.A. Nos. 271(Bom)/1986 & 272(Bom)/ 1986 arising out ofITA Nos. 5510 (Bom)/1983 & 5511 (Bom)/1983) for the AssessmentYears 1979-80 and 1980-81), for consideration of this court by theTribunal at the instance of the assessee are as follows: Whether on the facts and in the circumstances of thecase, 6% share of profit from M/s. B. Mehta & Co., belonged to the H.U.F. headed by M. D. Vora and 12%share belonged to M.D. Vora (Individual) for AssessmentYears 1979-80 and 1980-81.” 2. The factual matrix giving rise to the aforesaid question is as follows: The assessee M. D. Vora, in his individual capacity, was a partnerwith 12% share in B. Mehta & Co., as per partnership deed dated17.3.1975. Vora had contributed Rs. One lakh as capital as perclause 5 of the said partnership deed. There was a change in theconstitution of the said firm due to retirement of two partners and asper partnership deed dated 10.3.1978 (effective from 1.1.1978),Vora was entitled to 18% share in the said firm and as per clause 5of the partnership deed, he had to invest Rs.2.80 lakhs as capital.Vora claimed that the additional investment of about Rs. One lakhwas made by him out of H.U.F. Funds (he was karta of the H.U.F.).Vora made a declaration on 17.11.1978 that he held 6% of share inB. Mehta & Co., on behalf of H.U.F. headed by him, after the fundsbelonging to the H.U.F., were invested in the firm on 1.1.1978 (fromwhich date his share in the firm had been increased to 18% from12%). Vora accordingly declared only his share income of 12% fromB. Mehta & Co., in the accounting year ending 31.12.1978 relevantfor Assessment Year 1979-80. Income Tax Officer, however held that the unilateral declaration by Vora did not amount to anagreement and following Pondicherry Rly. Co., Ltd., 5 I.T.C. 363. The Income Tax Officer held that the assessee had only applied hisincome by passing 6% of share income to the H.U.F. Heaccordingly, assessed 18% share income from the said firm in thehands of the assessee, Vora, in Assessment Year 1979-80. Hefollowed this order in Assessment Year 1980-81. 3. Commissioner of Income Tax, (Appeals) accepted assessee'scontention after noting that the H.U.F., had declared the income from6% share in the said firm and that the assessment of the H.U.F. hadbeen completed accordingly. Similarly H.U.F.'s wealth taxassessments had been completed in which loan of the capital inquestion had been shown as advanced to M. D. Vora (Individual). contention after noting that the H.U.F., had declared the income from6% share in the said firm and that the assessment of the H.U.F. hadbeen completed accordingly. Similarly H.U.F.'s wealth taxassessments had been completed in which loan of the capital inquestion had been shown as advanced to M. D. Vora (Individual). 3. Commissioner of Income Tax, (Appeals) accepted assessee'scontention after noting that the H.U.F., had declared the income from6% share in the said firm and that the assessment of the H.U.F. hadbeen completed accordingly. Similarly H.U.F.'s wealth taxassessments had been completed in which loan of the capital inquestion had been shown as advanced to M. D. Vora (Individual). contention after noting that the H.U.F., had declared the income from6% share in the said firm and that the assessment of the H.U.F. hadbeen completed accordingly. Similarly H.U.F.'s wealth taxassessments had been completed in which loan of the capital inquestion had been shown as advanced to M. D. Vora (Individual). 4. The Tribunal in appeal before it accepted the assessee's alternatecontention that since 6% share in the firm was acquired by virtue ofadditional investment of capital of Rs. One lac which had beenadvanced out of H.U.F. funds, the 6% share income belonged toH.U.F., more so when assessee (individual) had himself declaredthat the said 6% share income belonged to H.U.F. The Tribunal alsonoted that the assessee did not rest his case on the overridingcharge of the H.U.F., but took the alternative plea that since the 6%contention that since 6% share in the firm was acquired by virtue ofadditional investment of capital of Rs. One lac which had beenadvanced out of H.U.F. funds, the 6% share income belonged toH.U.F., more so when assessee (individual) had himself declaredthat the said 6% share income belonged to H.U.F. The Tribunal alsonoted that the assessee did not rest his case on the overridingcharge of the H.U.F., but took the alternative plea that since the 6% share in the firm was acquired by virtue of additional investment ofcapital with the H.U.F., funds, the said 6% share in the income wasrelatable to the detriment to H.U.F. Funds and therefore, the said 6%share in the income belonged to the H.U.F. Moreover, the assesseehimself had declared the said 6% share in the income as belongingto the H.U.F. The Tribunal in arriving at the said conclusion placedreliance on the decision in the case of CIT vs. MahendrakumarMitharmal, reported in (1983) 140 ITR 300 (Guj). In the said case apartner in the firm had impressed his share in the income of the firmwith the character of Joint Family property by declaration and it washeld that the said income was not assessable as the assessee'sindividual income. 5. Before this court reliance is placed by learned counsel appearing forthe assessee on the finding of the Apex Court in the case ofCommissioner of Income Tax, West Bengal vs. Kalu Babu LalChand, reported in [1959] XXXVII ITR page 123. The facts of thecase are as follows: “R, the karta of a Hindu undivided family, was one ofthe promoters of a company to be floated, took over abusiness as a going concern and carried on thebusiness on behalf of the company until it was incorporated in December, 1930. The articles ofassociation of the company provided that R would bethe first managing director , specified his remunerationand required the company to enter into an agreementwith R. The agreement however was not actuallyentered into until January, 1934. It was found by theAppellate Tribunal that the shares held in the names ofR and his brother were acquired with funds belongingto the joint family and the family was in enjoyment of thedividends paid on these shares. Further, the companywas floated with funds provided by the family and Rmade no contribution in this respect. The company wasall along financed by the family. Prior to the accountingyear relevant to the Assessment Year 1943-44 themanaging director's remuneration received by R wascredited in the books of the family. In the AssessmentYear 1943-44 for the first time it was claimed that thewhole of the managing director's remuneration constitutedthe personal earnings of R and should to be added to theincome of the family. The Supreme Court held that the managingdirector' s remuneration received by R was, as betweenhim and the Hindu undivided family, the income of thefamily and should be assessed in its hands.” 