Commissioner Of Wealth Tax v. Swaraj Paul (Huf) — 1992 DIGILAW 7 (CAL)

Judgment SHYAMAL KUMAR SEN, J. 1. ON an application under s. 27(3) of the WT Act, 1957, the following questions have been directed to be referred to this Court : "(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest of the minors who happened to be the minor children of the Karta of the HUF, in the partnership firm of M/s Aminchand Pyarelal, cannot be included in the hands of the HUF ? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there is no logic in disallowing the past tax liabilities even though there was no assessment of the HUF as such ?" 2. THE facts, inter alia, are that the assessee is an HUF and the reference relates to the asst. yr. 1974-75 for which the relevant valuation date is 31st March, 1974. THE HUF was assessed to wealth-tax on net wealth of Rs.50,60,006 on the relevant valuation date 31st March, 1973 for the asst. yr. 1973-74 as against the net wealth as per return of Rs.11,56,320. While computing the gross wealth of the HUF the WTO included the interest of the HUF in the firm, M/s Aminchand Pyarelal, represented by the following minor children of the Karta of the HUF : (1) Master Ambar Paul, (2) Master Akash Paul, (3) Master Angad Paul, (4) Kumari Anjali Paul. The amount under this head was to the tune of Rs. 11,56,473 for the asst. yr. 1973-74. 3. THE firm, M/s Aminchand Pyarelal comprised four partners Shri Satya Paul, Jit Paul, Swaraj Paul and Surrendra Paul upto 31st March, 1972 and they were assessed on their shares of income from the firm in their individual capacity. Thereafter a claim was made to the effect that interest of the partners in M/s Aminchand Pyarelal was that of their respective HUFs as the firm M/s Aminchand Pyarelal was formed after a partition of the business assets of the HUF of which the aforesaid four persons were members and that capital of each one of them received on partition of the HUF business constituted their respective capital in the firm of M/s Aminchand Pyarelal. This claim of the assessee was accepted in case of Sri Satya Paul and Sri Jit Paul. This claim of the assessee was accepted in case of Sri Satya Paul and Sri Jit Paul. THEreafter from 1st April, 1972 Shri Swaraj Paul and Surrendra Paul retired from the partnership firm of M/s Aminchand Pyarelal and in their place their minor sons and daughter were admitted to the benefits of partnership. THE capital standing in the names of Swaraj Paul and Surrendra Paul on the date of their retirement on 31st March, 1972 were Rs.40,35,995 and Rs.43,34,012 respectively. Those capitals were allowed to be continued in the books of the firm M/s Aminchand Pyarelal even after 31st March, 1972. 4. THE firm of M/s Aminchand Pyarelal underwent change in the constitution from 1st April, 1972 when Shri Swaraj Paul and Surrendra Paul retired and their minor sons and daughter were admitted to the benefits of the partnership. It was claimed that the new partners, i.e. minor children of Shri Swaraj Paul and Sri Surrendra Paul became partners in their individual capacity after a partial partition effected on 15th March, 1972 by the members of the HUF known as M/s Swaraj Paul and M/s Surrendra Paul. In other words, the claim was that w.e.f. 1st April, 1972 the bigger HUF of which Sri Swaraj Paul and Sri Surrendra Paul were members did not exist and in their places the minor children became partners. THE claim for partial partition was made in respect of S/shri Swaraj Paul and Surrendra Paul, their wives and minor sons while the minor daughter of S/shri Swaraj Paul and Surrendra Paul remained with the bigger HUF. However, the application moved under s. 171 of the IT Act, 1961 on behalf of the HUF, M/s Swaraj Paul and Surrendra Paul relating to the asst. yr. 1973-74 had not yet been disposed of by the ITO. In other words, the claim for partial partition had not been accepted and accordingly the capital standing in the names of HUFs known as S/shri Swaraj Paul and Surrendra Paul belonged to them and was to be considered as part of the wealth for the purpose of assessments of the respective HUF known as Swaraj Paul, HUF and Surrendra Paul, HUF. In this view of the matter the capital allocated to minor sons of the respective HUFs had to be considered as belonging to the HUF known as Swaraj Paul, HUF and Surrendra Paul, HUF. In this view of the matter the capital allocated to minor sons of the respective HUFs had to be considered as belonging to the HUF known as Swaraj Paul, HUF and Surrendra Paul, HUF. It was held by WTO while completing wealth-tax assessment proceedings of the minor sons and daughters of Shri Swaraj Paul and Shri Surrendra Paul that business carried on by M/s Aminchand Pyarelal was previously carried on by the bigger HUF of which Shri Swaraj Paul and Surrendra Paul were partners. Even though Shri Swaraj Paul and Surrendra Paul, according to them, were partners in M/s Aminchand Pyarelal as representatives of their respective HUFs since retired, the family capital was retained in the aforesaid firm's books free of interest. If the HUF had no interest in the firm of M/s Aminchand Pyarelal, there was no reason why such huge capital was left in the firm free of interest. THE capital in the firm M/s Aminchand Pyarelal was the only asset for the HUF of Shri Swaraj Paul and Shri Surendra Paul. Further all the minor children of the partners Shri Swaraj Paul and Shri Surrendra Paul were admitted to the benefits of partnership. It was, therefore, quite obvious that Shri