Commissioner of Income-tax, Gujarat Iii Vs. Kiranchandra Madhusudan Patel - Court Judgment

Bhagwati, C.J.

1. The question of law which arises for consideration in this reference is not an easy one and it has caused some anxiety to us in reaching a conclusion. There was at all material times a Hindu undivided family consisting of one Madhusudan and his sons (hereinafter referred to as 'the assessee'). The assessee had not been assessed for any assessment year prior to 1956-57, but for the assessment year 1956-57, a notice under section 22(2) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the old Act'), was served on the assessee on 21st May, 1956, and it was pending and no assessment had been completed under it up to 15th March, 1957, which was the last date for filing an estimate of advance tax for the assessment year 1957-58, under section 18A(3) of the old Act. The assessee did not file an estimate of advance tax for the assessment year 1957-58, before 15th March, 1957, though its total income for the account year relevant to that assessment year was clearly likely to exceed the maximum amount not chargeable to tax in its case by two thousand five hundred rupees. The Income-tax Officer, therefore, while making an order dated 15th March, 1958, assessing the assessee to income tax for the assessment year 1957-58, issued a notice of the same date calling upon the assessee to show cause why penalty should not be imposed on it under section 28(1)(a) read with section 18A(9) for having failed without reasonable cause to comply with the provisions of section 18A(3). The assessee submitted its reply dated 5th September, 1959, showing cause against the penalty proposed to be imposed by the Income-tax Officer but for some inexplicable reasons, there was no progress for about six years and it was only on 20th November, 1965, that an order was made by the Income-tax Officer imposing penalty on the assessee. However, in the meantime, Madhusudan died on 29th January, 1962, and after the death of Madhusudan, a total partition of the properties of the Hindu undivided family by metes and bounds was effected on 12th February, 1962. The coparceners of the erstwhile Hindu undivided family made a claim at the time of assessment for the assessment year 1963-64, that a total partition had taken place amongst members of the Hindu undivided family and the Income-tax Officer, after making an order passed an order dated 21st June, 1966, under section 171(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the new Act'), which had come into force from 1st April, 1962, recording a finding that there was a total partition of the joint family properties with effect from 12th February, 1962. The assessee had in the meanwhile preferred an appeal against the order of penalty to the Appellate Assistant Commissioner and in view of the order dated 21st June, 1966, recognising the partition with effect from 12th February, 1962, the assessee raised a contention at the hearing of the appeal that the Hindu undivided family did not subsist at the date when the order of penalty was made and it was not competent to the Income-tax Officer to make the order of penalty against a non-existent entity. The assessee also contended in the alternative that in any event the Hindu undivided family was assessed for the assessment year 1956-57, when the notice under section 22(2) was served on the assessee on 21st May, 1956, and, therefore, it could not be said on 15th March, 1957, that the assessee 'has not hitherto been assessed so as to attract the applicability of section 18A(3) and, in the circumstances, there was no default on the part of the assessee in complying with the provisions of section 18A(3). The Appellate Assistant Commissioner was impressed by both these contentions and he allowed the appeal and cancelled the order of penalty. The revenue, being aggrieved by the order of the Appellate Assistant Commissioner, preferred an appeal to the Tribunal. The Tribunal disagreed with the view taken by the Appellate Assistant Commissioner in regard to the second contention and held that 'though the notice under section 22(2) was served on 21st May, 1956, no assessment under section 23 was made on the assessee prior to 31st March, 1957, nor was even provisional assessment under section 23B made on the assessee prior to 15th March, 1957' and the assessee was accordingly not 'hitherto....assessed' within the meaning of section 18A(3). However, so far as the first contention was concerned, the Tribunal found itself in agreement with the view taken by the Appellate Assistant Commissioner and held that since the Income-tax Officer had by his order dated 21st June, 1966, recognised the partition of the Hindu undivided family with effect from 12th February, 1962, there was no Hindu undivided family in existence at the date when the order of penalty was made and the order of penalty having been made on a non-existent entity was invalid. The Tribunal accordingly upheld the decision of the Appellate Assistant Commissioner. The revenue, thereupon, applied for a reference and on the application the Tribunal referred the following question of law for the opinion of this court :

'Whether, on the facts and in the circumstances of the case, it was competent for the Income-tax Officer to impose penalty on the assessee under section 18A(9)(b) of the Indian Income-tax Act, 1922 ?'

