TMI Blog1982 (1) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal for the opinion of the High Court were: "(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 assessee is a Hindu undivided family known as M/s. Kalloomal Tapeswari Prasad and the year of assessment is 1964-65. The assessee is governed by the Mitakshara school of law. The following genealogical tree represents the relationship amongst the members of the family: Phakki Lal _______________________ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partition orally as a result of which its eighteen immovable properties were divided amongst the ten members of the family and they held those properties as tenants-in-common from that date. It was claimed by the assessee in the course of the assessment proceedings that the members of the family had commenced to maintain separate accounts with regard to the income from the said eighteen properties and to divide the net profits amongst themselves according to their respective shares at the end of each year. The eighteen immovable properties were situated in different places and their valuation was as follows : S. No. Municipal number of the property Value 1. 75/2 1,78,875 2. 76/162 27,000 3. 76/169 45,000 4. 47/110 13,500 5. 47/26 20,700 6. 48/203 16/200 7. 55/124 90,000 8. 55/36-| 41,400 9. 55/37-| 10. 70/87 1,57,500 11. 71/150 8,100 12. 71/89 3,600 13. 71/112 19,800 14. 63/61 7,425 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e material before him, including the decree of the court referred to above and the evidence of Lakshman Swaroop ; held that the case of the assessee that it was not possible to divide the properties physically into ten shares referred to above was not tenable and dismissed the appeal. The assessee, thereafter, took up the matter before the Tribunal in appeal. The tribunal also was of the view that the contention of the assessee that if the properties had been divided into ten shares, they would have either been destroyed or would have lost their value, was not correct. Accordingly, the claim of the assessee under s. 171 of the Act that there was a partial partition was rejected. Thereupon, on an application of the assessee made under s. 256(1) of the Act, the two questions set out above were referred by the Tribunal to the High Court for its opinion. After hearing the parties, the High Court recorded its answer to the first question in the affirmative and in favour of the department and in reaching that conclusion, it observed thus: We have seen the evidence of the arbitrator as well as the Chief Engineer, and it is apparent therefrom that even though the 18 properties could no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the 18 immovable properties as a result of the oral partition dated 11th December, 1963. Thereafter the income of these properties belonged to the individual members and not to the joint family. It could not be included in the assessment of the family." Aggrieved by the answer to the first question, the assessee has filed Civil Appeal No. 1373 of 1974 and aggrieved by the answer to the second question, the revenue has filed Civil-Appeal No. 1768 of 1975. It is necessary to refer to the history of the relevant pro visions in order to decide the questions raised before us. Under the Indian I.T. Act, 1922 (for short " the 1922 Act "), an HUF could be assessed on its income. Section 3 of the 1922 Act laid down that where any Central Act enacted that income-tax should be charged for any year at any rate or rates, tax at that rate or those rates should be charged for that year in accordance with and subject to the provisions of that Act in respect of the total income of the previous year of every individual, HUF, etc. But s. 14(1) of the 1922 Act provided that no tax was payable by an individual assessee in respect of any sum which he received as a member of an HUF where such su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t being immaterial for the purposes of this case) came up for consideration by the judicial Committee of the Privy Council in Sir Sundar Singh Majithia v. CIT [1942] 10 ITR 457. The Privy Council held that s. 25A of the 1922 Act provided that if it be found that the family property had been partitioned in definite portions, assessment might be made, notwithstanding s. 14(1), on each individual or group in respect of his or its share of the profits made by the undivided family, while holding all the members jointly and severally liable for the tax. It was further held that if, however, though the joint Hindu family had come to an end, it be found that its property had not been partitioned in definite portions then the family was to be deemed to continue-that is, to be an existent Hindu family upon which assessment could be made on its gains of the previous year. But it was of the view that s. 25A had nothing to say about any HUF which continued in existence, never having been disrupted. Such case was held to fall outside sub-s. (3) of s. 25A and, in effect, it held that the said section did not apply to cases of partial partition. In Gordhandas T. Mangaldas v. CIT [1943] 11 ITR 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to the amendment, when the assessee was an undivided family, no assessment could be made thereon if at the time of the assessment it had become divided, because at that point of time, there was no undivided-family in existence which could be taxed, though, when the income was received in the year of account the family was joint. Nor could the individual members of the family be taxed in respect of such income as the same is exempt from tax under section 14(1) of the Act. The result of these provisions was that a joint family which had become divided at the time of assessment escaped tax altogether. To remove this defect, section 25A enacted that until an order is made under that section, the family should be deemed to continue as an undivided family. When an order is made under that section, its effect is that while the tax payable on the total income is apportioned among the divided members or groups, all of them are liable for the tax payable on the total income of the family. What that tax is would depend on the assessment of income in proceedings taken under section 23, and an order under section 25A would have no effect on that assessment. " The above view was reiterated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Officer under this section, and the partition took place during the previous year, (a) the total income of the joint family in respect of the period up to the date of partition shall be assessed as if no partition had taken place and (b) each member or group of members shall, in addition to any tax for which he or it may be separately liable and notwithstanding anything contained in clause (2) of section 10, be jointly and severally liable for the tax on the income so assessed. (5) Where a finding of total or partial partition has been recorded by the Income-tax Officer under this section, and the partition took place after the expiry of the previous year, the total income of the previous year of the joint family shall be assessed as if no partition had taken place; and the provisions of clause (b) of sub-section (4) shall, so far as may be, apply to the case. (6) Notwithstanding anything contained in this section, if the Incometax Officer finds after completion of the assessment of a Hindu undivided family that the family has already effected a partition, whether total or partial, the Income-tax Officer shall proceed to recover the tax from every person who was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r partition of an HUF. Under Hindu law partition may be either total or partial. A partial partition may be as regards persons who are members of the family or as regards properties which belong to it. Where there has been a partition, it is presumed that it was a total one both as to the parties and property but when there