1. These appeals are concerned with the construction of Section 171(9) of the Income-tax Act, 1961 ('the Act') and Section 20A of the Wealth-tax Act, 1957 ('the 1957 Act').
2. Each of the assessees in these appeals was a HUF. It was claimed by each of them that on 29-1-1980 there was partial partition and a sum of Rs. 1,50,000 was taken out of the joint family assets and held separately by the coparceners from that date. The assessee, therefore, contended that the said sum of Rs. 1,50,000 should be excluded from the net wealth of the assessee for the purpose of wealth-tax and the income arising from that asset should likewise be excluded from the total income of the HUF. But the assessing authority was of the opinion that in view of the provisions of Section 20A and Section 171(9), the partial partition, having taken place after 31-12-1978, had to be ignored and the assessments continued to be made on the HUF thereby including the asset in question and the income therefrom, in the net wealth and total income of the assessee. On appeal, the AAC accepted the contention of the assessee that in spite of the provisions of Sections 171(9) and 20A, there was no warrant for assessing the asset or the income which no longer belongs to the HUF as that of the HUF.3. The revenue is in appeal to contend that the intention of the statutory provisions was to create a fiction by ignoring the partial partition, the effect of which was to treat the asset or income which was sought to be taken out of the HUF as continuing to be that of the HUF and, therefore, the assessments were valid and should be restored.
On the other hand, the contention of the assessee was that on the wording of the sections there could only be an assessment in the status of HUF and in the absence of a further provision deeming the asset and income which has gone out of the HUF to continue to be that of the HUF, there cannot be an assessment including such asset or income in the net wealth or total income of that HUF.4. On a consideration of the rival submissions, we are of the opinion that the order of the AAC has to be confirmed. Section 171(1) provides that a Hindu family hitherto assessed as undivided shall be deemed for the purposes of the Act to continue to be a HUF, except where and insofar as a finding of partition has been given under this section in respect of the HUF. Sub-section (3) enables the ITO after completion of enquiry to record a finding as to whether there was a total or partial partition and the date on which it had taken place. Under Sub-section (4) where such a finding is recorded, the total income of the joint family shall be assessed up to the date of the partition as if no partition had taken place and the divided members shall be liable to pay tax thereon. By Section 28 of the Finance (No. 1) Act, 1980, Sub-section (9) was introduced with effect from 1-4-1980 which is as follows: 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 partiton; (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, (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 ap artition; (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.
Simultaneously, Section 20A was introduced in the 1957 Act in the following terms: 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) such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken place, (b) 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, (c) 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, Explanation: For the purposes of this section, 'partial partition' shall have the meaning assigned to it in Clause (b) of the Explanation to Section 171 of the Income-tax Act.
5. Prima facie, these new provisions direct that an assessment shall be made on the HUF as if the partial partition had not taken place. Since we are bidden to deem the HUF to have continued without having effected the partial partition claimed to have taken place, we cannot let our imagination boggle when we come to treating the asset which has been allotted to any coparcener in the partial partition or the income arising therefrom as that of the HUF deemed to continue to exist. But the problem arises only because the extended fiction comes in direct conflict with the charging sections of the Acts. Under Section 4 of the Act, income-tax shall be charged in respect of the total income of the previous year of every person. Section 5 of the Act defines the scope of total income to include all income which is received or deemed to be received in India or which accrues or deemed to accrue to the assessee.
Similarly Section 3 of the 1957 Act charges only the net wealth of the HUF. In the present case, it cannot be disputed by the revenue that the partial partition having taken place factually, the asset and the income, therefore, allotted to one of the coparceners belongs and accrues to him and no longer accrues to the HUF. In terms of Section 3 such asset is includible in the net wealth of the coparcener and in terms of Section 4 read with Section 5 such income would have to be assessed in the hands of that coparcener to be added to the net wealth and total income of the HUF in spite of the partial partition. Such an express deeming provision is absent. The absence of such a deeming provision is conspicuous when we contrast this section with Section 64(2) of the Act and 4(1A) of the 1957 Act. Under those Sections, in a case where an individual converts his individual property into that of a joint family property, three separate fictions are created: Firstly, that he shall be deemed to have transferred the converted property through the family to the members of the family, secondly, that the converted property and income derived therefrom shall be deemed to arise to the individual and not to the family and thirdly, such converted property and the income derived therefrom if received by spouse or minor child shall be deemed to belong or arise to them from assets transferred indirectly by the individual to them so that such assets and income will be added to the net wealth and total income of the individual.
6. The consequent position remains as it was under the Indian Income-tax Act, 1922 ('the 1922 Act') when under Section 25A of the 1922 Act only a total partition of the entire family property could be recorded and a partial partition could not be recorded by the ITO. In such a situation, the question arises whether the income arising from property which has been given to a coparcener on a partial partition could still be assessed in the hands of the HUF because there was no provision for recognising such a partial partition. The answer was given by the Madras High Court in the case of M.S.M.M. Meyyappa Chettiar v. CIT [1950] 18 ITR 586. The High Court held that the partial partition was valid in Hindu law, though it could not be recorded under Section 25A and further that an assessment on the basis of the undivided Hindu family will be confined to the income of the property so remaining undivided and the income from the property partitioned or alienated will have to be excluded from the computation of income for assessments in the hands of the HUF.7. This decision has been followed by several other decisions taking the same view, the latest of which is that of Andhra Pradesh High Court in the case of CIT v. Dara Seshavataram [1981] 129 ITR 339. The Supreme Court explained the scheme of Section 25A in the following terms: The scheme of Section 25A is therefore clear: a Hindu undivided family hitherto assessed in respect of its income will continue to be assessed in that status notwithstanding partition of the property among its members. If a claim is raised at the time of making an assessment that a partition has been effected, the Income-tax Officer must make an inquiry after notice to all the members of the family and make an order that the family property has been partitioned in definite portions, if he is satisfied in that behalf.