2. The question as framed is wide enough to take in both aspects of the controversy between the parties and we shall now proceed to consider the arguments which have been advanced before us in regard to both these aspects.

3. We may first dispose of the contention of the assessee relating to the second aspect of the controversy since it lies in a very in a very narrow compass and there is nothing much while can be said by the assessee in regard to it. It is necessary in order to appreciate this contention to refer to section 18A(3) of the Act. That section, omitting portions immaterial, reads as follows :

'Any person who has not hitherto been assessed shall, before the 15th day of March in each financial years, if his total income of the period which would be the previous year for an assessment for the financial year next following is likely to exceed the maximum amount not chargeable to tax in his case by two thousand five hundred rupees, send to the Income-tax Officer an estimate of the tax payable by him on that part of his income which is not chargeable under the head 'Salaries' of the said previous year calculated in the manner laid down in sub-section (1).....'

4. It is clear on a plain reading of the language of section 18A(3) that the obligation to send an estimate of the advance tax to the Income-tax Officer before the 15th day of March in each financial year is laid on a person 'who has not hitherto been assessed'. The last date for filing an estimate of advance tax is 15th day of March of the financial year and the liability to do so attaches only to a person who has not been assessed at any time up to that date. The assessee would, therefore, be liable to file an estimate of advance tax before the 15th day of March, 1957, only if it can be said that it was not assessed 'hitherto', that is, at any time before that date. Now it is evident from the facts that no assessment was made on the assessee at any time prior to 15th March, 1957. The only step which was taken against the assessee towards making an assessment was the issue of a notice under section 22(2) for the assessment year 1956-57. This notice was undoubtedly served on the assessee before 15th March, 1957, but mere issue of notice for assessment cannot be said to be tantamount to assessment. What section 18A(3) requires is that the assessee should have been assessed and it could not be said to have been assessed unless provisional assessment was made on him under section 23B or regular assessment made under section 23. The assessee in the present case was, therefore, person who had not been assessed before 15th March, 1957, and it fell within the description 'who has not hitherto been assessed' so as to attract the applicability of section 18A(3). The assessee was accordingly liable to file an estimate of advance tax before 15th March, 1957, and since it admittedly did not do so, and, on the finding reached by the Tribunal, there was no reasonable cause which prevented it, the assessee must be held to have failed without reasonable cause to comply with the provisions of section 18A(3) and rendered itself liable to penalty under section 28(1)(a) read with section 18A(9)(b).

5. That takes us to a consideration of the first aspect of the controversy between the parties. The question which arises for consideration under this head of controversy is whether the Income-tax Officer was competent to make the order of penalty on 20th November, 1965, when, according to the order dated 21st June, 1966, made under section 171(3) of the new Act, there was a total partition of the properties of the Hindu undivided family with effect from 12th February, 1962, and the Hindu undivided family had ceased to exist from that date. The determination of this question depends on the true interpretation of certain provisions of the old Act as well as the new Act. The new Act came into force from 1st April, 1962, and by section 297(1) it repealed the old Act. Section 297(2)(f) provides that notwithstanding the repeal of the old Act, any proceeding for the imposition of a penalty in respect of any assessment completed before the 1st day of April, 1962, may be initiated and any such penalty may be imposed as if the new Act had not been passed. What is the proper construction of section 297(2)(f) came up for consideration before a Division Bench of this court in Sheth Gunvantlal Mangaldas v. Commissioner of Income-tax : [1968]68ITR740(Guj) . There a notice of demand for advance tax was issued under section 18A of the old Act prior to 1st April, 1962, and the question arose whether penalty for non-payment of an instalment of advance tax demanded by the notice could be imposed under section 46(1) if such non-payment took place after the commencement of the new Act. The Division Bench, construing section 297(2)(f), observed :

