TMI Blog1994 (11) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------------------------------------------------------------------- Date on which Amount and Date of gift Amount Donee property of nature of by Hindu applicant was property undivided thrown into family common stock (FD) --------------------------------------------------------------------------------------------------------------------------------------------------- 3-3-1972 1,80,000 22-3-1972 18,000 Wife of karta 21-2-1973 12,000 23-3-1973 12,000 Wife of karta 20-2-1974 10,000 26-3-1974 10,000 Wife of karta 4-3-1975 20,000 23-3-1975 10,000 Minor daughter 23-3-1975 10,000 Minor daughter 19-3-1973 12,000 24-3-1975 12,500 Wife of karta ------------------- 72,500 ---------------------------------------------------------------------------------------------------------------------------------------------------- The Wealth-tax Officer, applying section 4(1A) of the Wealth-tax Act, added the said amount to net wealth declared for the purpose of assessment. The Appellate Assistant Commissioner upheld the addition on the reasoning that section 4(1A) of the Wealth-tax Act is applicable to this case. The Revenue appealed to the Tribunal, and the Tribunal has he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no interest in favour of the wife and unmarried daughters. The Tribunal rejected the case of the assessee accordingly, and held that the gifts were to be included in the wealth of the husband. The Wealth-tax Act, 1957, brought a charge for every assessment year commencing on and from the 1st day of April, 1957, by way of a tax called the wealth-tax, in respect of net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in Schedule I. The assets, in computing the net wealth of an individual, are required to be assessed, as specified in section 4 of the Act. It states, inter alia, that there shall be included as belonging to that individual, the value of assets which on the valuation date are held : (i) by the spouse of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, or (ii) by a minor child, not being a married daughter of such individual, to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar commencing on or after the 1st day of April, 1972,-- (a) the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly ; (b) the converted property or any part thereof shall be deemed to be assets belonging to the individual and not to the family ; (c) where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the converted property or any part thereof which is received by the spouse or minor child of the individual on such partition shall be deemed to be assets transferred indirectly by the individual to the spouse or minor child and the provisions of sub-section (1), shall, so far as may be, apply accordingly." The specific provision as to the Hindu undivided family is that the monies put in the hotchpot of the Hindu undivided family, and divided according to the shares of the members of the undivided family are not a gift, and the amounts allotted to each member of the joint family are not liable to gift-tax. The individual, who otherwise is the owner, could bring a property or estate exclusively belong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be assessed in the status of a Hindu undivided family. The income-tax authorities and the Income-tax Appellate Tribunal rejected that contention for varying reasons. The Income-tax Officer held that in the absence of a nucleus of joint family property, there was nothing with which the appellant could mingle his separate property and, secondly, that there could not be a Hindu undivided family without there being undivided family property. The appellant/assessee carried the matter in appeal to the Appellate Assistant Commissioner, who differed from the Income-tax Officer on both the points but dismissed the appeal on two other grounds. The Appellate Assistant Commissioner held that even after the declaration, the appellant was dealing with the income of Kathoke Lodge in the same way as before which showed that the declaration was not acted upon and, secondly, that even assuming that the property was thrown into the common stock and was, therefore, joint family property, the income from that property could still be taxed in the appellant's hands as he was the sole male member of the family. The Tribunal accepted the declaration as genuine and differed from the Appellate Assistant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled to dispose of the co-parcenary property as if it were his separate property . . . That is the position which the assessee held so far as this property is concerned. So far as the income is concerned, he has the complete power of disposal over the income and, even assuming that he is the karta of a joint Hindu family, there is no one who can question his spending, i.e., whether or not it is for legal necessity or other justifiable purpose. If then, his right to the income remains under his personal law the same as it was before he made the declaration, the question arises whether under the Income-tax Act it must be held to be the income of the karta of the Hindu undivided family. That is precisely the question which the Privy Council answered against the assessee in Kalyanji's case [1937] 5 ITR 90. In our opinion, therefore, the assessee's case would fall squarely within the principle enunciated by their Lordships of the Privy Council in Kalyanji's case [1937] 5 ITR 90 and upon that view the income in the hands of the assessee would be liable to be assessed as his individual income '. The Privy Council decision on which the High Court relies is Kalyanji Vithaldas v. CIT [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. Therefore, the expression ' Hindu undivided family ' must be construed in the sense in which it is understood under the Hindu law. " Thereafter, the Supreme Court observed as follows : " There is no substance in the contention of the respondent that in the absence of an antecedent history of jointness, the appellant cannot constitute a joint Hindu family with his wife and unmarried daughter. The lack of such history was never before pleaded and not only does it find no support from the record but such an assumption ignores the plain truth that the joint and undivided family is the normal condition of Hindu society. The presumption therefore, is that the members of a Hindu family are living in a state of union, unless the contrary is established. (Mayne's Hindu Law and Usage, eleventh edition, page 323 ; Mulla's Hindu Law, fourteenth edition, page 284). The strength of the presumption may vary from case to case depending upon the degree of relationship of the members and the farther one goes from the founder of the family, the weaker may be the presumption. But, generally speaking, the normal state of every Hindu family is joint and in the absence of proof of division, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mily is thus, I larger body consisting of a group of persons who are united by the tie of sapindaship arising by birth, marriage or adoption. 