Commissioner of Income Tax vs K.P.R. Rajah

Ramanujam, J.—At the instance of the Revenue, the following two questions have been referred by the Income Tax Appellate Tribunal to

this court for its opinion :

(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal''s decision is correct in law in holding that No. 2, Venkatesa

Mudaliar Street, Madras 81, belongs to the Hindu undivided family only, when the assessee''s father had died on July 4, 1970, and material

changes in the law had taken place after the enactment of the Hindu Succession Act, 1956, in cases of intestate succession and after December

31, 1969, when the Taxation Laws (Amendment) Act, 1970, had modified the Income Tax Act, 1961 ?

(2) If the answer to the first question is in the negative, whether the capital gains on sale of that property be not taxed in the assessee-individual''s

hands and the interest of the minor sons be not clubbed in the assessee''s hands ?

The assessee, Shri K. P. R. Rajah, is an individual deriving income from his own business and as a partner in Messrs. K. P. R. Rajah. For the

assessment to capital gains of Rs. 18,850 relating to the sale of a property at No. 2, Venkatesa Mudaliar Street, Madras-81, in the assessment

order, the Income Tax Officer proceeded on the basis that the property was left behind by Sri K. P. Ramiah Nadar, the father of the assessee, that

the same was inherited by the assessee and his sister, Sivakami Ammal, that under the provisions of the Hindu Succession Act, the property

devolved on them in equal shares, that later on the assessee paid a sum of Rs. 5,000 to his sister and obtained a release deed in respect of her half

share in the property, that the assessee after the said release had become entitled to the entirety of the property and that, therefore, the entire

capital gains arising out of the sale of the said property should be assessed in his individual capacity.

On appeal, the Appellate Assistant Commissioner held that the property derived by a Hindu from his male ancestors who constituted his lineal

ascendants, should be treated as belonging to the Hindu undivided family consisting of such person and his sons, that even otherwise as on 1970, it

was open to a Hindu to throw his self-acquired property into the common hotchpot of the Hindu undivided family, that even though the property

could be taken to be his separate property after he obtained a release from his sister of her half share, as he has thrown the same into the common

hotchpot of the Hindu undivided family, he should be taken to have impressed the property with the character of ''joint family property'' and that,

therefore, the capital gains has to be assessed only on the Hindu undivided family of Sri K. P. R. Rajah and not individually in his hands.

Against the order of the Appellate Assistant Commissioner, the Revenue preferred an appeal before the Tribunal which found that the entire

property belonged to the Hindu undivided family of the assessee and his sons and that, therefore, no capital gains could be assessed in the hands of

the assessee as an individual. It also held that the interest of the minor sons of the assessee could not be clubbed u/s 64 of the Income Tax Act,

because the particular for clubbing came into operation by way of the Amending Act of 1975 which came into force on April 1, 1976, and,

therefore, the said amended provision will not apply to capital gains which arose on April 27, 1973. Aggrieved by the order of the Tribunal, the

Revenue has sought and obtained the reference of the questions set out above.

According to the learned counsel for the Revenue, under the provisions of the Hindu Succession Act, the property left by his father devolved on

the assessee and his sister in equal shares. Therefore, the half share which devolved on the assessee on the death of his father could be taken to be

either ancestral or separate with reference to his sons. If the half share belonging to the assessee has been impressed with the character of joint

family property or has been thrown into the common hotchpot of the joint family, the share which the assessee could obtain in a partition should be

taken to be his interest in the property in view of the amendment which was brought in by the Taxation Laws (Amendment) Act, 1970, which

came into force on April 1, 1971.

It is further submitted by the learned counsel for the Revenue that even in respect of the property which devolved on the assessee''s sister, the

same legal position has to follow, for, the assessee has got a release of the half share belonging to his sister by paying a sum of Rs. 5,000 out of his

own funds and that after such a release, the half share belonging to his sister has become the separate property of the deceased and when he

throws that property into the common hotchpot or impresses the same with the character of joint family property, then by virtue of the said

Amending Act, the assessee''s share on an assumed partition of the said half share will also come up for charge. It is also contended that the

Tribunal is in error in stating that there is no evidence to show that the assessee paid the sum of Rs. 5,000 out of his individual funds while the

