Wealth-tax Officer Vs. Champalal Saraogi. - Court Judgment

Excerpt:
- orderper shri anand prakash, accountant members - the present appeal is by the revenue whereas the cross-objection is by the assessee. both are being disposed of by a combined order for the sake of convenience.2. the assessee is a huf. its valuation date for the assessment year 1975-76 was 31-3-1975. it owned a property known as 4, mukhram kanoria road, howrah. it was alleged to have been partitioned amongst the following coparceners with effect from 4-8-1974 by an agreement dated 3-2-1975 :shri champalal saraogismt. bhagwati debi saraogishri mahendra kumar saraogishri surendra kumar saraogishri indra kumar saraogishri debendra kumar saraogishri chandra kumar saraogi trust.admittedly, the said property was not divided by metres and bound between the various coparceners on the date of.....

Judgment:
ORDER

Per Shri Anand Prakash, Accountant members - The present appeal is by the revenue whereas the cross-objection is by the assessee. Both are being disposed of by a combined order for the sake of convenience.

2. The assessee is a HUF. Its valuation date for the assessment year 1975-76 was 31-3-1975. It owned a property known as 4, Mukhram Kanoria Road, Howrah. It was alleged to have been partitioned amongst the following coparceners with effect from 4-8-1974 by an agreement dated 3-2-1975 :

Shri Champalal Saraogi

Smt. Bhagwati Debi Saraogi

Shri Mahendra Kumar Saraogi

Shri Surendra Kumar Saraogi

Shri Indra Kumar Saraogi

Shri Debendra Kumar Saraogi

Shri Chandra Kumar Saraogi Trust.

Admittedly, the said property was not divided by metres and bound between the various coparceners on the date of partition.

3. Subsequent to the said partition, two-fifths of the said property and the lands appurtenant thereto were acquired by the Government and Rs. 1,31,658 appeared to have been given for this portion by way of compensation by cheques to the various coparceners as per details given in the paper book in the form of extract from the cash book for 3-4-1975.

4. On these facts the assessee excluded from its return of income for the assessment year 1975-76 the value of the aforesaid property from its wealth. According to the assessee, the said property had ceased to be belonging to the HUF and as such it should not be assessed as the property belonging to the HUF.

5. The above contention of the assessee was not accepted by the WTO who pointed out that the assessees claim for partial partition in the income-tax proceedings with regard to the said property had been rejected by the Tribunal vide its order in IT Appeal Nos. 1979, 1980 and 2569 (Cal.) of 1979 dated 5-9-1980 on the ground that the property in question had not been dividend by metes and bounds and that for identical reasons the assessees claim for partial partition had to be rejected in the wealth-tax assessment also. Accordingly, the WTO included the value of the property in the assessees net wealth for the assessment year 1975-76.

6. Against the aforesaid order, the assessee went in appeal to the AAC and reiterated its claim that the said property ought to be excluded from the wealth of the family as it had been partitioned amongst the various coparcerners and it no more belonged to the family. In the alternative, it was pleaded that in any the compensation which was received from the Government of West Bengal with regard to two-fifths part of it could not be included in the wealth of the family as the compensation had been paid in specific shares to each of the coparceners and, therefore, at least with regard to the compensation there had been a division by metes and bounds and that, therefore, the wealth to the extent of Rs. 1,31,658 ought to be reduced.

7. The AAC rejected the assessees contention with regard to partition of the immovable property. He, however, accepted the assessees alternative contention and excluded the value of the compensation amounting to Rs. 1,31,925 which had been received by seven coparceners by individual cheques from the the Land Acquisition Officer.

8. The department feels aggrieved of the finding of the AAC excluding the sum of Rs. 1,31,925 for the net wealth of the assessee-family. In its cross-objection, the assessee-family questions the finding of the AAC that there has been no partial partition in the present case with regard to the aforesaid property and that, therefore, three-fifths of the value of the said property should be assessed in the hands of the assessee-family. The contentions of the rival sides before us have been the same as before the authorities below.

