Punjalal L. Shah (HUF) vs Commissioner of Income Tax

D.M. Dharmadhikari, C.J.—These Income Tax References Nos. 120 of 1985 and 276 of 1985 u/s 256(1) of the Income Tax Act, 1961 (for short "the Act"), have been made to this court seeking its opinion in the cases pertaining to the assessment years 1980-81 and 1981-82 and 1982-83. On similar facts the following questions of law have been referred :

ITR No. 120 of 1985 :

"1. Whether, on the facts and in the circumstances of the case, the entire share of profit of 32 per cent., 30 per cent, and 39 per cent, in the firms of Pipe Dealers, Tube Dealers and Pipe Distributors, was taxable in the hands of the assessee ?

Whether, on the facts and in the circumstances of the case, the enhancement of income made by the Commissioner (Appeals) was valid in law ?"

ITR No. 276 of 1985 :

"Whether, on the facts and in the circumstances of the case, the interest income earned by the alleged smaller-Hindu undivided families was rightly included in the total income of the assessee-Hindu undivided family?"

The relevant facts giving rise to the aforesaid three questions are as under:

The assessee is assessed in the year 1980-81 for the previous year ending on October 21, 1979, to Income Tax in the status of a Hindu undivided family (HUF). The Hindu undivided family consisted of five members. The assessee- Hindu undivided family is a partner in three firms, viz., Pipe Dealers, Tube Dealers and Pipe Distributors, having 32 per cent., 30 per cent, and 39 per cent, shares, respectively. Three separate deeds of partial partition dated September 29, 1979, October 3, 1979 and October 4, 1979, were executed under which Shri Sharadkumar Pujalal Shah separated with five per cent, share in Pipe Dealers, Shri Atulkumar Pujalal Shah separated with five per cent, share from Tube Dealers and Shri Pujalal Lalfubhai Shah separated with four per cent, share from Pipe Distributors. Consequent upon the above three partial partitions resulting in separation of three members of the Hindu undivided family, deeds of partnerships were executed in respect of the aforesaid three firms on October 3, 1979, October 5, 1979 and October 5, 1979, respectively, by incorporating the necessary changes consequent upon the partial partition of the Hindu undivided family.

The Hindu undivided family consisting of four members filed returns declaring Rs. 29,150 being 27 per cent, share from Pipe Dealers, Rs. 31,250 being 25 per cent, share from Tube Dealers and Rs. 45,679 being 35 per cent, share from Pipe Distributors.

The Income Tax Officer framed the assessments on protective basis and issued draft assessment order u/s 143(3)/144B of the Act. The asses-see-Hindu undivided family took a stand before the Income Tax Officer that due to the abovementioned partial partition, it has no longer remained a partner in any of the three firms and therefore the share of profit from each of the said three firms was not includible in its total income.

The Income Tax Officer rejected the contention of the assessee staling that in view of the provisions of Sub-section (9), inserted by the amendment in Section 171, the partial partitions cannot be recognised and the Hindu undivided family will be taxed in the same status as partner of the three partnership firms. Sub-section (9) in Section 171 was inserted by the Finance (No. 2) Act of 1980 with effect from April 1, 1980, and being directly relevant for answering the questions referred, is reproduced in full as under :

"Notwithstanding anything contained in the foregoing provisions of this section, where a partial partition has taken place after the 31st day of December, 1978, among the members of a Hindu undivided family 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 18th day of June, 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.

Explanation,--In this section,--

(a) ''partition'' means-

(i) where the property admits of a physical division, a physical division of the property, but a physical division of the income without a physical division of the property producing the income shall not be deemed to be a partition; or

(ii) where the property does not admit of a physical division, then such division as the property admits of, but a mere severance of status shall not be deemed to be a partition ;

(b) ''partial partition'' means a partition which is partial as regards the persons constituting the Hindu undivided family, or the properties belonging to the Hindu undivided family, or both."