The Tncome-tax Officer is by law required still to make the assessment of the income of the Hindu undivided family, as if no partition had taken place and then to apportion the total tax liability and to add to the separate income of the members or groups of members the tax proportionate to the portion of the joint family property allotted to such members or groups of members and to make under Section 23 assessment on the members accordingly. If no claim for recording partition is made, or if a claim is made and it is disallowed or the claim is not considered by the Tncome-tax Officer, the assessment of the Hindu undivided family which has hitherto been assessed as undivided will continue to be made as if the Hindu undivided family has received the income and is liable to be assessed.
Addl. ITO v. A. Thimmayya [1965] 55 ITR 666 (SC). IT is pertinent to note, however, that that case arose out of an attempt of the revenue to collect tax based on an assessment made on the HUF disregarding a petition to recognise partition. Tn that context the Supreme Court also, observed that there was no personal liability on the members to pay the tax assessed and the remedy for the income-tax authorities was to proceed against the property, if any, of the HUF. This decision is on the same lines as the decision of the Madras High Court because though the partition was not recognised for the purpose of assessment, it was recognised for the purpose of collection of tax as the properties taken out of the HUF were held to be outside the charge of the assessment. This decision of the Supreme Court has also been distinguished by the Kerala High Court in the case of ITO v. Smt. N.K.Sarada Thampatty [1976] 105 ITR 67, by pointing out that the question, as in this case, whether income accruing from properties which had in fact been divided could be included in the total income of the HUF, the partition of which is not recognised, did not fall for consideration in that case. The Kerala High Court also contrasted this decision of the Supreme Court with another decision of the Supreme Court in the case of Kalwa Devadattam v. Union of India [1963] 49 ITR 165 which states that the provisions of Section 25A was a machinery provision for recovery of the tax in cases where the HUF exists and income accrued to it when the liability to pay the tax arose. Viewed from this light even the later decision of the Supreme Court in the case of Kalloomal Tapeswari Prasad (HUF) v. CIT [1982] 133 ITR 690 must be considered to be a decision only on the same lines as in the case of A. Thimmayya (supra). In that case the properties being capable of division but not being divided by metes and bounds, it was held that there was no partition which could be recognised by the ITO. Therefore, the Supreme Court further held that the assessment of the income from those properties in the hands of the HUF was a necessary consequence. But the Court rejected the contention that income which was not actually received by the family could not be taxed by observing that such a plea would lead to the nullification of the scheme of Section 171 itself and that as long as a finding is not recorded under Section 171 holding that a partial partition had taken place, the HUF will be deemed to be the owner of the property which is subject-matter of the partition and also the recipient of the income from such property. Tt was further observed that in every partition under Hindu law there is a need for division of family properties by metes and bounds and, therefore, in that context where there is a finding that a partition had not taken place, it would necessarily follow that the income accrued to the HUF only and could not accrue to the individual coparceners. It is clear from the facts of that case that even in fact there was no partition and, therefore, it is not a case where a partition had taken place in fact but was not recognised so as to create a fiction by which properties which had in fact been partitioned was treated as properties of the HUF. This distinction between the two situations, namely, one where in fact there is no partition and the income continues to be assessed as that of the HUF and the other where in fact there is a partition by which certain properties go out of the HUF but assessments continue in the name of the HUF has been brought out clearly by the decision of the Kerala High Court in the case of Smt. N.K. Sarada Thampatty (supra), which has held that the fiction created by Section 171 should not be extended beyond its object and the decision of the Supreme Court referred could not be understood to enlarge the scope and ambit of the section and make the income of the members of the divided family the income of the HUF because the statute does not contain any express provision that such income should be treated as income of the HUF nor is there any such necessary implication in Section 171.
8. In the present case, we are concerned with the situation where in fact and in Hindu law a partial partition had taken place and the asset belongs to and the income actually accrues only to the coparcener to whom the property is allotted. In that context it falls for consideration whether the effect of not recognising the partial partition is that the HUF is deemed to be the owner of the property which is the subject-matter of partition and also the recipient of the income from such property. As we have noted before, there is a direct answer to this question in the Madras High Court judgment which has not been overruled so far. To understand this question, we may take an illustration. Supposing there is a joint family holding certain shares in companies and on a partial partition the shares are allotted to a coparcener. Thereafter the dividend income accrues only to the coparcener and under Section 4 has to be assessed in his hands. No doubt, under Section 171(9), a partial partition will have to be ignored and the assessment continued to be made on the HUF, but when there is no specific provision deeming the dividend income which has accrued to the coparcener as having accrued to the joint family or that such income should be added to the total income of the joint family analogous to the provisions of Section 64, it is difficult to assume that the provision which requires a partial partition to be ignored by itself deems that the income accruing from the divided property to the individual coparcener continues to accrue to the joint family. To continue the illustration further, if the coparcener were to transfer the shares to a stranger, we would be led to the absurd situation of the joint family being assessed on the dividend income from the shares which no longer belongs either to the HUF or even to the coparcener.