9. The question of validity of a partition in a HUF is normally to be determined with reference to the Hindu law, according to which partition may be either total or partial. As has been explained by their Lordships of the Supreme Court in the case of Kalloomal Tapeswari Prasad (HUF) v. CIT : [1982]133ITR690(SC) :

'may be as regards persons who are members of the family or as regards properties which belong to it ... It is, ... open to a party who alleges that the partition has been partial either as to persons or as to property, to establish it. The decision on that question depends on proof of what the parties as to persons or as properties or as to both. When there is partial partition as to property, the family ceases to be undivided as regards properties in respect of which such partition has taken place out continues to be undivided with regard to the remaining family property. After such partial, the rights of inheritance and alienation differ according as the property in question belongs to the members in their divided or undivided capacity. Partition can be brought about (1) by a father during his lifetime between himself and his sons by dividing properties equally amongst them; (2) by agreement; or (3) by a suit or arbitration. A declaration of intention of a coparcener to become divided brings about severance of status ... A physical division of the property which is the subject-matter of the partition is not necessary to complete the process of partition in so far as that items of property is concerned under Hindu law. The parties to the partition may enjoy the property in question as tenants-in-common ... It is thus clear that Hindu law does not require that the property must in every case be partitioned by metes and bounds or physically into different portions to complete a partition. Disruption of status can be brought about by any of the modes referred to above and it is open to the parties to enjoy their share of property as tenants-in-common in any manner known to law according to their desire ...' (p. 702)

There can be no doubt that on the facts of the present case, the severance of status amongst the various coparceners has come about with regard to the property No. 4, Mukhram Kanoria Road, Howrah, and, thus, under the Hindu law the said property has ceased to be the property of the HUF which continues to be undivided with regard to other assets.

10. The above concept of partition - total or partial -under the Hindu law would normally hold the field for the purpose of the Income-tax Act, 1961 (the 1961 Act) and Wealth-tax Act, 1957 (the Act) unless it has been specifically modified by either of the said Acts. Section 171 of the 1961 Act brings about modification in the above concept of partial partition for the purpose of this Act when it specifically points out that partitionin order to be effective must be by metes and bounds where the property admits of a physical division and where the property does not admit of a physical division then such division as the property admits of and it has been specifically states in the Explanation to section 171 that 'a mere severance of status shall not be deemed to be a partition'. In view of the above position, the finding of our learned brothers in the income-tax appeal of the assessee that there had been no partial partition of the property in question for the purposes of section 171, if we may say so with respect, was entirely justified. But for the the purpose of the Act, the aforesaid finding would hold good only in case there is analogous provision restricting the meaning of partial partitions in the aforesaid manner under the Act. Under the Act, section 20 deals with Assessment after partition of a HUF and it reads as follows :

'(1) 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 a Hindu undivided family, and the Wealth-tax Officer, after inquiry, is satisfied that the joint family property has been partitioned as a whole among the various members of groups of members in definite portions, he shall record an order to that effect and shall make assessment on the net wealth of the undivided family as such for the assessment year or years, including the year relevant to the previous year in which the partition has taken place, if the partition has taken place on the last day of the previous year and each members or group of members shall be liable jointly and severally for the tax assessed on the net wealth of the joint family as such.

(2) Where the Wealth-tax Officer is not so satisfied, he may, be order, declare that such family shall be deemed for the purposes of this Act to continue to be a Hindu undivided family liable to be assessed as such.'

11. A careful reading of the aforesaid section would show that it applies to the case of total partition where 'the joint family property has been partitioned as a whole among the various members'. In such a case an obligation has been cast on the assessee that he would bring it to the notice of the WTO that a partition has taken place among the members of the HUF and thereafter the responsibility has been cast upon the WTO to make inquiry into the aforesaid claim of the family members and to satisfy himself that the partition in question has taken place among the various members or group of members in definite portions, and after such satisfaction, he is to record an order recognising partition of the family. Subsection (2) of section 20 requires that, if the WTO after enquiry is not satisfied about the claim of partition, he would reject the claim and declare that 'such family shall be deemed for the purposes of this Act to continue to be a HUF liable to be assessed as such'. The aforesaid provision of section 20 apparently do not apply to the case of partial partition, for in such a case the HUF continue to exist and apparently to order can be recorded to the effect that 'the joint family property has been partitioned as a whole among the various members or groups of members in definite portions.' The legal effect of partial partition as to a property is that the said property of the joint family is excluded from the ownership of the family, as after partition thereof it belongs to the coparceners in question. In such a case, it is not necessary for the assessee to make any formal claim under section 20 or for the WTO to pass a formal order under the said section, for section 20 has no application to partial partition. He has to ascertain in the course of the assessment proceedings as to whether or not partial partition of the property, as alleged, has taken place, and if that has taken place, he has to exclude the property from the ownership of the family. The partition in question has to be in terms of the Hindu law inasmuch as there is nothing in any of the section of then Act as it stood in the relevant previous year, imposing restriction with regard to partial partition that it should be by metes and bounds. As noted earlier, section 20 does not at all concern itself with the case of partial partition, and as such the condition laid down in it as to partition in definite portions will not be attracted. In this respect, it is in pari material with section 25A of the India Income-tax Act, 1922 (the 1922 Act) which also did not apply to the case of partition as held by their Lordships of the Privy council in the case of Sir Sundar Singh Majithia v. CIT [1942] 10 ITR 457. It was explained by their Lordships in the aforesaid case that section 25A 'has no reference at all to any case in which the Hindu undivided family remains in existence at the time of assessment'. According to their Lordships :