Income Tax Officer as well as the Appellate Assistant Commissioner had definitely given a finding that the sum of Rs. 5,000 had been paid out of

the assessee''s separate funds for getting a release of the half share in the property from his sister. If really the sum of Rs. 5,000 which was the

consideration for getting the release from his sister with reference to the half share belonging to her was paid from the separate funds of the

assessee and not from his joint family funds, then the half share of the property should be taken to have been acquired by him in his individual

capacity and not as the karta of his family. Therefore, from where the consideration of Rs. 5,000 came is a material fact to find out whether the half

share of his sister became the separate property of the assessee or whether it is the property of the joint family after the release. However, the

Tribunal has proceeded on the basis that the assessee after acquiring the interest of his sister in the property in question, impressed the same with

the character of ''joint family property'' either by blending or by throwing the same into the common hotchpot and that the recitals in the release

deed also indicated that the half share belonging to the sister was released not only to the assessee but also to his sons as well. The answer to the

question whether the property was released in favour of the assessee or to the entire family will depend upon the source of the consideration. The

release deed refers to a consideration of Rs. 5,000 having been paid. If the consideration has come out of the assessee''s separate funds, then he

should be taken to have acquired the property as his self-acquisition. By his subsequent conduct, the assessee impressed the same with the

character of joint family property. However, if the consideration of Rs. 5,000 came from the Hindu undivided family of the assessee, then the half

share of Sivakami Ammal should be taken to have been released in favour of the Hindu undivided family. Thus a finding on the question as to who

paid the consideration becomes quite relevant. In this case, the Income Tax Officer specifically finds that Sivakami Ammal released her share in the

property in favour of the assessee and his sons for the consideration of Rs. 5,000 received by her from Sri K. P. R. Rajah and that since the

release is for a consideration from the assessee individually, the release could be taken only for the benefit of the assessee and not for his sons. The

Income Tax Officer also found that the sum of Rs. 5,000 was paid out of the individual income of the assessee. He actually found that the sum of

Rs. 5,000 paid for the release had been withdrawn from the individual funds of Sri K. P. R. Rajah and when the consideration of Rs. 5,000 was

paid in his individual capacity, he cannot be taken to be acting in a representative capacity as karta of a Hindu undivided family consisting of himself

and his sons. These findings had practically been accepted by the Appellate Assistant Commissioner in his appellate order. The appellate authority

also observed that the amount of Rs. 5,000 paid to his sister for obtaining the release deed was drawn from the individual funds of the assessee.

Thus both the Income Tax Officer as well as the appellate authority had categorically given a finding that the sum of Rs. 5000 paid as consideration

for obtaining the release from the assessee''s sister, came from the assessee''s individual funds and not from the family of his. The Tribunal without

reference to these findings, proceeded to state in its order that there is no evidence to show that the assessee paid the sum of Rs. 5,000 out of his

individual funds. If really the Tribunal doubted the correctness of the findings rendered by the Income Tax Officer as well as the appellate authority,

it should have called for the requisite materials to justify the findings of the authorities below. But without any such attempt, the Tribunal ignored the

findings rendered by the authorities below, merely by saying that there is no evidence to show that the assessee paid a sum of Rs. 5,000 came is

relevant to find out whether by the release, the property became the property of the assessee or whether it became the property of the joint family,

we are of the view that the Tribunal has to go into the question as to from where the sum of Rs. 5,000 came. Apart from this question which relates

to the half share which devolved on the assessee''s sister, as regards the half share which devolved on the assessee on the death of his father, the

applicability of the Taxation Laws (Amendment) Act, 1970, which came into force on April 1, 1971, has not been considered by the Tribunal. It is

not in dispute now before us that the said Taxation Laws (Amendment) Act, 1970, is applicable to the assessment year in question. But the

Tribunal has not referred to the said Amending Act and it has not also considered its scope with reference to the facts of this case. If the said

Amending Act is to apply, then the capital gains referable to the share which he will obtain on an assumed partition will only be assessable in his

hands. The question of the applicability of the said Amending Act to the other half share which originally devolved on the assessee''s sister and later

on released, in the event of the consideration for the release proceeding from individual funds of the assessee, will also have to be considered. Of

course, if the consideration for the release should be taken to be in favour of the joint family, the applicability of the Taxation Laws (Amendment)

Act, 1970, in such an event may not arise. However, since the Tribunal has not considered the applicability of the Taxation Laws (Amendment)

Act, 1970, which is applicable to the relevant assessment year in question, we are not in a position to answer both the questions as it is, unless the

Tribunal considers the scope of the Taxation Laws (Amendment) Act, 1970, and also the question as to who provided the consideration for the

release. We have, therefore, to return the reference unanswered with a direction to the Tribunal to consider the appeal afresh on the lines indicated

above in this judgment. There will be no order as to costs.