Commissioner of Income Tax, Madras vs RM. AR. AR. Veerappa Chettiar

Veeraswami, J.—This is a reference at the instance of the Commissioner of Income Tax and the question that arises is, whether a certain

receipt, which was included in the taxable income for the assessment year 1958-59, was of a capital or revenue nature. That it was of a casual and

non-recurring nature was also raised but it is not reiterated before us. The Tribunal held, differing from the view of the Income Tax Officer and the

Appellate Assistant Commissioner of Income Tax, that the receipt was of a capital nature.

One Arunachalam Chettiar died on February 23, 1938, leaving a considerable estate, including properties in Ceylon. He was married three

times. By his first wife he had a son with a similar name, who died on July 9, 1934, leaving his second widow, Umayal Achi. His mother, Valami

Achi, had died long before him. Arunchalam Chettiar (senior) left him surviving his two widows, Lakshmi Achi and Nachiar Achi, and also his last

will and testament by which he nominated his widows as also the them to arrange for adoption of a son to each of his widows as also the widow of

his pre-deceased son. When Arunachalam Chattiar (junior) died, the Government of Ceylon levied estate duty on his half share in the estate, which

belonged to the joint family consisting of himself and his father. The levy as reduced in April, 1942, amounted to Rs. 2,21,743. This amount was

paid on March 31, 1943. In the meantime, litigation between the three widows having arisen, the Court of the Subordinate Judge of Devakotta

appointed receivers to take possession of the entire estate. On May 16, 1942, they instituted suit in the District Court of Colombo questioning the

validity of the levy of estate duty on certain grounds. On these death of Arunachalam Chettiar (senior) a similar demand of estate duty on his share

of the properties in Ceylon was made and a total sum of Rs. 6,33,601.76 was paid by March 31, 1943. On November 8, 1949, the District

Court of Colombo set aside the levy of estate duty in the case of Arunachalam Chettiar (junior) and affirmed the levy the levy in the other case. On

October 12, 1953, the Supreme Court at Ceylon, however, allowed the appeal of the receivers relating to Arunachalam Chettiar (senior). A

further appeal by the Ceylon Government to the Privy Council was unsuccessful. The result of it was, as directed by the courts, the Ceylon

Government deposited Rs. 7,97,072 towards interest, apart from the principal which had been paid out of the funds of the estate towards the

estate dung s levied in both the cases. Deducting the litigation expenses amounting to Rs. 2,17,087, the balance of Rs. 5,79,985 was credited in

the accounts of the estate. On June 16 or 17, 1945, each of the widows adopted a son. It would appear that the widow of Arunachalam Chettiar

(junior) contested the validity of the will of Arunachalam Chettiar (senior) as to the direction for partition and separated possession of a third share

for each of the adopted for sons. This litigation eventually reached the Privy Council and at that stage on February 17, 1947, a compromise was

that as arrived at between the three widows, one of the terms of which was that of the adopted son was to take a third share in the estate along

with his adoptive mother. In the case if the assessee, who is the adopted son of Arunachalam Chettiar (junior), there was pre-partition agreement

between himself and his adoptive mother by which the assessee was entitled to 5/24 share in the estate. This share worked out to Rs. 1,20,830 out

of Rs. 5,79,986.

This sum it was that the Income Tax Officer included in the chargeable income for the assessment years 1958-59, on the view that it was of

from Colombo. He rejected the contention for the assessee that it was of a casual and non-recurring nature. On appeal by the assessee, a further

ground was taken, namely, that the amount was in the nature of a capital receipt. The Appellate Assistant Commissioner did not accept either of

the grounds of the assessee. But, on a further appeal by the assessee, the Tribunal held in his favour. This was upon the view :

It seems to us when all payments and receipts have been made by the Estate, without any allocation to any of the sharers, nor indeed could they

have been, for, the sharers came later on the scene, before any of these proceedings for collection of or refund of the estate duty. The books also

show that there was no separate allocation between capital and revenue receipts. They were all credited to one account. So, at the time the

assessee and his shares divided the estate, they only divided the capital left by the Arunachalas. Any share in that capitals, whatever it may have

been at its inception, at the time of division between the sharers, was only capital having regard to the decision in Veerappa Chettiars case.

Therefore, this sum must be deleted from the assessment.

So, the Tribunals view was based upon the primary grounds :

(1) there was no allocation of the receipt to any of the shares and (2) the entire receipt without any allocation, as so much for principle and so

much for interest, was found credited to one account in the books of the estate. On these premises the Tribunal was prepared to take the view that

when there was a division on February 17, 1947, the shares divided the fund as capital. In its opinion, whatever the charter of the amount might

have been before partition, when the joint estate was divided, it went to the sharers only as capital.