The situation will be more complicated when a coparcener goes out of the family by partial partition. Section 171 is not a charging section but only a section to facilitate the assessment and collection of the revenue where a joint family is disrupted. It is "only a machinery section for collection of tax--Kalwa Devadattam's case (supra) and CIT v. Kapoorchand Shrimal [1974] 95 ITR 20 (AP). It had provided for three situations, that is, where there is a disruption in the family during the previous year, where there is a disruption in the family before an assessment is made or where there is a disruption after the assessment is made so that the tax on the income assessable in the hands of the HUF could be collected from the coparceners. But the actual charge on the income which could arise to the HUF or be deemed to arise to the HUF has to be found only with reference to Sections 4 and 5 or any other specific provision deeming the income of the coparcener to arise to the HUF or to be included in the total income of the HUF.9. We do see that while introducing Sub-section (9) to Section 171, the Finance Minister observed as follows: As Hon'ble Members are aware, the separate treatment accorded to Hindu undivided family in tax laws has been widely used for avoidance of proper tax liability. I accordingly propose to de-recognise partial partitions of Hindu undivided families both for income and wealth taxation. Partial partitions made on or after 1st January, 1979, will not be recognised for tax purposes and taxes will continue to be levied on the basis that the existing Hindu undivided family had continued to remain joint. [1980] 123 ITR (St.) The notes on clauses for Clause 28 which seeks to insert Sub-section (9) in Section 171 are as follows: The new sub-section seeks to provide that notwithstanding anything contained in the other provisions of Section 171, where any partial partition has been effected after 31st December, 1978, in relation to a Hindu undivided family which had been assessed as undivided, certain consequences will follow.
Clause (a) of Sub-section (9) provides that it will not be competent for the Income-tax Officer to inquire into any claim of such partial partition which has taken place and no finding will be recorded under Sub-section (3) of Section 171 that such partial partition had taken place. Where any such finding has been recorded under Sub-section (3) of Section 171 to that effect either before or after 18th June, 1980 (the date of introduction of this Bill in the House of the People) it will be treated as null and void.
Clause (b) of Sub-section (9) provides that the family will continue to be liable to be assessed as a Hindu undivided family as if no partial partition had taken place.
Clause (c) of Sub-section (9) provides that each member or group of members of such family immediately before such partial partition and the family will be jointly and severally liable for any tax, penalty, interest, fine or any other sum payable under this Act in respect of any period preceding or succeeding such partial partition.
Clause (d) of Sub-section (9) provides that the several liability of any member or group of members will be computed in accordance with the portion of the joint family property which has been allotted to him or such group at such partial partition.
This amendment will take effect from 1st April, 1980, and will accordingly apply in relation to the assessment year 1980-81, and subsequent years.--[1980] 123 ITR(St.) 132.
The notes on Clause 39 which seeks to insert Section 20A are as follows: The new Section 20A seeks to provide, that where any partial partition has been effected after 31st December, 1978, by a Hindu undivided family which had hitherto been assessed as undivided, certain consequences will follow.
Clause (a) of Section 20A provides that such family will continue to be liable to be assessed under the Wealth-tax Act as if no partial partition had taken place.
Clause (b) of Section 20A provides that each member or group of members of such family immediately before such partial partition, as also the family itself, will be jointly and severally liable for any tax, penalty, interest or any other sum payable under the Wealth-tax Act by the family in respect of any period preceding or succeeding such partial partition.
Clause (c) of Section 20A provides that the several liability of any member or group of members for the purposes of Clause (b) will be computed according to the portion of the joint family which has been allotted to him at the time of partial partition.
The Explanation to Section 20A seeks to provide that for the purposes of this section, 'partial partition' will have the meaning assigned to it in Clause (b) of the Explanation to Section 171 of the Income-tax Act.
This amendment will take effect from the 1st April, 1980, and will accordingly apply in relation to the assessment year 1980-81.--[1980] 123 ITR (St.) 135-136.
44. Modification in the provisions relating to partial partition of Hindu undivided families.--Under the Hindu law, a Hindu undivided family is entitled to effect a partition which may be total or partial. Where a Hindu undivided family undergoes a total partition, the entire joint family property is divided among all the coparceners and the family ceases to exist as an undivided family. A partial partition, on the other hand, may be partial as regards the persons constituting the joint family or as regards the properties belonging to the joint family, or both. In a partial partition as regards the persons constituting the joint family, one or more coparceners may separate from others and the remaining coparceners may continue to be joint. In a partial partition as regards the property, a joint family may make a division and severance of interest in respect of a part of the joint estate while retaining their status as a joint family and holding the rest of the properties as joint and undivided family.
45. While under the Hindu law, a joint family may make a division and severance of interest in respect of the joint estate while retaining their status as a joint family, the Income-tax Act does not recognise a partition in status alone and where a Hindu undivided family has been assessed to income-tax as such, it continues to be regarded as Hindu undivided family unless the property has been partitioned by metes and bounds. This provision applies equally in the case of total as well as partial partition.
