Commissioner of Income Tax vs Chamba Mal Harjeet Singh

Sudhir Agarwal, J.—In IT Ref. Nos. 23 of 1982 and 47 of 1987, the following two questions of law have been referred to be answered by this Court:

Whether on the facts and in the circumstances of the case the Tribunal was correct in law in holding that the business income pertaining to the sales and manufacture of rice and other grains etc. was assessable in the hands of the bigger HUF and not in the hands of the smaller HUF ?

Whether on the facts and in the circumstances of the case, Tribunal was correct in law in holding that the business of sale and manufacture of rice and other grains, etc. was carried on by the bigger HUF only as a result of family arrangement and that the department was not justified in interfering with the same ?

In IT Ref. No. 106 of 1986 though two questions have been referred, the first question is similar to question No. 1 as stated above, the question No. 2 is also based on the aforesaid references but has been coined as under : "2. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the business of sale and manufacture of rice and other grains, etc. was carried on by the bigger HUF only as a result of family arrangement and that the department was not justified in interfering with the same specially when the reference applications u/s 256(1) are pending before the Hon*ble High Court for the assessment years 1974-75 and 1975-76 on similar issue ?"

3.The facts of the case, as admitted between the parties, are that earlier Sri Chamba Mal, his son, Sri Harjeet Singh, two wives of Sri Harjeet Singh and children of Sri Harjeet Singh constituted HUF. The family was carrying on business in rice. On 2-11-1954 they claimed to have a partial partition in the family and the capital of business was divided between late Sri Chamba Mal and his son, Sri Harjeet Singh. This partition was accepted by the Income Tax Officer (hereinafter referred to as ITO'') vide order dated 28-9-1966. Sri Chamba Mal died and the business was carried on by Sri Harjeet Singh in the status of HUF. For the years 1966-67 to 1968-69, the assessments were made in the status of HUF and the assessee was assessed both in respect of Income Tax from business and the property income. The assessment for the year 1969-70 was also made in the status of HUF. The assessee claimed that there was another partial partition in the family on 21-10-1968 when capital of Rs. 1,93,402 was divided between Harjeet Singh (Karta) and his two wives, Smt. Suraj Kumar and Smt. Dharmendra Kaur and three minor sons, Harmendra Singh, Ravindra Singh and Pratap Singh. The Commissioner (Appeals) held that the correct status of the assessee was that of HUF. Thereafter, for 1971-72 and 1972-73, the business income of assessee was taxed in the status of smaller HUF. In the assessment year 1973-74, the assessee filed return showing income from house property and business income in the status of bigger HUF and contended that as per the family arrangement, the business was carried on by all the members jointly with the help of the assets which belong to the family which were never the subject-matter of partial partition. He also claimed that business was carried on in the status of bigger HUF. This was not accepted by Income Tax Officer and his view was confirmed by the Assistant Commissioner in appeal. However, the Tribunal took a different view and reversed the orders of Income Tax Officer and Commissioner (Appeals) directing that the income should be taken as that of bigger HUF and not of smaller HUF.

The learned Counsel appearing for the revenue contended that business of smaller HUF cannot be treated to be that of bigger HUF only on the basis of family arrangement and the Tribunal erred in law in directing that the business income of the assessee was to be treated to be that of bigger HUF.

Section 171 of the Act provides for assessment after partition of a HUF and reads as under:

Assessment after partition of an HUF.''(1) A Hindu family hitherto assessed as undivided shall be deemed for the purpose of this Act to continue to be an HUF, except where and insofar as a finding of partition has been given under this section in respect of the HUF.

(2) Where, at the time of making an assessment u/s 143 or Section 144, it is claimed by or on behalf of any member of a Hindu family assessed as undivided that a partition, whether total or partial has taken place among the members of such family, the assessing officer shall make an inquiry thereinto after giving notice of the inquiry to all the members of the family.

(3) On the completion of the inquiry, the assessing officer shall record a finding as to whether there has been a total or partial partition of the joint family property, and, if there has been such a partition, the date on which it has taken place.

(4) Where a finding of total or partial partition has been recorded by the assessing officer under this section, and the partition took place during the previous year,''

(a) the total income of the joint family in respect of the period upto the date of partition shall be assessed as if no partition had taken place; and

(b) each member or group of members shall, in addition to any tax for which he or it may be separately liable and notwithstanding anything contained in clause (2) of Section 10, be jointly and severally liable for the tax on the income so assessed.