Mr. Balasubrahmanyan for the revenue argues that the Tribunal was wrong in taking that view. He says that at the time the estate duties were

paid, there was actually no joint family and when the refunds, including the interest, were received, the joint family had ceased to exist. The source

for the receipt of interest was the decree and the receipt of interest had no existence independent of it. It is only after the courts found that the

estate duties had been wrongfully collected and a declaration to that effect made, the amounts paid towards estate duties with the interest accrued

thereon became a debt and not before. If at all the funds for payment of the estate duties could be regarded as having come from an estate

belonging to a joint family, this could only be by reason of the doctrine of relation back with reference to the adoption of the three sons in June,

1945. Further, according to Mr. Balasubrahmanyan, we think he is right there, the character of the receipt should be determined from the intrinsic

nature of the receipt rather than from the terms of entries relating to it in the books of the common estate. On these premises he submits that the

receipt by the assessee was a revenue receipt.

It may be mentioned that in Ramanathan Chettiar v. Commissioner of Income Tax, this court rejected a contention that the interest that was

awarded in the litigation for recovery of estate duties wrongfully collected was in the nature of damages in tort, that is, for the wrongful act of the

Ceylon Government in making the illegal collection of estate duty. It was found that interest so received would be income chargeable to tax. There

the assessee was Ramanathan Chettiar, one of the adopted sons of Arunachalam Chettiar (senior). No argument would appear to have been

addressed in that case, at any of the stages, as to whether the receipt by Ramanathan Chettiar for his share was in the nature of a capital receipt

and not revenue. In the reference before us, learned counsel for the assessee contends, on the strength of Veerappa Chettiar v. Commissioner of

Income Tax that as the estate duties were paid out of joint family funds and eventually they were refunded with accrued interest, whatever the

character of such interest for purposes of Income Tax might be before a division of the estate between the relative sharers, the share obtained by

each of them bore the character of capital. As an abstract proposition of law, it may be true that when an estate belonging to a joint Hindu family is

divided, irrespective of the character of a particular property or fund, which it posed before division, it would only be capital in the hands of the

sharer. This proposition has been laid down by this out in Veerappa Chettiar v. Commissioner of Income Tax and it has been followed in

subsequent cases. Learned counsel for the assessee urges that this principle should apply to the facts of this case.

We are of the view that it is not possible to give effect in full to either the contention for the revenue or that of the assessee. It may be that in a

sense the decree is the basis for the estate getting interest. But this is only in recognition of a cause of action which the estate already had. The

decree was but merely declaratory of the liability of the Ceylon Government to pay interest on the estate duties illegally collected. The

circumstances in which the court directed payment of interest cannot in any way be distinguished from an action for money had and received with

accrued interest. The interest, as held in Ramanathan Chettiar v. Commissioner of Income Tax, is a sort of compensation for the use of money

which has been wrongfully collected. We are, therefore, unable to accept the contention for the revenue that the source of the interest was the

decree and therefore its character should be determined on that basis without reference to other facts. Equally, we are not prepared to accept Mr.

Balasubrahmanyans contention that when the amounts were paid towards estate duties, they did not belong to joint Hindu family. It is true the

adoptions took place only in June, 1945, and therefore before the adoptions the funds which were paid towards estate duties did not bear at that

moment a coparcenary character. But the personal law of the parties clearly related back the adoptions to the respective dates of the demise of the

relative adoptive fathers, so that when the amounts were paid towards estate duties, by virtue of this doctrine of relation back, they should be

regarded as having come from joint family funds. If we go that far, it is obvious that the principle of Veerappa Chettiar v. Commissioner of Income

Tax, would be applicable and when the interest, even assuming that there was allocation of it as such in the books of the estate, was divided

between the shares, they would take their respective shares only as capital.

Mr. Balasubrahmanyan forcibly argues that subsequent events show that the joint family was disrupted, as there was a division in status brought

about by the compromise between the three widows on February 17, 1947, that, thereafter, the three adopted sons were no longer members of a

joint Hindu family and that the disruption in status brought about a change in the character of the common estate, a change from coparcenary to

tenancy-in-common. He adds that, as a result of this change, the peculiar incidents applicable to a coparcenary and the character of a share on a

division of such property would no longer apply to what was owned by members of a quondam joint family as tenants-in-common. We think the

revenue is right in its contention.

In Veerappa Chettiar v. Commissioner of Income Tax this court, dealing with the nature of property allocated to a sharer, who was a member

of a joint Hindu family, held :

What is divided at a partition is the entire family estate consisting of the original family estate with all subsequent accretions to that estate in the

shape of income or profits, the whole thing constituting one composite property without allocation to capital or profits. On a partition the sole right

of a member of the family is to get an allotment of his share in the assets available after discharging the family debts.... What is distributed amongst

the shares at the partition is the net residue of the estate after payment of family debts and no artificial dissection of the allotments into capital and

profits is necessary and in many cases would be impossible.