46. In spite of the measures taken in recent years, Hindu undivided family continues to be used as a medium for reduction of tax liability. This appears to be specially true in cases where multiple Hindu undivided families have been created by effecting partial partitions as regards persons constituting the joint family or as regards the properties belonging to the joint family, or both. With a view to curbing the creation of multiple HUFs by making partial partition, it is proposed to de-recognise the partial partition of a Hindu undivided family effected after 31st December, 1978, for tax purposes. In cases where a Hindu undivided family has been taxed in the status of a Hindu undivided family, it will continue to be taxed as such unless there has been a total partition of the family properties by metes and bounds and a finding to that effect is recorded by the Income-tax Officer.
126. Modification of the tax treatment of Hindu undivided family.--Under the existing provisions, where at the time of making an assessment, it is brought to the notice of the Wealth-tax Officer that a partition has taken place among the members of the Hindu undivided family and the Wealth-tax Officer, after enquiry, is satisfied that the joint family property has been totally partitioned amongst the various members or groups of members in definite portions, he makes an order to that effect and makes assessment on the net wealth of the undivided family for the assessment year or years for which the family remained undivided.
Where such partition has taken place on the last day of the previous year, the assessment for the relevant assessment year is also made on the Hindu undivided family. Each member or group of members is jointly and severally liable for the tax assessed on the net wealth of the joint family. Where the Wealth-tax Officer is not satisfied that the whole of the property of the Hindu undivided family has been partitioned, he makes an order declaring that the family will be deemed to continue as a Hindu undivided family and assessed in that status.
127. It is proposed to derecognise the partial partition of Hindu undivided families taking place after 31st December, 1978. Where any claim is made before the Wealth-tax Officer that a partial partition of the Hindu undivided family which has hitherto been assessed as undivided has taken place after 31st December, 1978, such family will continue to be liable to be assessed under the Wealth-tax Act as if no such partial partition has taken place. Each member or group of members of such family immediately before such partial partition and the family will be jointly and severally liable for the tax, penalty, interest or any other sum payable under this Act by the family in respect of any period, whether before or after the partial partition. The liability attributable to any member or group of members will be computed according to the portion of the joint family property which has been allotted to him at the time of partial partition. For this purpose, the expression 'partial partition' will have the same meaning as in Clause (b) of the Explanation bdow Section 171 of the Income-tax Act, that is to say, 'partial partition', will mean 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.
128. This amendment is similar to the amendment proposed to be madel in Section 171 of the Income-tax Act referred to in paragraphs 44 to 129. This amendment will take effect from 1st April, 1980, and will accordingly apply in relation to the assessment year 1980-81 and subsequent years.--[1980] 123 ITR (St.) 157, 176.
10. A reference to these background information shows that there was no proposal to have a distinct deeming provision treating the income from the divided property as that of the HUF. On the other hand, the amendment appears to have been initiated with the only object of preventing creation of multiple HUF by means of a partial partition.
Since the purpose of Section 171 itself was only to ensure the collection of taxes from the divided coparceners in respect of the charge falling on the HUF, it is difficult to accept that the amendment implies a charge on income or asset which has ceased to be that of the family when such a fiction is not only outside the scope of the original section but also leads to absurd results.
11. As we have seen from a perusal of the section itself, there is no express deeming provision treating the income of the divided coparcener as that of the HUF though the section provides for making the assessment on the HUF. We may also consider whether there is any necessary implication of such a fiction. The law favours complete freedom of transfer. For instance, Section 6 of the Transfer of Property Act, 1882 states that property of any kind may be transferred except as otherwise provided by that Act or by any other law for the time being in force. Therefore, coparceners of a HUF are at complete liberty to partition the properties even partially to enable them to deal with their share of the property. Under Section 23 of the Indian Contract Act, 1872, it is only an agreement of which the object or consideration is unlawful that is void. The consideration or object of an agreement is lawful unless it is forbidden by law or is such that if permitted it would defeat the provisions of any law or is fraudulent.
The Supreme Court has held even in the latest decision in the case of Apoorna Shantilal Shah (HUF) v. CIT [1983] 141 ITR 558 that partial partition under the Hindu law is permissible and valid. Such a partial partition is neither forbidden by law nor can it be regarded to be fraudulent. It does not also defeat the provisions of any law because Section 171(9) only states that a partial partition will not be recognised and does not state that such a partial partition cannot be made. It does not also defeat any provisions of the Act, because Sub-section (9) itself provides for recovering the tax or other sums payable under the Act from the coparceners even if the family is divided, but assessed in the status of an undivided family. This provision is sufficient to indicate that the section takes note of the factual division of the properties of the HUF even if such a partial partition is not recognised, This is because, according to Clause (d) of Sub-section (9), the several liability of the members of the family is to be computed according to the portion of the joint family property allotted to him on the partial partition. Therefore, instead of there being a necessary implication of a deeming provision to regard the income accruing from the divided properties as that of the undivided HUF, there is in fact an internal evidence in the section itself to show that even if the assessment is made in the name of the undivided faimily, the factual partial partition cannot be ignored and the tax due on the income accruing from the divided properties is to be collected from the coparcener to whom the share is allotted. We may recall that even in the 1922 Act there was a similar provision in proviso to Section 25A(2) which states that the members shall be jointly and severally liable for the tax assessed even though the assessment may be made by deeming the HUF to continue without being partitioned. Hence, in our considered opinion, the position emerging after the amendment of Section 171 by the introduction of Sub-section (9) is identical with the position that obtained at the time when Section 25A provided for recognition of only a complete partition and not a partial partition. Therefore, the decision of the Madras High Court which arose out of that situation equally applies to the present situation and the income accruing from properties which had gone out of the HUF as well as those assets cannot be included in the total income or wealth of the HUF in respect of which assessment may continue to be made without recognising the partial partition.