(5) Where a finding of total or partial partition has been recorded by the assessing officer under this section, and the partition took place after the expiry of the previous year, the total income of the previous year of the joint family shall be assessed as if no partition had taken place, and the provisions of clause (b) of Sub-section (4) shall, so far as may be, apply to the case.

(6) Notwithstanding anything contained in this section, if the assessing officer finds after completion of the assessment of an HUF that the family has already effected a partition, whether total or partial, the assessing officer shall proceed to recover the tax from every person who was a member of the family before the partition, and every such person shall be jointly and severally liable for the tax on the income so assessed.

(7) For the purpose of this section, the several liability of any member or group of members thereunder shall be computed according to the portion of the joint family property allotted to him or it at the partition, whether total or partial.

(8) The provisions of this section shall, so far as may be, apply in relation to the levy and collection of any penalty, interest, fine or other sum in respect of any period upto date of the partition, whether total or partial, of an HUF as they apply in relation to the levy and collection of tax in respect of any such period.

(9) Notwithstanding anything contained in the foregoing provisions of this section, whether a partial partition has taken place after the 31-12-1978, among the members of an HUF hitherto assessed as undivided,''

(a) no claim that such partial partition has taken place shall be inquired into under Sub-section (2) and no finding shall be recorded under Sub-section (3) that such partial partition had taken place and any finding recorded under Sub-section (3) to that effect whether before or after the 18-6-1980, being the date of introduction of the Finance (No. 2) Bill, 1980, shall be null and void;

(b) such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken place;

(c) each member or group of members of such family immediately before such partial partition and the family shall be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under this Act by the family in respect of any period, whether before or after such partial partition;

(d) the several liability of any member or group of members aforesaid shall be computed according to the portion of the joint family property allotted to him or it at such partial partition;

and the provisions of this Act shall apply accordingly.

Section 171 for the purpose of partition in the family requires an enquiry or finding of fact by the assessing authority that there has been a total or partial partition of the joint family property. Sub-section (9), which was inserted by Finance Act of 1980 with effect from 1-4-1980 prevents any benefit of partial partition if it has taken place after 31-12-1978. However, in the present case, since the partial partition has been claimed to be prior to 31-12-1978, therefore, the same would have no application. However, where transfer of property is sought to be claimed from one person to another, namely, in the present case, from smaller HUF to bigger HUF, in order to give effect to partition whether partial or complete, there has to be an enquiry made by the Income Tax Officer and acceptance about such partition by him. In the absence thereof, even if such transfer has taken place, it would not give any benefit for the purpose of Income Tax Act and the property would be assessed in the hands of such assessee where it was being assesseed before the alleged partition.

In Kalloomal Tapeswari Prasad (HUF), Kanpur Vs. Commissioner of Income Tax, Kanpur, the Apex Court held that a claim made that a partition, total or partial, has taken place, but disallowed by the Income Tax Officer, the HUF will have to be assessed as such notwithstanding the fact that a partition had in fact taken place as per Hindu Law. A finding of fact to that effect that partition, had taken place has to be recorded u/s 171 by Income Tax Officer. The Apex Court further held that unless a finding is recorded u/s 171 that a partition partial or total has taken place, income from the property should be included in the total income of the family by virtue of Section 171. The said decision has been followed in Income Tax Officer v. Smt. N.K. Sarada Thampatty (1991) 187 ITR 696 . In MOHAMMAD ALI KHAN AND OTHERS Vs. COMMISSIONER OF WEALTH-TAX., , the Apex Court also clarified the position that where the partition has taken place under Hindu Succession Act. for the purpose of the said Act, the right of the parties may be governed by Section 6 of Hindu Succession Act, 1956, but so far as income tax law is concerned, the matter has to be governed by Section 171(1) of the Income Tax Act.

The Tribunal, in the present case, has referred to the judgment of the Apex Court in Kale and Others Vs. Deputy Director of Consolidation and Others, , where partition on the basis of family arrangement was in question. In the consolidation proceedings, the family arrangement or the personal laws will be recognised, but for the purpose of Income Tax, the situation is different as stated above. In the present case, the only basis for claiming'' partition for the assessment year in question was family arrangement which was not accepted by the Income Tax Officer and, therefore, the view taken by the Tribunal that the assessee was entitled to claim business income belong to bigger HUF on the basis of the said family arrangement cannot be sustained. The questions referred, therefore, are answered accordingly. The references are disposed of as above.