is a partition between brothers, there is no presumption that there has been partition between one of them and his descendants. It is, however, 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 intended-whether they intended the partition to be partial either as to persons or as to 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 but continues to be undivided with regard to the remaining family property. After such partial partition, 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 171(2) that there has been a partition-total or partial in it. The partition contemplated under s. 171 of the Act may be either total or partial. Here there is a departure made from s. 25A of the 1922 Act which was concerned with a total partition only. In sub-ss. (2) to (5) and (8) of s. 171 of the Act, the word " partition " is qualified by words " total or partial ". The Explanation to s. 171 of the Act to which we shall revert again also defines the expression " partial partition " as meaning a partition which is partial as regards the persons constituting the HUF, or the properties belonging to the HUF, or both. Sub-section (2) of s. 171 provides that where at the time of making an assessment under s. 143 or s. 144 of the Act it is claimed by or on behalf of any member of an HUF assessed as undivided that a partition, whether total or partial, has taken place among the members of such family, the ITO shall make an inquiry into the said claim after giving notice to all the members of the family. On the completion of the inquiry, the ITO is required by sub-s. (3) of s. 171 to record a finding as to whether the claim of partition, total or partial is true or not and if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed an HUF which is hitherto being assessed as such will have to be assessed as such notwithstanding the fact that a partition had in fact taken place as per Hindu law. A finding to the effect that partition had taken place has to be recorded under s. 171 by the ITO. He can record such a finding only if the partition in question satisfies the definition of the expression " partition " found in the Explanation to s. 171. A transaction can be recognised as a partition under s. 171 only if, where the property admits of a physical division, physical division of the property has taken place. In such a case mere physical division of the income without a physical division of the property producing income cannot be treated as a partition. Even where the property does not admit of a physical division then such division, as the property admits of, should take place to satisfy the test of a partition under s. 171. Mere proof of severance of status under Hindu law is not sufficient to treat such a transaction as a partition. If a transaction does not satisfy the above additional conditions it cannot be treated as a partition under the Act even though under Hindu law there has been a partitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey had held the held until the Act came into force with s. 171 inserted in it. Parliament enacted s. 171 after taking note of the above decision and several other decisions following it, which had taken the view that a partial partition did not fall within the scope of s. 25A. It expressly stated in s. 171 of the Act that the said provision was applicable to both kinds of partitions-total or partial. It has also defined partial partition as one which is partial as regards persons constituting the undivided family or as regards the properties belonging to the undivided family or both. Virtually the present provision deals with all kinds of partitions, the nature of which sometimes may be difficult to predicate correctly. Take a joint family consisting of a father, his sons and grandsons as shown in the following genealogical tree : A B C D E F G H I J When a partition takes place in the above family there may be a partition when all of them A, B, C, D, E. F, G, H, I and J become divided each of them taking his rightful share in the family property. In this case there is a total partition. The second kind of partition may be amongst four groups, the first consisting of A onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. In view of the substantial changes that are brought about in s. 171, we find it impossible to accept the contention that the fiction in s. 171 (1) of the Act does not operate in the case of partial partitions as regards property where the composition of the family has remained unchanged. The answer to the first question referred to the High Court by the Tribunal depends upon the true construction of sub-cl. (i) of cl. (a) of the Explanation to s. 171 of the Act. The subject-matter of partial partition, as mentioned earlier, consisted of eighteen items of immovable property. The value of each of them is given in the earlier part of this judgment. Under the partial partition in question, six persons were allotted 1/12th share each in these eighteen properties and four persons were allotted 1/8th share each. The total value of the eighteen properties was Rs. 7,26,120. Six of the members were, therefore, entitled to properties of the value of Rs. 60,510 each and four of them were entitled to properties of the value of Rs. 90,765 each. Before the Tribunal two submissions were made on behalf of the assessee in support of the plea that the arrangement entered into amongst the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and bounds arises and in that process a physical division of several items of property which admit of such physical division does take place. It is not necessary to divide each item into the number of shares to be allotted at a partition. If a large number of items of property are there, they are usually apportioned on an equitable basis having regard to all relevant factors and if necessary by asking the parties to make payments of money to equalise the shares. Such apportionment is also a kind of physical division of the properties contemplated in the Explanation to s. 171. Any other view will be one divorced from the realities of life. The case before us is not a case where it was impossible to make such a division. Nor is it shown that the members were not capable of making payment of any amount for equalisation of shares. We are of the view that there is no material in the case showing that the assessee ever seriously attempted to make a physical division of the property as required by law. All that was attempted was to rely upon the arbitrator's award and Lakshman Swaroop's evidence which were rightly held to be insufficient by the Tribunal to uphold the claim of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h has failed to substantiate its plea of partial partition as regards property under s. 171 of the Act. The property which is the subject-matter of partial partition would continue to be treated as belonging to the family and its income would continue to be included in its total income until such a finding is recorded. That is the true effect of s. 171(1). It was, however, urged on the analogy of the income from family property alienated by a karta in favour of a stranger that the income which was not actually received by the family could not be taxed and in support of this plea reliance was placed on a decision of the Madras High Court in A. Kannan Chetty v. CIT [1963] 50 ITR 601, 612. In that decision, it is observed thus : " For instance, if the karta of a family effects an alienation or even makes a gift, in so far as the taxing department is concerned, it is the income of the members of the Hindu undivided family that can be assessed, and if by reason of an alienation, whether it is binding upon the members of the joint family or not, an item of property ceases to be in the hands of the joint family, it would not be open to the department to say that they would ignore such a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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