12. The Supreme Court has observed in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. It has also been held that the onus of establishing that the conditions of taxability are fulfilled is always on the revenue. In the light of these canons of construction, we are constrained to hold that the income arising from assets divided by a partial partition cannot be added to the total income of the HUF in respect of which the partial partition is not recognised and similarly the assets taken out of the HUF cannot be added back to the net wealth of the HUF by ignoring the partial partition because there is no express provision nor any necessary implication to assess such income or assets in the hands of the HUF. We have, therefore, to confirm the orders of the AAC. The appeals are dismissed.
1. I have carefully gone through the order of my learned brother but I am unable to agree with his reasons, illustrations and conclusions.
Hence, I am recording my order of dissent.
2. According to my learned brother, after factual partial partition has taken place and in the absence of further provision deeming the asset/the income to continue to be that of HUF, the assessment of asset for wealth-tax purposes or income therefrom for income-tax purposes is not permissible in law and if the fiction is to be extended, it comes in conflict with relevant charging sections. As preface to my order, I wish to mention as to why express deeming provision is made under Section 64(2) of the 1961 Act and Section 4(1A) of the 1957 Act. Under the Transfer of Property Act, any transfer of property vests legal title on the transferee and the right of the transferee is a right in rem. In order to counter any attempt at tax avoidance through the medium of transfer to interested persons, the Legislature has provided deeming provision under Sections 64(2) and 4(1A). These provisions show that the revenue law, being a special law, prevails over the general law.
3. The HUF is an assessable person in terms of Section 2(31) of the Act. The right of members entitled to claim partition in the property of the HUF is a joint and unascertained at any point of time. Partition is an act of volition. On partition the inchoate right by birth becomes right in possession. Thus, partition is not transfer of property as per the Transfer of Property Act but division of property among members entitled to it. The joint ownership is converted into an individual ownership by the act of disruption of HUF as a unit of assessment and consequent distribution of property by metes and bounds to its members.
The income-tax law recognises the partition of HUF only with reference to property and enables the assessment of HUF as an entity till the date of its disruption and thereafter the members of the family separately in respect of the separate assets allotted to them and the income arising therefrom. Therefore, under the 1922 Act, the position regarding the assessment of HUF was to make assessment in the hands of the HUF by means of legal fiction till date it is fully partitioned or assessments of individual members of the family after the ITO's satisfaction of partition of the property by metes and bounds. In other words, the partial partition was not recognised under the 1922 Act. It is on account of judge made laws, the partial partition has come to be recognised in the Act. The law requires the assessee to make a claim regarding partition either full or partial and enjoins the ITO to make enquiry and record a finding of fact regarding such claim of partition either full or partial. If the ITO is satisfied about the fact of partition, the assessment shall be made on the HUF till the date of disruption as if the HUF continued to remain joint and the liability is fastened on the erstwhile members of the HUF by the concept of joint and several liability. After partition the several liability of the members depends upon the portion of the joint family property allotted to them inter se.
4. It is in this background, the Finance (No. 2) Act, 1980, has amended Section 171 by inserting Sub-section (9) with effect from 1-4-1980. To resolve the point of dispute construction of the section is called for.
According to Maxwell, the rule of literal construction is only the safe rule when construction of statute is involved. The rule of literal construction is 'to intend the Legislature to have meant what they have actually expressed'. The object of all interpretations is to discover the intention of the Parliament but the intention of the Parliament must be deduced from the language used. Where the language used is clear and unequivocally capable of only one meaning, the enactment by the Legislature must be enforced however harsh or absurd or contrary to commonsense the result may be. The duty of the Court is to expound the law as it stands and to leave the remedy to others. A plain reading of Sub-section (9) of Section 171 shows that it is non-obstantive in nature and is introduced only for the purpose of meeting a situation where partial partition has taken place after 31-12-1978 among the members of the HUF hitherto assessed as undivided. Clause (a) prohibits enquiry into claim of partial partition and recording of any finding and declares any finding already recorded on partial partition whether before or after 18-6-1980 as null and void. Therefore, Clause (a) restores the position that obtained before the partial partition of the HUF, i.e., status quo ante has been restored so far as the claim of partial partition is concerned. This shows the intention of Legislature is to derecognise the claim of partial partition.