'....when section 297(2)(f) speaks of 'any assessment completed before the 1st day of April, 1962', what is contemplated is the completion of any stage or anything in the process of assessment and if such step or stage is competed before 1st April, 1962, then the proceedings for the imposition of penalty in respect of that stage may be initiated and such penalty may be imposed as if the Act of 1961 had not been passed. This being the case, in our opinion, the words 'any assessment completed before the 1st day of April, 1962', in the context in which they occur and occurring as they do in a repealing section have to be interpreted as meaning 'any stage in the procedure of imposing the tax liability upon the taxpayers'. That being the case, it is clear that the notice of demand having been issued under section 18A prior to 1st April, 1962, that particular stage in the assessment was completed....and the proceedings for the imposition of penalty in respect of that completed stage could be taken under section 46(1) of the Act of 1922 as if the Act of 1961 had not been passed' and sustained the penalty imposed under section 46(1) of the old Act. Here also the liability to file an estimate of advance tax arose at the latest on 15th March, 1957, and this particular stage in the assessment was completed on that date and, therefore, having regard to this decision it is clear - and indeed that was not disputed on behalf of the assessee - that the proceeding for imposition of penalty in respect of this completed stage could be initiated and such penalty could be imposed only under the old Act as if the new Act had not been passed. It may be pointed out that, even apart from this decision which places a wide interpretation on the language of section 297(2)(f), it is apparent that what section 18A(3) requires the assessee to do is to pay in advance the tax which may be found due on assessment and, therefore, penalty for failure to comply with the provisions of section 18A(3) would be penalty in respect of the assessment for the assessment year in question and if the assessment is completed before 1st April, 1962, section 297(2)(f) would be attracted. The proceeding for imposition of penalty for failure to comply with the provisions of section 18A(3) which was initiated on 15th March, 1958, was, therefore, liable to be continued and the penalty liable to be imposed according to the provisions of the old Act as if the new Act had not been passed. The income-tax authorities were required to ignore the new Act as if it were not on the statute book and to continue the proceeding for imposition of penalty having regard to the provisions of the old Act. It is, therefore, be reference to the provisions of the old Act that we must judge whether penalty could be validly and lawfully imposed on the assessee at the date when the order for penalty was made.

The provisions of the old Act which are material for the consideration of this question are those contained in section 25A which runs as follows :

'25A. Assessment after partition of a Hindu undivided family. - (1) Where, at the time of making an assessment under section 23, it is claimed by or on behalf of any member of a Hindu family hitherto assessed as undivided that a partition has taken place among the members of such family, the Income-tax Officer shall make such inquiry thereinto as he may think fit, and, if he is satisfied that the joint family property has been partitioned amongst the various members or groups of members in definite portions, he shall record an order to that effect :

Provided that no such order shall be recorded until notices of the inquiry have been served on all the members of the family. (2) Where such an order has been passed, or where any person has succeeded to a business, profession or vacation formerly carried on by a Hindu undivided family whose joint family property has been partitioned on or after the last day on which it carried on such business, profession or vocation, the Income-tax Officer shall make an assessment of the total income received by or on behalf of the joint family as such, as if no partition had taken place, and each member or group of members shall, in addition to any income-tax for which he or it may be separately liable and notwithstanding anything contained in sub-section (1) of section 14, be liable for a share of the tax on the income so assessed according to the portion of the joint family property allotted to him or it; and the Income-tax Officer shall make assessments accordingly on the various members and groups of members in accordance with the provisions of section 23 :

Provided that all the members and groups of members whose joint family property has been partitioned shall be liable jointly and severally for the tax assessed on the total income received by or on behalf of the joint family as such. (3) Where such an order has not been passed in respect of a Hindu family hitherto assessed as undivided such family shall be deemed, for the purposes of this Act, to continue to be a Hindu undivided family.'

6. Section 25A was enacted to meet the difficulty which arose when a Hindu undivided family had received income in the year of account but was no longer in existence as such at the time of the assessment. The difficulty was more acute by reason of the provision - an important principle of the Act - contained in section 14(1) :

'The tax shall be payable by an assessee in respect of any sum which he receives as a member of a Hindu undivided family....'

