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Karta and individual are separate legal entities

G P KHUNGAR

I own a handicrafts business and file my tax return regularly. In my last income tax return, I showed a business loss of Rs 4 lakh on account of overseas travel costs. The income tax officer disallowed this expenditure on the grounds that since I had travelled overseas along with my wife and children and no evidence of any business done or business contacts established had been furnished, the expenditure incurred could not be deemed to be a business expenditure. He further pointed out in his order that although I had purchased foreign exchange to the extent of the permissible limits for my wife and me against our FTS entitlement, no foreign exchange was secured as such for business purposes. He therefore concluded that this was a pleasure trip and not a business trip.

The ITO also proceeded to add Rs 4 lakh to my income for the year and raised an income tax due demand for Rs 1,62,000. Although I appealed against this decision, he proceeded to attach the bank account of my HUF, which derives its income from residential and commercial properties. He has issued directions to the bank to disallow operation of this account till such time as my personal income tax dues are fully settled with interest. He has also written to my tenants to henceforth deposit the monthly rent with the income tax department till I clear my tax arrears.

These actions have caused me considerable embarrassment and denied me access to the monthly rentals that my family uses for our day to day expenses. Although I am the Karta of the HUF, it has always been my understanding that the two incomes cannot be clubbed for tax assessment purposes and that neither can be attached to settle the dues of the other.

Furthermore, as I have already filed an appeal against the order of the ITO with my range income tax assistant commissioner (IAC) within the stipulated time period and this appeal is still to be disposed of by the IAC, how can the department start recovery proceedings?

Please advise me on my legal position and what steps I should take to stop being unnecessarily penalised by the income tax officer.
—V Baleshwar Rao, HYDERABAD

It has been recognised by the courts of law in unambiguous terms that the Karta of an HUF and an individual income tax payer, even if they are the same person, are two separate legal entities. Therefore, their assets and liabilities cannot be clubbed together for income tax assessment and arrears recovery purposes. As the two entities are separate and legal, there can be no occasion for the tax authorities to be recovering the tax of one legal entity from the other. There is no provision for income tax authorities to force other members of your HUF to part with their interest in the joint property simply because they, the tax authorities, have an outstanding unpaid tax demand standing in your capacity as a company assessee.

You can always approach the courts of law to secure a restraining order against the income tax department. However, before you do so, you should exhaust the remedies laid down under the income tax act and try and secure redressal of your grievance by first approaching the concerned assistant commissioner of income tax to expedite the hearing and disposal of your pending tax appeal.

I only hope that you have prepared a business report for your records and also filed a copy with the income tax authorities. This report should conclusively show that the foreign trip was undertaken for business development purposes and was subsequent to prior exchange of some correspondence and contact with potential business houses, some of whom were contacted during your foreign visit. Any letters from these business houses in pursuance of your visit, seeking more details or written offers for products offered by you, would of course be beneficial in establishing your claim. In case you have not submitted these papers already, then do prepare a proper file that you can personally show or even file with the IAC when your appeal is posted for a hearing.