5. Clause (b) of Sub-section (9) of Section 171 is very significant and reads as under: such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken place; The words 'to be liable' appearing between the words 'shall continue' and 'to be assessed' show that these words are not mere words of surplusage but manifest that the scope and extent of liability is same as that of the HUF before partial partition has taken place. If this is not the intention of the Legislature, there is no need to include these words in Clause (b) inasmuch as there is already a legal fiction contained in Sub-section (1) of Section 171, namely, the HUF hitherto assessed as undivided shall be deemed for the purpose of this Act to continue to be HUF which would enable the assessment of HUF except where and insofar as finding of partition has been given in respect of such family. Therefore, reading the words 'to be liable' in conjunction with the words 'as if no such partial partition had taken place' makes it clear that the extent of liability of HUF after a partition has taken place and in the absence of any finding recorded by the ITO thereon, is the same as before partial partition. The word 'shall' shows that the provision is mandatory in nature. The words 'such family' refer only to the HUF which has hitherto been assessed as undivided but where a partial partition has in fact taken place after 31-12-1978. Thus, as per Clause (b) of Sub-section (9) of Section 171, liability of the HUF shall continue to be the same as before partial partition. Therefore, in my view the words 'as if no such partial partition had taken place' themselves constitute express provision for deeming the asset that has gone out of the family by way of partial partition or the income arising therefrom as that of the HUF.Consequently, no more specific or further provision in necessary to deem the partitioned asset or the income arising thereon as deemed asset or income of the HUF.6. Clause (c) provides that every member of such family immediately before 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. [Emphasis supplied.] Before the amendment the joint and several liability was enjoined only on members of the family in situations when partition took place during the previous year or after the previous year or after completion of assessment of the HUF.Clause (c) imposes joint and several liability on both family and members before partial partition of the family. Therefore, by imposing joint and several liability on the HUF also besides the members of the HUF, integrity of the HUF as a unit of assessment has been carefully safeguarded and preserved by amended law in addition to the statutory provision contained in Section 171(1) itself. Prior to amendment, the joint and several liability of members was confined to the liability of the family arising till the date of partition and not thereafter as obviously they will have several liability to the extent of property allotted to them. As per Clause (c), for the liability payable by the family not only for the period before partial partition but also thereafter, members of the family are also jointly and severally liable along with family which shall be deemed to continue by way of legal fiction. In other words, joint and several liability of members extends to liability of the family arising by including the divided asset and the income arising therefrom by prohibiting the ITO to recognise partial partition that has in fact taken place.
7. In this connection, it is to be mentioned that the amended law does not abrogate the right of the members of the HUF under personal law but on the other hand, it tacitly recognises the same which is evident from Clause (d) of Sub-section (9) inasumuch as only for the purpose of enforcing the several liability of member, it shall be computed according to the portion of the joint family property allotted to him in such partial partition. This is also clear from the fact that already Sub-section (7) of Section 171 provides for the several liability of any member of the HUF according to the portion of the joint family property allotted to him at the partition whether total or partial. Therefore, in the amended provision there was no necessity at all for the Legislature to reiterate the concept of several liability of the members of the HUF after partial partition.
8. Now that the amended law restored the position of partition to status quo ante as contained in the 1922 Act, reference to decisions of the Courts in respect of cases under the 1922 Act, is necessary. I shall rely only on some cases already considered by my learned brother, In the case of A. Thimmayya (supra), the Supreme Court dealing with scheme and scope of Section 25A has observed as follows: . . . If no claim for recording partition is made, or if a claim is made and it is disallowed or the claim is not considered by the Income-tax Officer, the assessment of the Hindu undivided family which has hitherto been assessed as undivided will continue to be made as if the Hindu undivided family has received the income and is liable to be assessed.
The above extract will show that in the event, of the claim for partition being not considered by the ITO inadvertently or otherwise, the assessment of HUF which was hitherto assessed as undivided will continue to be made as if the HUF has received the income and is liable to be assessed. As per the amended law, the ITO is prohibited from recognising claim of partial partition and, therefore, it amounts to a case of non-consideration of claim of partial partition by the ITO.From the above ratio of the Supreme Court it is crystal clear that the income arising out of divided asset can be said to have been received by the HUF and it is liable to be assessed on the same. Even the proviso to Section 25(2) of the 1922 Act shows that the joint and several liability of members of the joint family shall extend to tax assessed on total income received by the joint family or received on behalf of joint family. Therefore, the receipt of income on behalf of joint family has been noticed in the aforesaid provision of the income-tax law and also by the aforesaid decision of the Supreme Court in the extract given above. In other words, the income arising from the divided asset on account of partial partition shall be treated as if received by the erstwhile HUF which has hitherto been assessed as undivided. Clause (a) of Section 5 which deals with scope of total income includes not only income received or deemed to be received by a person but also on behalf of such person.
9. In the case of Kalloomal Tapeswari Prasad (supra) the Supreme Court has observed as under: . . . As long as a finding is not recorded under Section 171 holding that a partial partition had taken place, the HUF should be deemed for the purposes of the Act to be the owner of the property which is the subject-matter of partition and also the recipient of the income from such property. The assessment should be made as such and the tax assessed can be recovered as provided in the Act . . . .
In my view, the amended law reflects the ratios of the Supreme Court in the cases of Kalloomal Tapeswari Prasad (supra) and A. Thimmayya (supra) and deems the income of the divided property as income of the HUF in the context of absence of any order recording the fact of partition of the HUF. On parity of reasoning the divided asset is to be included as the wealth of the HUF. In the facts and circumstances of the assessee's cases, the matter can be treated as concluded though the cases before the Supreme Court were not directly on the point at issue.
10. In the case of the assessee, the subject-matter of partial partition was cash which has been invested in several concerns. No right in rem is transferred to the divided members when cash is allotted to them. Such investments in the absence of any order by the ITO/WTO recording partial partition, shall be treated as if they were the investments made on behalf of the HUF and those investments shall be assessed in the hands of the HUF for wealth-tax purposes.