7. Section 25A, therefore, provided a machinery for assessment and recovery of the tax, where after the income was earned by the Hindu undivided family, the property of the joint family had been partitioned in definite portions and the Hindu undivided family had ceased to exist. The machinery for assessment and recovery of the tax, however, differed according as an order recording partition was made or not made. If, at the time of making an assessment under section 23, a claim was made by a member of the Hindu undivided family that a partition had taken place amongst the members of the family and the Income-tax Officer was satisfied that the joint family property had been partitioned amongst the various members or groups of members in definite portions, he would record an order to that effect under section 25A, sub-section (1); and, thereupon, according to section 25A, sub-section (2), where such an order has been passed, the Income-tax Officer would make assessment as if no partition had taken place and notwithstanding anything contained in sub-section (1) of section 14, each member or group of members would be liable, in addition to any income-tax for which he or it is separately liable, for a share of the tax on the income so assessed according to the portion of the joint family property allotted to him or it. Where, however, such an order has not been passed under section 25A, sub-section (1), (sic) provided section 25A, sub-section (3), the Hindu undivided family shall be deemed, for the purposes of the old Act, to continue to be a Hindu undivided family. Section 25A thus enable the revenue to bring to tax income earned by a Hindu undivided family even though, at the time of making the assessment, it was found to have disrupted and also provided a machinery for recovery of the amount of the tax assessed on the Hindu undivided family. Now it is clear from these provisions that so long as an order under section 25A, sub-section (1), is not made, the Hindu undivided family would be deemed for the purposes of the old Act continue to be a Hindu undivided family and a proceeding for imposition of penalty could be initiated and penalty could be imposed on the Hindu undivided family under the old Act as if it did not cease to exist. The legal fiction enacted in section 25A, sub-section (3), continued the Hindu undivided family for the purpose of imposition of penalty under the old Act. The only way in which this legal fiction could be displaced was by the passing of an order under section 25A, sub-section (1). If there was no order under section 25A, sub-section (1), the legal fiction would operate in its fullness and for all purposes of the old Act, the Hindu undivided family would be deemed to continue as if it had never disrupted. Here, in the present case, there was admittedly no order recognising partition of the property of the Hindu undivided family made under section 25A, sub-section (1). Obviously, there could be no such order because the partition took place on 12th February, 1962, and a claim in regard to such partition was made by the erstwhile members of the Hindu undivided family at the time of the assessment for the assessment year 1963-64 which was governed by the new Act. It is true that an order dated 21st June, 1966, was made by the Income-tax Officer recognising the partition of the Hindu undivided family with effect from 12th February, 1962, but that was an order under section 171(3) of the new Act. That was not an order under section 25A, sub-section (1). There is no provision in the new Act which says that an order recognising partition made under section 171(3) of the new Act shall be deemed to be an order under section 25A, sub-section (1), of the old Act. The assessee when faced with this difficulty tried to extricate himself out of it by contending that the words used in section 25A, sub-section (3), were 'where such an order has not been passed' and not 'where an order under sub-section (1) of this section has not been passed'. The words 'such an order', according to the assessee, had reference only to the kind of order, namely, an order recognising that the joint family property has been partitioned amongst various members or groups of members in definite portions and they did not require that the order should have been made under section 25A, sub-section (1). The argument of the assessee was that an order under section 171, sub-section (3), of the new Act, is an order recognising that the joint family property has been partitioned amongst the various members or groups of members is definite portions and it would be 'such an order' contemplated by section 25A, sub-section (3). We do not think this is a valid argument. The words 'such an order' which occur at the commencement of section 25A, sub-section (3), are also to be found in section 25A, sub-section (2), and they have obviously reference to an order made under section 25A, sub-section (1). Where the joint family property has been partitioned among the members or groups of members in definite portions and the members of the quondam Hindu undivided family do not want the Hindu undivided family to be assessed as such, they would have to make a claim before the Income-tax Officer and the Income-tax Officer would, if satisfied, record an order recognising the partition. What are the consequences if an order under section 25A, sub-section (1), is made, is dealt with in section 25A, sub-section (2), and similarly what are the consequences if no order under section 25A, sub-section (1), has been passed is set out in section 25A, sub-section (3). Sub-section (2) and (3) of section 25A merely provide the consequences which would follow according as an order under section 25A, sub-section (1), is made or not made. It is difficult to see how sub-sections (2) and (3) of section 25A can be construed so as to provide for the consequences of an order which may or may not be made under another statute, even if the order contemplated by such other statute may be an order recognising partition. Such other statute would provide for the consequences if an order is made or not made under it, but it would be flying in the face of all canons of construction to read the consequences of an order which may or may not be made under such other statute in section 25A, sub-sections (2) and (3). The words 'such an order' have clearly reference to an order under section 25A, sub-section (1), and they cannot be stretched to include an order of a similar kind which may be made under a provision of another statute. To read these words in the manner suggested on behalf of the assessee would be to do violence to grammar as well as language.