These observations, which form the ratio of that decision, sprung from the cardinal principle that no member of joint Hindu family could

predicate that he has a eight to any definite share in any item of the joint family property or in the income of the family estate until he gets divided

from the family. Until a division is effected, the owner of the properties is the joint family, which is treated as a unit even for purposes of Income

Tax. It is because of this peculiar incident of coparcenary property, it had been held that when joint family properties are divided, they are divided

as such without any distinction being made between one character and another of this or other property of the joint family, as capital, interest or

outstanding and so on. On facts, Veerappa Chettiar v. Commissioner of Income Tax was also a case where a receipt which was included was

regarded in the assessment proceedings as interest earned by the joint family before it became divided. The amount was included in the chargeable

income as of a revenue nature but this court held it could not be so included, as the essential character of what the share got in that case at the

family partition was of a capital nature and not revenue.

Mr. Balasubrahmanyan submitted that the real principle which Veerappa Chettiar v. Commissioner of Income Tax, laid down was contained in

the following sentence :

For the reasons already stated by us, it is open to question whether the allotment of the business assets at the petition was liable to be apportioned

as between capital and profit unless there was any such specific provision in the deed of partition.

According to Mr. Balasubrahmanyan all that this case divided was that if the terms of the partition deed showed that the entire property was

treated as one whole and was divided as such, without any specific provision for sharing of this or that property as capital or interest, what fell to a

sharer must be regarded as capital. We do not think that this is the scope of the decision. What will be the character of a share in the hands of a

member of a joint Hindu family on division, if the terms of a partition showed its identity, does not arise for decision in the reference before us. We

do not understand Veerappa Chettiar v. Commissioner of Income tax, as holding that the terms of partition would make any difference to the

proposition. At any rate, on the facts in that case, this court had not to decide the effect of the terms of a partition on the character of property

allotted to a share at a family partition. We are of the view that Veerappa Chettiar v. Commissioner of Income Tax, is authority for the proposition

that when joint family properties are divided and a share is allotted to a member of the family, he gets it as capital and no part of it can regarded as

anything of a different character. Mr. K. Srinivasan for the assessee, therefore, rightly relied on Veerappa Chettiar v. Commissioner of Income Tax

when he urged that, so long as the joint Hindu family continued undivided, no differentiation could be made between interest and principal at the

hands of the joint Hindu family from the standpoint of the character of allotment at partition. But this contention for the assessee does not take him

the whole length for, in this case, as we said, there was disruption in the status of the family as on February 17, 1947. The effect of the disruption in

status undoubtedly is that the joint Hindu family as such came to an end then. We are not at the moment thinking of a joint Hindu family as

statutorily recognised under the provisions of the Indian Income Tax Act 1922. We may in passing mention that no argument for the assessee was

addressed to us based on section 25A . After the disruption in status, the three adopted sons owned the common estate not as coparceners but as

tenants-in-common. In Commissioner of Income Tax v. Keshavlal Lallubhai Patel the Supreme Court quoted with approval the following

observation of this court in M. K. Stremann v. Commissioner of Income Tax :

... obviously no question of transfer of assets can arise when all that happens is separation in status, though the result of such severance in status is

that the property hitherto held by the coparcenary is held there after, by the separated members as tenants-in-common...

When this change is brought about in the character of the common property, the peculiar incidents of coparcenary property no longer

governed its character on division. No longer can it be said, when the member owned the common estate as tenants-in-common, that each of them

is not entitled to a definite share in the common estate. A member of tenancy-in-common can, therefore, claim his share in every item of property

owned in common. It follows, therefore, that when after the disruption of the joint status of the Hindu family, interest accrued on a principal amount

which had belonged to the erstwhile coparcenary, each member of the tenancy-in-common has a distinct interest not merely in the principal but

also in the interest and such a member can enforce his right to a share in the specific fund, either principal or interest. The result flows as a result of

a coparcenary being stripped of its character as such and continues to exist as a tenancy-in-common. In effect, therefore, in our view, while no one

of the three adopted sons should say prior to February 17, 1947, that he was entitled to specific share qua interest, the position is different after

that date. It is on this basis the character of receipt in this case has to be decided. We are inclined to the view that the receipt to the extent to which

it related to a period prior to February 17, 1947, should be regarded as capital, and to the extent to which it related to a period subsequent to that

date, should be regarded as revenue in accordance with this courts view in Ramanathan Chettiar v. Commissioner of Income Tax.

We accordingly answer the question referred to us partly in favour of the assessee and partly in favour of the revenue. We make no order as to

costs.