11. The object and purpose of amendment reflects the intention of the Legislature or the representatives of the people who are sovereign in the State. My learned brother has copiously extracted the Finance Minister's observation, notes on clauses and the memo explaining the provisions of the amended law which clearly show that the amended law seeks to prevent attempts on tax avoidance in the guise of creation of multiple HUF's by means of partial partition and, consequently, mischief. The Supreme Court in the case of K.P. Varghese (supra) has held that the statutory provision must be construed so as to achieve the obvious intention of the Legislature and produce rational construction. This is exactly what I have attempted to do, however harsh or absurd or contrary to commonsense the result may be, though personally I do not feel so.
12. In the facts and circumstances of the cases, I hold that notwithstanding the fact of partial partition, which was not recognised by the ITO/WTO the asset allotted and the income arising from such asset to members of the HUF which was hitherto assessed as undivided shall have to be included in the net wealth or income of the HUF. In this view of the matter, therefore, the orders of the AAC are set aside and that of the ITO/WTO restored. The appeals are allowed.
1. On a difference of opinion between the learned members who heard these appeals originally, the following point of difference was stated: Whether on the facts and in the circumstances of the case, the assets divided by a partial partition in a Hindu undivided family and the income arising from those divided assets could be assessed as part of the net wealth/total income of the Hindu undivided family The President having assigned the case to himself for disposal under Section 255(4) of the Act, the matter has come up before me for hearing as a Third Member.
2. The facts have been fully and correctly stated by the learned members. However, for the sake of completeness, I propose to refer to the facts, in brief, once again. All the assessees herein are HUFs.
There has been a partial partition in each family on 29-1-1980 as a result of which a sum of Rs. 1,50,000 was taken out of the family assets and held separately by the coparceners from that date. All the assessee-HUFs have claimed that the said amount as well as the income arising to the coparceners out of/or attributable to the said amount are not the income or the wealth of the assessee-HUFs. However, in view of the provisions of Section 20A and Section 171(9), providing that a partial partition if taken place after 31-12-1978 has to be ignored, the ITO/WTO has treated the said amount of Rs. 1,50,000 as well as the income arising out of/or attributable to the said amount in the hands of the different coparceners as the wealth or the income of the respective HUFs. The AAC having accepted the claim, the department came up in appeal before the Tribunal. As already stated, there has been a difference of opinion between the learned members who heard the appeals originally. While according to the learned Judicial Member, the departmental appeals have to be dismissed, the learned Accountant Member has held that they have to be allowed.
3. Besides strongly relying on the order of the learned Accountant Member, Shri K. Venkataraman for the revenue reiterated that the provisions of Section 171(9) and Section 20A clearly provide for the assessment of the HUF with the same assets as the HUF possessed before the partition. His submission is that all such properties which are the subject-matter of partial partition have to be treated as the properties of the HUF for all purposes. On the other hands, Shri K.Srinivasan, the learned Counsel for the assessee, strongly relied on the order of the learned Judicial Member. According to him, the decisions relied upon by the revenue are distinguishable and that unless the Legislature had specifically provided for creating a charge on the property which has factually gone out of the HUF nucleus, such a property cannot be treated as the property of the HUF for any purpose whatsoever. When Shri Srinivisan's pointed attention was drawn to the decision of the Supreme Court in the case of Kalloomal Tapeswari Prasad (supra), he stated that the finding in that case was that there was factually no partition and, therefore, the observations of the Supreme Court in that case have no bearing in this case.
4. I have gone through the orders passed by the learned members and the relevant provisions of the Income-tax and Wealth-tax Acts. I have also gone through the decisions relied on before me.
According to me, the position obtaining regarding total partition or disruption of HUF under the 1922 Act now obtains under the 1961 Act both regarding total and partial partition or disruption of the HUF.Under the general law, properties/assets which have actually gone out of the HUF nucleus, whether by way of total or partial partition or by disposition, etc., do not belong to the HUF after their so going out irrespective of whether an order under Section 171 is or is not recorded. Except for the fact that the newly inserted Sub-section (9) to Section 171 and Section 20A provides that no order of partial partition can be passed by an ITO after a particular date. I do not see the amendment has made any material change. Therefore, the question would still be whether the assets or properties which have gone out of the HUF nucleus, whether by way of partition, total or partial or otherwise, but when an order under Section 171 has not been passed or could not be passed in the eye of law, would continue to belong to the HUF so much so that both for the purposes of income-tax and wealth-tax their income and/or wealth would be included in the assessment of the HUF.5. In view of the Bombay High Court's decision in the case of Waman Satwappa Kalghatgi v. CIT [1946] 14 ITR 116, the Madras High Court's decision in the case of M.S.M.M. Meyyappa Chettiar (supra) and the Kerala High Court's decision in the case of Smt. N.K. Sarada Thampatty (supra), I am inclined to agree with the learned Judicial Member that the provisions in question are machinery provisions and do not create a charge on those assets which have factually gone out of the HUF assets in general law. The Kerala High Court in its aforesaid decision having considered the implication of the Supreme Court's decisions in the cases of Kalwa Devadattam (supra) and A. Thimmayya (supra). I may also agree with the learned Judicial Member that the abovesaid two Supreme Court decisions can be distinguished.