As the opening part of the provision contained in Sub-section (9) of Section 171 states any partial partition which has taken place after the 31st day of December, 1978, is unrecognisable and as per clause (b) of Sub-section (9) the Hindu undivided family shall continue to be liable to be assessed as if no such partial partition had taken place.

When the matter was taken by the assessee in appeal, the Commissioner (Appeals) noticed that to give full effect to Sub-section (9) of Section 171 of the Act, the original share of profit, viz., 32 per cent, 30 per cent, and 39 per cent, in the three above named firms, respectively, was liable to be brought to tax in the hands of the Hindu undivided family and not 27 per cent, 25 per cent, and 35 per cent, respectively, as was done by the Assessing Officer on the basis of separation of three members from the Hindu undivided family leaving 27 per cent, 25 per cent, and 35 per cent, share of profit of the remaining Hindu undivided family.

The assessee-Hindu undivided family then preferred appeal to the Tribunal. The Tribunal confirmed the opinion of the Assessing Officer based on the effect of the provisions of Sub-section (9) of Section 171 and also approved the action of the Commissioner (Appeals) in bringing to tax the original share income to the extent of 32 per cent., 30 per cent, and 39 per cent, in the three partnership firms.

It is on the above facts that the Tribunal has referred the above questions for the opinion of this court.

Learned counsel Shri J.P. Shah, appearing for the assessee, mainly raised two contentions. Firstly, it is submitted that the Income Tax law contained in Sub-section (9) of Section 171 of the Act cannot take away the right in accordance with the Hindu law of members of a Hindu undivided family to effect a total or partial partition. After the partial partition, it is not the original bigger-Hindu undivided family but the smaller truncated Hindu undivided family which continued to be the partner in the three above mentioned firms. The share of profit or income of the smaller-Hindu undivided family in the partnership firms could not be taxed in the hands of the erstwhile bigger-Hindu undivided family. The second submission made on behalf of the asses-see is that Sub-section (9) of Section 171 may not recognise the fact of partial partition having taken place after the appointed date December 31, 1978, but there was no legal inhibition to hold that the smaller-Hindu undivided family had only remained as partner of the three firms and the Assessing Officer was, therefore, right in not bringing to tax the whole share of profit of the original Hindu undivided family to the extent of 32 per cent, 30 per cent, and 39 per cent, respectively, in three firms but in including for tax only 27 per cent, 25 per cent, and 35 per cent, respectively, as a result of separation of three of the members of the Hindu undivided family in partial partition and subsequent execution of fresh partnership deeds.

So far as the second question referred to this court in I. T. R. No. 120 of 1985 is concerned, learned counsel submitted that its answer is dependent upon the answer to the first question and he does wish to press the question on the power of the Commissioner (Appeals) to make the enhancement of income and bring to tax the initial share of profits of the original Hindu undivided family to the extent of 32 per cent, 30 per cent, and 39 per cent, instead of 27 per cent, 25 per cent, and 35 per cent, in the three firms respectively.

Shri Akil Kureshi, learned counsel appearing for the Revenue, in his reply submitted that the contention advanced on behalf of the assessee, if accepted, would defeat the object and nullify the effect of the provisions contained in Sub-section (9) of Section 171 which were inserted only to curb the tendency of the Hindu undivided family of effecting colourable or sham partial partitions only as a device to evade tax and as part of their tax planning. On behalf of the Revenue, learned counsel submits that partial partitions effected after December 31, 1978, are not recognisable for the purpose of Income Tax and the tax authorities were fully justified in treating the original Hindu undivided family as continuing and bringing to tax its full share of profit in the firms in which it was partner. It is pointed out that the validity of Sub-section (9) of Section 171 has been upheld by the Supreme Court in Union of India v. M.V. Valliappan [1999] 238 ITR 1027.