8. Moreover, if we turn to section 171 of the new Act, it is clear that section provides a machinery for the purpose of the new Act. Sub-section (1) of section 171 provides that a Hindu family hitherto assessed as undivided shall be deemed for the purposes of the new Act to be a Hindu undivided family, except where and in so far as a finding of partition has been given under this section in respect of the Hindu undivided family. The legal fiction of continuance of the Hindu undivided family is created for the purposes of the new Act and its displacement is also provided for the purposes of the new Act. What sub-section (1) of section 171 says is that a Hindu undivided family shall be deemed to continue as such for the purposes of the new Act but where and in so far as a finding in respect of partition has been under the section, it shall not be deemed to continue to be a Hindu undivided family and shall be regarded as partitioned for the purposes of the new Act. Then sub-section (2) of section 171 says that where, at the time of making an assessment under section 143 or section 144, it is claimed by or on behalf of any member of a Hindu family assessed as undivided that a partition, whether total or partial, has taken place among the members of such family, the Income-tax Officer shall make an inquiry thereinto and sub-section (3) of section 171 then goes on to provide that on the completion of the inquiry, the Income-tax Officer shall record a finding as to whether there was a total or partial partition of the joint family property, and, if there has been such a partition, the date on which it has taken place. The opening words of sub-section (2) of section 171 make it clear that an order contemplated under section 171, sub-section (3), would be made on a claim made at the time of making assessment under section 143 or section 144. Here in the present case the order under section 171, sub-section (3), was made on a claim made by the members of the erstwhile Hindu undivided family at the time of making assessment for the assessment year 1963-64 under section 143. Sub-sections (4) and (5) provide the machinery for assessment of the total income of the Hindu undivided family for the period up to the date of partition. It is obvious from the opening words of sub-section (2) of section 171 and indeed that was common ground between the parties that sub-sections (4) and (5) of section 171 operate only in respect of assessments under the new Act. Such assessments may be for the assessment years commencing from 1962-63 or they may even be for previous assessment years if the return of income in respect of such assessment years may have been filed after 1st April, 1962 : Vide section 297(2)(a). But sub-sections (4) and (5) of section 171 can have no application to assessments made under the old Act. Sub-section (8) of section 171 makes the provisions of sub-sections (4) and (5) applicable for the purposes of levy and collection of any penalty, interest, fine to other sum in respect of any period up to the date of the partition. But, like sub-sections (4) and (5), sub-section (8) also applies only to levy and collection of any penalty, interest, fine or other sum under the new Act. It will, therefore, be seen that an order recognising partition made under section 171, sub-section (3), is an order which is available only for the purposes of the new Act. It enables the revenue to levy and collect tax, penalty, interest, fine or other sum under the new Act. It cannot be projected into assessment of tax or levy of penalty under the old Act. We have already pointed out that section 297(2)(f) requires the income-tax authorities to ignore the new Act while proceeding to impose penalty on the assessee and that by itself would be sufficient to exclude the operation and effect of an order under section 171, sub-section (3), of the new Act, unless, of course, there is anything in the new Act which directly and in so many terms provides that an order under section 171, sub-section (3), shall have effect in relation to assessment of tax or levy of penalty under the old Act. But, far from there being any such provision in the new Act, we find that section 171 clearly and explicitly says that an order under section 171, sub-section (3), shall have effect only in relation to assessment of tax and levy of penalty under the new Act. The governing consideration denoted by the words 'for the purposes of this Act' runs through the entirety of the provisions of section 171. We are, therefore, of the view that the order recognising partition made by the Income-tax Officer under section 171, sub-section (3), could not be invoked by the assessee for the purpose of demolishing the legal fiction in section 25A, sub-section (3). Since no order recognising partition was passed under section 25A, sub-section (1), the legal fiction enacted in section 25A, sub-section (3), continued to operate in its full strength and vigour and the assessee must be held to continue to be a Hindu undivided family for the purposes of the old Act. That would include the purpose of imposition of penalty under section 28(1)(a) read with section 18A(9). The Income-tax Officer was, therefore, entitled to impose penalty on the assessee despite the order under section 171, sub-section (3), recognising partition with effect from 12th February, 1962.

9. We, therefore, answer the question referred to us for our opinion in the affirmative. The assessee will pay the costs of the reference to the Commissioner.

10. Question answered in the affirmative.