'... No difficulty whatever in the assessment of a Hindu undivided family is caused ... by the facts than in one year it has certain assets and certain income therefrom and that in the next yet it is found to have parted with one asset and to be no longer in receipt of the same income. The same assessee has a different income in each year - that is all. It matters nothing whether the particular asset no longer possessed by the undivided family has become the separate property of a member or belongs to a stranger ....' (p. 464)

At page 465, their Lordships again pointed out that Hindu undivided family 'can part with an item of its property to its individual members if it takes the proper steps'. The above observation apply, in our opinion, mutatis mutandis, to the case of partial under the Act. Section 20 does not refer to partial partition. The case of partial partitions for the purpose of the Act has, therefore, to be dealt with under the terms of the Hindu law. The position under the 1961 Act, in this respect is, as noted ealier, radically different inasmuch as section 171 in terms refers to the case to partial partition also and prescribes the condition of division of an asset by metes and bounds even in the case of partial partition. This point has been clearly explained by their Lordships of the Supreme Court in the case of Kalloomal Tapeswari Prasad (supra) referred to above, at page 705. Under the Act, the provisions analogous to section 171 were brought on the statute book by section 20A of the Act by the Finance (No. 2) Act, 1980, with effect from 1-4-1980. The said provision do not apply to the assessment year presently under consideration. The case of partial partition under the Act of the assessment year 1975-76 cannot, therefore, be put to the test to the provisions of section 20A or, for that matter, to the principles enunciated in section 171. In view of this, the authorities below were not, in our opinion, justified in presuming that partial partition cannot be given effect to under the Act if it is not by metes and bounds. The only thing that has to be considered under the Act is whether on the given valuation date, the property in question belonged to the HUF. If before the valuation date the property has been alienated by the family by any of the recognised modes of alienation, includings that of partial partition, the property no more belongs to the HUF and, therefore, it cannot be included in the new wealth of the HUF. In view of this, we hold that the property No. 4, Mukhram Kanoria Road, Howrah, was not the property of the HUF as on the valuation date under consideration in view of its alienation by the family through partial partition amongst the various coparceners in the manner indicated above. Its inclusion in the net wealth of the HUF was thus not justified. Accordingly, we direct that the property in question be excluded from the net wealth of the family as on the valuation date presently under consideration.

12. The next controversy in the departmental appeal pertains to the direction of the learned AAC to delete the addition of Rs. 24,851 which was made by the ITO on the ground that enquiry shares of the newly established industrial undertaking Kaberi Plasticchem (P.) Ltd. were not exempt as they were hit by the overall exemption of Rs. 1,50,000 prescribed under sub-section (1A) of section 5 of the Act. A reference to sub-section (1A) of section 5 shows that clause (xx) has not been included by the Legislature within the said sub-section. The WTO was, therefore, patently in error in having presumed that the exemption in terms of clause (xx) was subject to the provisions of sub-section (1A) of section 5. The order of the AAC in this respect is. therefore, entirely justified and we uphold it. In the result, the departmental appeal stands rejected.

13. In the cross-objection the assessee has challenged the non-deduction of the loan from the LIC of Rs. 10,057 taken against the security of the life insurance policy of the assessee. Under sub-clause (ii) of clause (m) of section 2 of the Act the debts which are secured on or which had been incurred in relation to, any property in respect of which wealth-tax is not chargeable under the Act is not to be deducted from the aggregate value of the assets. The debt which the assessee has contracted in the present case by taking loan from the LIC is secured on the life insurance policy of the assessee which is exempt from the impost of wealth-tax by virtue of clause (vi) of sub-section (1) of section 5. The WTO was, therefore, in our opinion, justified in refusing to deduct the aforesaid debt from the aggregate of the assets of the assessee. Accordingly, we reject the assessees cross-objection in this regard.

In the result, the cross-objection is partly allowed.