Swaraj Paul and Shri Surrendra Paul retired by putting their minor sons and daughters in the firm of M/s Aminchand Pyarelal and, therefore, they were partners representing their respective HUFs, i.e., known as Swaraj Paul, HUFs and Surrendra Paul, HUF and not in their individual capacity. Accordingly, the interest of the minor sons and daughters of Shri Swaraj Paul and Shri Surrendra Paul have to be assessed in the hands of their respective HUF. As such interest of the minor sons and daughter of Shri Swaraj Paul and Surrendra Paul have been included in the hands of the respective HUFs of Shri Swaraj Paul and Shri Surrendra Paul. Against the aforesaid inclusion of interest of the minor children of the Karta of the HUF named and styled as Swaraj Paul in the firm of M/s Aminchand Pyarelal, the assessee went up in appeal before the CWT(A) who confirmed the action of the WTO. 5. Against the aforesaid inclusion of interest of the minor children of the Karta of the HUF named and styled as Swaraj Paul in the firm of M/s Aminchand Pyarelal, the assessee went up in appeal before the CWT(A) who confirmed the action of the WTO. 5. BEING aggrieved by the aforesaid order of the CWT(A) the assessee HUF preferred a second appeal before the Tribunal and the Tribunal had held that the interest of the minors in the partnership firm M/s Aminchand Pyarelal, could not be included in the hands of the assessee. While computing the net wealth of the assessee HUF, the WTO did not allow wealth-tax and income-tax liabilities for the assessment years upto and including 1972-73 on the ground that the HUF Swaraj Paul never filed any return for income-tax and wealth-tax up to the asst. yr. 1972-73 and there was no assessment of the HUF as such prior to the asst. yr. 1971-72. On appeal the CWT(A) confirmed that action of the WTO. On a second appeal at the instance of the assessee, the Tribunal was of the view that there was no logic in disallowing the past tax liability and held that the HUF is entitled to deduction of past tax liability and accordingly directed the WTO to look into the tax liability and to give the benefit of deduction bearing in mind the provisions of s. 2(m) of the WT Act. 6. THE Tribunal rejected the reference application by observing that the first question was a question of fact and the second question needed no reference. Thereafter, the Revenue preferred an application under s. 27(3) of the WT Act, before this Court which directed the Tribunal to make a statement of the case and refer the two questions as suggested by the Revenue and as mentioned hereinbefore. 7. IT has been submitted on behalf of the Revenue that the capital in the firm of Aminchand Pyarelal was the only asset of the HUF of Swaraj Paul and that the family capital was retained in the firm free of interest. The minor sons Ambar Paul, Akash Paul and Angad Paul and daughter are stated to have been admitted to the benefits of partnership. But Swaraj Paul, his wife and their minor daughter were not given a share in the profits of the firm. The minor sons Ambar Paul, Akash Paul and Angad Paul and daughter are stated to have been admitted to the benefits of partnership. But Swaraj Paul, his wife and their minor daughter were not given a share in the profits of the firm. IT was urged that none of the other coparceners of Swaraj Paul (HUF) disclaimed or relinquished his or her right to claim the share, right, title and interest in the partnership firm, its assets and profits. IT has also been argued that there was no agreement between the other partners and the minor children of Swaraj Paul and there appears to be no new deed of partnership with the assent and agreement of other coparceners of the family of Swaraj Paul. Under such circumstances, it has been submitted on behalf of the Revenue that the share income received by the minor children should be regarded in substance as a return made to the family because of the investment of family funds in the business. In this connection the learned advocate for the Revenue relied upon the judgment and decision in the case of Y.L. Agarwalla and Ors. vs. CIT reported in 1978 CTR (SC) 124 : (1978) 114 ITR 471 (SC). He also relied upon the judgment and decision in the case of CIT vs. Kalu Babu Lalchand reported in (1959) 37 ITR 123, 128 (SC) wherein it was held that if a copercener utilises the joint family funds for contributing his share of capital in the firm, he must be regarded as having entered into partnership on behalf of and representing the family. Learned advocate also relied upon the judgment and decision in the case of Rajkumar Singh Hukam Chandji vs. CIT reported in (1970) 78 ITR 33 (SC) wherein it was held that the question to be considered is whether the remuneration received by the copercener is in substance merely a mode of return made to the family because of the investment of family fund in the business. 