6. On carefully going through the Supreme Court's decision in the case of Kalloomal Tapeswari Prasad (supra), however, I find that the said decision is on all fours and squarely applies to the facts in these 'cases. The High Court's decision in this very case is reported in Kalloomal Tapeshwari Prasad v. CIT 1973 Tax LR 697 (All.). The facts in that case were that the family had made a partial partition orally in respect of its 18 immovable properties amongst its 10 coparceners. The claim for partial partition having not been accepted, the department assessed the income from the partitioned properties in the hands of the HUF. It was contended before the Tribunal that the partial partition was valid and that in any event the income from the partitioned properties which had admittedly gone out of the HUF nucleus, could not be assessed in the hands of HUF even if the partition was such that could not be recognised as a partial partition under the Act. The Tribunal decided both these issues against the assessee.
The following two questions were referred to the Hon'ble High Court for opinion: 1. Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the properties in dispute were capable of division in definite portions amongst the 10 coparceners as contemplated in Explanation (a)(i) to Section 171 of the Income-tax Act, 1961 and that even otherwise the mere severance of status was, not sufficient to entitle the assessee to succeed in its claim for partial partition 2. Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the income from the properties in dispute which were accepted to have been partitioned under the Hindu law but with regard to which an order accepting the claim of partial partition was not made was liable to be included in the computation of the assessee's income The High Court agreed with the Tribunal that the manner in which partition was effected with regard to the 18 properties amongst the 10 coparceners, justified the ITO to reject the assessee's claim for partial partition under Section 171. The Hon'ble High Court has referred to the fact referred to by the Tribunal in paragraph 11 of its order as under.
Coming to the second question, the position is that the revenue did not dispute that in fact the members of the assessee family had on 11th December, 1963, effected an oral partition in respect of 18 immovable properties. The income of these properties was separately received by the individual member in accordance with their shares.
Under Hindu law a disruption of a joint Hindu family can validly be brought about by an oral expression of an intention to separate. The oral partition effected on 11th December, 1963, was valid in Hindu law and it disrupted the ioint status of the members in regard to the 18 immovable properties. Since that day the members will be deemed to hold these properties as tenants-in-common and not as joint tenants with the result that these properties ceased to belong to the coparcenary of the joint Hindu family. The income derived from these properties was not income received by the joint Hnidu family, the assessee. In accordance with Hindu law, such income could not hence be included in the assessment of the Hindu undivided family. The share of the income of the individual members was liable to be assessed in their individual assessments.
However, after relying on the Bombay and Madras High Court decisions (supra) amongst others, their Lordships of the Allahabad High Court answered the second question in favour of the assessee observing that assets/properties factually gone out of the HUF nucleus by way of partition do not and cannot belong to the HUF and, therefore, the income therefrom cannot be assessed in the hands of the HUF for the period after partition even though the manner in which the partition was effected cannot be recognised as a partition under the Act.
7. Aggrieved by the aforesaid order of the Hon'ble High Court, both the assessee and the department went in appeal to the Hon'ble Supreme Court. The Supreme Court answered both the questions in favour of the revenue and against the assessee. In other words, the Tribunal's order was confirmed in full. It is observed thus: . . . Having held that the assessee was not entitled to claim that a partial partition had taken place under Section 171, the High Court erred in holding that the income of the properties which were the subject-matter of partial partition could not be included in the total income of the assessee by relying upon decisions which had been rendered on the basis of Section 25A of the 1922 Act which was not applicable to partial partitions. Section 171 of the 1961 Act applied to all partitions--total and partial--and unless a finding was recorded under Section 171, the income from the properties had to be included in the total income of the family by virtue of Sub-section (1) of Section 171.
8. However, it is contended vehemently before me by Shri K. Srinivasan, the learned counsel for the assessee, that the above Supreme Court decision is not applicable to the facts of this case as the Hon'ble Supreme Court in that case had proceeded on the assumption that there was no partial partition at all, whether in civil law or under the Act.
According to him, that being the assumption, other observations made by the Hon'ble Supreme Court are of not much consequence. In this connection, Shri K. S rinivasan has laid emphasis on the expression, "Having held that the assessee was not entitled to claim that a partial partition had taken place under Section 171, the High Court erred in holding, etc., etc.". In my opinion, this is an over-simplification of the whole case. Apart from the fact that this expression does not at all support the claim of Shri K. Srinivasan that the Hon'ble High Court had proceeded on the assumption that there was no factual partition and the properties had not gone out of the HUF nucleus, the facts referred to by us from the Hon'ble High Court's decision, clearly indicate that it was not so. In fact, if we accept this submission of the learned Counsel, it would appear that the Hon'ble High Court's decision on the second issue in favour of the assessee was given without any basis whatsoever and that the Hon'ble High Court had unnecessarily entered into the discussion. I am afraid that this contention is not tenable at all. Therefore, to my mind, the Supreme Court's decision in Kalloomal Tapeswari Prasad's case (supra) gives a complete answer to the problem before me in this case. This being so, there does not appear to me any scope for discussion on the question of specific charge, etc.
9. Section 171(9), as I have stated earlier, does not make material difference except for the fact that the statute debars the ITO from holding any enquiry and/or from passing any order with regard to partial partition after 31-12 1978. Therefore, I agree with the learned Accountant Member that the income from or attributable to the aforesaid sum of Rs. 1,50,000 which was the subject-matter of partial partition in each case is assessable as the income of the HUF and similarly, the said amount and accretions thereto are assessable as the wealth of the respective HUFs.
10. The order will now be placed before the Bench for deciding the appeals according to majority view.