Commissioner of Income Tax vs Chanchalben

Rajesh Balia, J.—At the instance of the Revenue the following three questions of law have been referred to this Court for its opinion by the Tribunal, Ahmedabad Bench ''A'', which arose out of its order in ITA No. 1989/Ahd/77-78 for the asst. yr. 1972-73 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was liable to pay capital gains tax only on 1/9th of the compensation because of partial partition of the HUF of Natverlal M. Dudhia ?

Whether the Tribunal was correct on the facts and in the circumstances of the case in deciding the question of taxing the capital gains as it did without considering the contention of the Revenue that blending of the property by the assessee through declaration was not valid ?

Whether, on the facts and in the circumstances of the case, a female member can throw or blend her personal property into the common stock of HUF ?"

The facts necessary for the present purposes, as found by the Tribunal, may be stated briefly. The assessee is widow of Harilal J. Dudhia. On partial partition of the assets of the HUF of which Harilal J. Dudhia was the Karta, the land bearing Survey No. 224/1 along with shares of Calico Mills and some cash came to be allotted to the assessee. The land had been subject matter of acquisition proceedings. By declaration dt. 14th Aug., 1970, the assessee who was living with her son Natwarlal, Natwarlal''s wife and six grandsons purported to throw the subject plot of land to the common hotchpotch of HUF headed by Natwarlal H. Dudhia of which she was a member, and a request for disbursement of the amount of compensation to each member of the HUF in the respective shares, namely 1/9th, was made to the Land Acquisition Officer on 3rd Oct., 1970. The award was made on 5th April, 1971, determining the compensation. The assessee did not offer any amount for being taxed under the head capital gains. Her case was that she had only 1/9th share in the land after the same was blended with the common hotchpotch of the HUF on 14th Aug., 1970, and on repartition under partition deed dt. 18th Aug., 1970, he received only 1/9th share in the compensation given by the Government. The amount of compensation which fell to her share did not result in capital gains to the extent it could attract taxable liability after the amount of compensation was adjusted against the cost of acquisition and the deduction under s. 80T. The claim of the assessee was rejected by the Assessing Officer (AO) by holding that female''s right in respect of blending properties is not at par with coparcener''s right. According to the AO a female member cannot throw her property into the common stock by mere declaration as a coparcener could and, therefore, in law, notwithstanding her declaration dt. 14th Aug., 1970, and second partition dt. 18th Aug., 1970, she continued to remain the absolute owner of the land in question and the capital gains having arisen as a result of the said acquisition she alone is liable to capital gains arising on account of such acquisition in its entirety. He made addition of Rs. 1,24,949 on account of long term capital gains in the hands of the assessee.

In appeal before the AAC the assessee failed. The Tribunal, without deciding the question about the right of a female, held that the assessee having accepted the position that the property belonged to HUF in the deed of partial partition dt. 18th Aug., 1970, she is now estopped from contesting that it did not belong to HUF, and acting on that basis the Land Acquisition Officer, without the consent of the assessee, could not have given anything in excess of 1/9th of compensation in view of the fact that the other parties to the deed of partial partition dt. 18th Aug., 1970, had the right to claim from the Land Acquisition Officer 8/9th of the compensation on the strength of that deed.

Having heard the learned counsel for the parties we are of the opinion that the Tribunal clearly erred in making the order which it had made.

We first consider question No. 2. Apparently the Tribunal has fallen in error in applying the principle of estoppel in the present case. The assessee was nowhere claiming that the property did not belong to the HUF or she has more than 1/9th share allotted to her on 18th Aug., 1970. However, it failed to appreciate that the IT Department was not estopped from going into the fact and taking into account the legal effect in accordance with the principles of law affecting the transactions and computing the income in accordance with law. Whether the assessee''s own action in throwing her property into the common hotchpotch had any legal effect or not to divest her of that property in law and vest it in HUF was a question which the ITO was very much competent to go into and was not estopped from going into and applying the correct law as it ought to be. A capital gain arises on transfer of property. Transfer takes place between the owner of the property and the acquirer of the property. In the case of compulsory acquisition the volition of owner of the property is not required. Nonetheless what the acquisition authority acquires is the right of owner and it disburses the compensation in accordance with the claims of the persons interested which have been made before it. The fact that the claimants have agreed about their interest and disbursement about the compensation does not alter the true effect of the acquisition, namely, transferring the property from the true owner and its vesting in the Government. For the purposes of determining the capital gains arising from such acquisition the ITO has to determine as to who was the owner of the capital asset on the date of transfer, and that inquiry cannot be shifted on account of the admissions made by the persons interested in the property acquired, but had to be determined in accordance with the legal principles applicable to any transactions that have taken place between the persons claiming to be interested in the property prior to the date of acquisition. If, in law, as a result of such transaction the property at one time vesting in one of the claimants resulted in transfer of the right of such person into other persons or creation of other interests therein, computation of capital gains would have to be determined in accordance with the existing situation. If, in law, no transfer of the property could have taken place and the original holder continued to remain in law the owner of the property the capital gains would be assessed in the hands of such owner and disbursement of compensation would only amount to application of the compensation received by the owner. Therefore, in our opinion, the Tribunal clearly erred in not deciding the real issue which arose for determining the basic question as to the ownership of the property as on the date of the vesting of the property in the State. It is only on determining to what extent in whom the property in question vested on the date of transfer, the question of computation of capital gains in the hands of assessee could be decided. It could not have been decided merely on the basis of the assessee''s own admission, by invoking the principle of estoppel which, in our opinion, has no applicability to the facts of the present case.

Therefore, in our opinion, the Tribunal was in error in deciding the question of taxing the capital gains as it could, without considering the contention of the Revenue that the blending of the property by the assessee through declaration was not valid. Therefore, question No. 2 is answered in negative, i.e., in favour of the Revenue and against the assessee.

From the Tribunal''s order we find that while the Revenue had contended that female had no right to blend the property in the common stock of HUF, no legal effect can be given to it. The assessee had raised alternative ground that throwing by the assessee the property in the common hotchpotch be treated as gift given to HUF or in any event as a family arrangement. Therefore, the question of taxability of the entire or any part of compensation to the capital gains in the hands of the assessee could not be decided without determining all the three alternative contentions raised before the Tribunal for which necessary facts have also not been found by the Tribunal. Therefore, we are unable to answer question Nos. 1 and 3 referred to above. It will now be for the Tribunal to determine all these questions when the matter comes up before it for deciding the appeal in accordance with the decision of the reference. The reference stands disposed of accordingly with no order as to costs.