8. IT has been submitted on behalf of the assessee on the other hand that in view of the deed of partial partition and stipulations for retaining about Rs.22 lakhs there is no question of treating the interest of the minors as belonging to the HUF especially when the partial partition was effected on 15th March, 1973, i.e., prior to the relevant valuation date for the asst. yr. 1973-74 being 31st March, 1973. IT has been further contended on behalf of the assessee that so far as the HUF is concerned it had no longer any interest in the partnership firm. The money was retained only for the purpose of meeting several liabilities of the firm when the HUF was a partner. IT has also been submitted on behalf of the assessee that the sum of Rs.22 lakhs was retained in the account of the HUF, however, for meeting several liabilities of the HUF while it was continuing as a partner in the firm which were incurred when the joint family was subsisting. IT was not recorded that the amount was retained free of interest. The amount was left with the firm for specific purpose and details were furnished by the assessee which are on record namely the ledger account of the assessee in the books of the firm it also appears from record that out of the amount retained several expenses were met upto 1977 leaving a small balance of about Rs.1,70,100. IT has further been submitted on behalf of the assessee that the minors also introduced some capital of their own though to a small extent. IT has also been submitted that they were admitted to the benefits of partnership in their own right and the HUF had nothing to do with the same any longer after the partial partition the assessee having retired from the partnership firm. We have considered the submissions of the parties. From the facts on record, it appears that the partial partition took place on 15th March, 1973, i.e., prior to the relevant valuation date for the asst. yr. 1973-74 being 31st March, 1973. Accordingly, it cannot be said that so far as the HUF is concerned it had any interest in the partnership firm. With regard to retention of Rs.22 lakhs in the undivided family it is clear from record that the money was retained only for the purpose of meeting several liabilities of the firm arising when the HUF had been a partner. The said liabilities were incurred when the joint family was subsisting. The fact that the amount was left with the firm for specific purpose and details were furnished by the assessee, namely, the ledger account of the assessee in the books of the firm is also evident from the facts on record. The said liabilities were incurred when the joint family was subsisting. The fact that the amount was left with the firm for specific purpose and details were furnished by the assessee, namely, the ledger account of the assessee in the books of the firm is also evident from the facts on record. From the records it also appears that several expenses were met upto 1977 leaving a small balance of about Rs.1,70,100. It is also the admitted position that the minors introduced some capital on their own though to a small extent and they were admitted to the benefits of partnership in their own right and the HUF had nothing to do with the same any longer after the partial partition and the assessee's retirement from the partnership firm. Therefore, the decisions cited on behalf of the Revenue have no application to the facts and circumstances of the case. Accordingly, in our opinion, the interest of the minor sons and daughter of Shri Swaraj Paul and Shri Surrendra Paul cannot be assessed in the hands of their respective HUFs, and, as such, it will be wrong to include the interest of the minor sons and daughter of Shri Swaraj Paul and Surrendra Paul in the hands of their respective HUFs after the partial partitions have been affected. 9. ACCORDINGLY, in our opinion, there is no reason to interfere with the decision of the Tribunal so far as question No. 1 is concerned. The question No. 1 is, therefore, answered in the affirmative and in favour of the assessee. 10. WE may now take up the second question. While computing the net wealth of the assessee HUF, the WTO did not allow wealth-tax and income-tax liabilities for the assessment years upto and including 1972-73 on the ground that the HUF Swaraj Paul never filed any return for income- tax and wealth-tax upto the asst. yr. 1972-73 and there was no assessment of the HUF as such prior to the asst. yr. 1971-72. On appeal, the CWT(A) confirmed that action of the WTO. yr. 1972-73 and there was no assessment of the HUF as such prior to the asst. yr. 1971-72. On appeal, the CWT(A) confirmed that action of the WTO. On a second appeal at the instance of the assessee, the Tribunal was of the view that there was no logic in disallowing the past tax liability and held that the HUF is entitled to deduction of past tax liability and accordingly directed the WTO to look into the tax liability and to give the benefit of deduction bearing in mind the provisions of s. 2(m) of the WT Act. The claim for deduction of tax liability has been disallowed on the ground that there were no assessments in respect of the HUF as such prior to the asst. yr. 1973-74. The assessments were made in individual status. It has been contended on behalf of the assessee that the assessment made in individual status having been found to be not correct in view of the admitted position that the assessments (should) have been made in the status of HUF, the liabilities relating to the same entity and in respect of the same assessments should be allowed as deduction. 11. IT may be noted in this connection that there is a separate assessment in respect of different properties of the assessee in the status of an individual. Since the HUF did not submit any return it cannot claim deduction in respect of the past liabilities. 12. IN our opinion, there is no justification in holding that there is no logic in disallowing past tax liabilities. The past tax liabilities cannot be allowed. Accordingly, the question No. 2 should be answered in the negative and in favour of the Revenue. There will be no order as to costs.