6. The learned counsel for the assessee also placed reliance on thejudgment of this court in Commissioner of Income Tax vs. M. D.Kanoria, reported in [1982] 137 ITR p.137, wherein the facts are asunder: judgment of this court in Commissioner of Income Tax vs. M. D.Kanoria, reported in [1982] 137 ITR p.137, wherein the facts are asunder: “The assessee was the karta of an HUF consisting ofhimself, his wife and two minor sons. He had investedfunds of the HUF in certain firms and was a partner inthem for and on behalf of the family. There was a partialpartition of the assets of the family invested in the firms,and the memoranda attached to the partition deedscontained agreements between the members that theassessee was to remain a partner in the firms but theprofits falling to the share of the assessee were to be theprofits of the members of the family “severally in theirown respective individual right and interest” in theproportion stated in the memoranda. There were furtheragreements recorded in the memoranda that the share in the profits of the firms was to be received by theassessee “for and on behalf of the members (severally)”. The ITO assessed the income received by the assesseefrom the firm as his income. On appeals, the AAC andthe Tribunal held that the shares of the other membersof the erstwhile family were diverted by overriding titleand was not assessable in the hands of the assessee.The Tribunal held also that the partition did not result inthe creation of a sub- partnership consisting of theassessee and his wife and, therefore , s. 64 of the I.T.Act, 1961, was not applicable. On a reference of thequestion whether the income of the erstwhile membersof the family was diverted by overriding title, theRevenue contended that, in the alternative, the incomewas assessable in the hands of the assessee under theprovisions of s. 64: Held, (i) that the applicability of s. 64 was whollyindependent of the question which had been referred. Inany event, the Tribunal had found as a fact that thepartition did not bring about any partnership. Thecontention that the Tribunal's finding was erroneous in (ii) that the memoranda of partition expresslydivided the capital standing in the name of the karta inthe firms, among the members of the joint family, withthe result that though the capital stood in the assessee'sname in the firms' account books, that the capital wasseverally owned by the erstwhile members of the jointfamily in definite shares with a further agreement thatthe assessee was to receive the profits for and on behalfof the contracting parties severally. Hence, the shareincomes of the assessee in the firms was subject to anoverriding title in favour of the other members of theHUF in proportion to the shares allotted to them inpartial partition and as such could not be taxed in thehands of the assessee.” 7. Lastly, reliance has been placed upon the decision of the AllahabadHigh Court in the case of Commissioner of Income Tax vs. RajaRam Jaiswal reported in [1992]195 ITR 834, wherein the facts areas under: “During the assessment proceedings for the assessment 7. Lastly, reliance has been placed upon the decision of the AllahabadHigh Court in the case of Commissioner of Income Tax vs. RajaRam Jaiswal reported in [1992]195 ITR 834, wherein the facts areas under: “During the assessment proceedings for the assessment year 1970-71, the assessee raised a claim before theIncome-tax Officer that he had borrowed certainamounts from two persons, namely, S and H, whichamount he invested in a firm in which he was a partner.The assessee had entered into an agreement with theaforesaid two lenders some time in the year 1969,where-under he had agreed to pay the said two persons7 per cent and 13 per cent, out of the share incomereceived by him from the said firm. He, accordingly,claimed that the amount representing 20 per cent shouldnot be treated as his income since that income wasdiverted to the lenders by an overriding title. Theassessee's claim was rejected by the Income-tax Officerbut accepted by the Tribunal. On a reference: Held, that the agreements between theassessee and the said lenders were practically in thenature of sub- partnership. It was not a case where theassessee could, at any time, pay up the loans anddischarge / terminate the agreements. Hence, thepayments in question constituted a case of diversion ofincome by an overriding title.” 8. In the present case the assessee has made additional investment ofcapital amounting to Rs.1 lac, to the firm of M/s. B. Mehta & Co.,which was advanced from HUF funds. The additional share of 6%was relatable to the additional investment to the capital of B. Mehta& Co., fromd the funds of the H.U.F. The assessee who was thekarta of the HUF also made a declaration that he was holding 6%share in B. Mehta & Co., on behalf of the HUF of which he was thekarta. The department has not disputed that the assessee had beengranted additional share of 6% in the said firm of B. Mehta & Co.,after infusion of additional funds to the capital of the firm. Thedepartment has also not denied the declaration made by theassessee who is the karta to the effect that the 6% additional sharein the firm was on account of the additional investment from HUFfunds. There was therefore no reason for the ITO not to haveaccepted the contention of the assessee and to have rejected theclaim of the assessee. The ITO rejected the claim solely on theground that the declaration by the assessee being unilateral doesnot amount to an agreement. The existence of the declaration notbeing denied and the fact of HUF funds being invested in the firm ofB. Mehta & Co., also not being disputed, there was no reason for theITO to have rejected the claim of the assessee. The assessee's 6% additional share in the income from the firm being attributable to thecontribution of additional capital from the HUF funds become theshare of the HUF by an overriding title of the HUF and therefore theassessee's additional 6% share in the income has to be diverted tothe HUF. We accordingly answer the question referred for ouropinion in the affirmative, that is, in favour of the assessee andagainst the Revenue. Reference disposed of with no order as tocosts. (V. C. DAGA J. ) (A. S. AGUIAR J.) -x-