The provisions contained in Sub-section (9) of Section 171 as introduced by the amendment to the Act and the question of its constitutionality came up for consideration before the Supreme Court in the case of Union of India and Others Vs. M.V. Valliappan and Others, . The Hindu law recognises the right of members of a joint family to effect a partial or total partition. With a view to avoid or reduce the tax liability partial partitions in the case of Hindu undivided family-assessee were found to be continuing in a large scale resulting in adverse effect on the Revenue. With that object in view Sub-section (9) was added to Section 171 giving a cut off date that any partial partition effected after December 31, 1978, will not be recognised and the Hindu undivided family shall continue to be liable to be assessed as if no partition has taken place in the family. In the case of Union of India and Others Vs. M.V. Valliappan and Others, while upholding the validity of Sub-section (9) of Section 171, the Supreme Court observed (page 1038):

"It is for the Legislature to recognise or not to recognise partial partition of the Hindu undivided family property for the purpose of levy and collection of tax, it is also for the Legislature to decide whether only non bona fide partial partition undertaken for reducing the tax liability should not be recognised or not to recognise all partial partitions of the Hindu undivided family properties."

The Supreme Court further went on to observe (page 1039):

"Lastly, once the partial partition is not recognised, tax is to be calculated as if the assets are held by the Hindu undivided family. Hence, the question whether the Hindu undivided family is required to recover tax from the person to whom the properties are allotted, is not required to be considered by the taxing authority as for the purpose of Income Tax the properties belong to the Hindu undivided family. If the Hindu undivided family finds any hardship, it is for the members of the Hindu undivided family to have the partition of the entire estate and not to have partial partition."

As has been held by the Supreme Court in Union of India and Others Vs. M.V. Valliappan and Others, once the Income Tax law can validly refuse to recognise partial partition in a Hindu undivided family, the liability of the erstwhile Hindu undivided family for assessment or payment of tax would continue to be the same as it existed before the partial partition. The argument advanced on behalf of the assessee cannot be accepted that although the partial partition is not recognisable, yet, in considering the share in the income of the partnership firm the smaller-Hindu undivided family can be recognised for determining the tax liability.

As has been contended in reply on behalf of the Revenue, such argument on behalf of the assessee cannot be accepted as that would nullify the effect of the provisions contained in Sub-section (9) of Section 171 and would directly frustrate the very purpose of the amended provision, as in that case the partial partition would have to be recognised partly for the purpose of determining the share of income of the smaller-Hindu undivided family in the three partnership firms. Once the law contained in Sub-section (9) of Section 171 prohibits recognition of any partial partition of the Hindu undivided family, full effect to such prohibition has to be given in determining the tax liability of the so called erstwhile Hindu undivided family as existed prior to the partial partition. The argument, therefore, advanced on behalf of the assessee is unacceptable. We are supported in our conclusion by the earlier decisions of the Supreme Court in Kalloomal Tapeswari Prasad (HUF), Kanpur Vs. Commissioner of Income Tax, Kanpur, and the Andhra Pradesh High Court in the case of Commissioner of Income Tax Vs. S.V. Dalappa and Sons, and Commissioner of Income Tax Vs. Sri Krishna Motor and Engineering Works and Others, .

So far as the second question on the powers of the Commissioner (Appeals) of enhancement of tax by treating the original share of profit to the extent of 32 per cent., 30 per cent, and 39 per cent, in the three respective firms is concerned, as a result of the answer of the first question in favour of the Revenue, the said question has to be answered in favour of the Revenue. On the question of power of Commissioner to make enhancement, learned counsel for the assessee rightly did not press the question in view of the clear provisions delineating the scope of powers of the Commissioner u/s 251(l)(a) in appeal. He has been conferred with power to confirm, reduce, enhance or annul the assessment.

One question framed in Income Tax Reference No. 276 of 1985 on the taxability of the interest income earned by the Hindu undivided family, on answer of main question in favour of the Revenue, the said question also deserves to be answered in favour of the Revenue by holding that the interest income earned by the alleged smaller-Hindu undivided family was rightly included in the total income of the original assessee-Hindu undivided family.

In the aforesaid view of the matter, the two questions, i.e., questions Nos. 1 and 2 in Income Tax Reference No. 120 of 1985 and the question framed in Income Tax Reference No. 276 of 1985 are answered in favour of the Revenue and against the assessee.

In the circumstances, we make no order as to costs.