'The fundamental principle of the Hindu joint family is the sapindaship. Without that it is impossible to form a joint Hindu family. With it as long as a family is living together, it is almost impossible not to form a joint Hindu family. It is the family relation, the sapinda relation, which distinguishes the joint family, and is of its very essence,' (Karsondas Dharamsey v. Gangabai [1908] ILR 32 Bom 479) (see also Hindu Law in, British India by S. V. Gupte, second edition, page 59). The joint Hindu family, with all its incidents, is thus a creature of law and cannot be created by act of parties, except to the extent to which a stranger may be affiliated to the family by adoption. But the absence of an antecedent history of jointness between the appellant and his ancestors is no impediment to the appellant, his wife and unmarried daughter forming a joint Hindu family. The appellant's wife became his sapinda on her marriage with him. The daughter too, on her birth, became a sapinda and until she leaves the family by marriage, the tie of sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided family. That decision was set aside by this court on the ground that a joint Hindu family could consist under the Hindu law of a single male member, his wife and daughters and that it was not necessary that the assessable unit should consist of at least two male members. In both of these cases, Gowli Buddanna's case [1966] 3 SCR 224 60 ITR 293 (SC) and Narendranath's case [1969] 3 SCR 882 ; 74 ITR 190 (SC), the assessee was a member of a pre-existing joint family and had, in one case on the death of his father and in the other on partition, become the sole surviving coparcener. But the decision in those cases did not rest on the consideration that there was an antecedent history of jointness. The alternative argument in Gowli Buddanna's case [1966] 60 ITR 293 (SC) ; [1966] 3 SCR 224 was an independent argument uncorrelated to the pre-existence of a joint family. The passage which we have extracted from the judgment of Shah J., in that case shows that the decision of this court did not proceed from any such consideration. The court held in terms categorical that the Hindu undivided family as an assessable entity need not consist of at least two male members. The same is true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contention raised before us on behalf of the Department. But above all, though an argument was raised in the High Court on behalf of the Department that for the operation of the doctrine of blending it was essential that there should exist not only a coparcenary but also a coparcenary property, learned counsel who appeared for the Department in the High Court, " did not, after some discussion, press that there should necessarily be coparcenary property ". This was not a concession on a question of law in the sense as to what the true legal position was. What the Department's counsel stated in the High Court was that he did not want to press the particular point. In our opinion, it is not open to the Department to take before us a contention which in the first place does not arise out of the reference and which the Department's counsel in the High Court raised but did not press. Having examined the true nature of an undivided family under the Hindu law and in view of the findings of the Tribunal and the High Court on the second aspect, two points emerge clear ; firstly, that the appellant constituted a Hindu undivided family with his wife and unmarried daughter and, secondly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 ITR 90, the Privy Council observed : ' In an extra legal sense, and even for some purposes of legal theory, ancestral property may perhaps be described, and usefully described, as family property ; but it does not follow that in the eye of the Hindu law, it belongs, save in certain circumstances, to the family as distinct from the individual. By reason of its origin, a man's property may be liable to be divested wholly or in part on the happening of a particular event, or may be answerable for particular obligations, or may pass at his death, in a particular way ; but if, in spite of all such facts, his personal law regards him as the owner, the property as his property and the income therefrom as his income, it is chargeable to income-tax as his, i.e., as the income of an individual. In their Lordships' view, it would not be in consonance with ordinary notions or with a correct interpretation of the law of the Mitakshara, to hold that property which a man has obtained from his father belongs to a Hindu undivided family by reason of having a wife and daughters.' On the other hand, in Arunachalam's case [1958] 34 ITR (ED) 42, 45, 46 (PC), which falls within the rule in Gowli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C), not in Arunachalam's [1958] 34 ITR (ED) 42 (PC) or Gowli Buddanna's case [1966] 60 ITR 293 (SC) has to be applied to the instant case. Kathoke Lodge was not an asset of a pre-existing joint family of which the appellant was a member. It became an item of joint family property for the first time when the appellant threw what was his separate property into the family hotchpot. The appellant has no son. His wife and unmarried daughter were entitled to be maintained by him from out of the income of Kathoke Lodge while it was his separate property. Their rights in that property are not enlarged for the reason that the property was thrown into the family hotchpot. Not being coparceners of the appellant, they have neither a right by birth in the property nor the right to demand its partition nor indeed the right to restrain the appellant from alienating the property for any purpose whatsoever. Their prior right to be maintained out of the income of Kathoke Lodge remains what it was even after the property was thrown into the family hotchpot ; the right of maintenance, neither more nor less. Thus, Kathoke Lodge may be usefully described as the property of the family after it was thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the net wealth of the individual. " On a plain reading, the above proviso can be split into two parts, viz., (1) where the transfer of such assets or any part thereof is chargeable to gift-tax under the Gift-tax Act, the value of such assets or part thereof, as the case may be, shall not be included in computing the net wealth of the individual ; and (2) where the transfer of such assets or any part thereof is not chargeable under section 5 of the Gift-tax Act, 1958, for any assessment year commencing after March 31, 1964, but before April 1, 1972, the value of such assets or part thereof, as the case may be, shall not be included in computing the net wealth of the individual. If it is read as above, then, where the transfer of such assets or any part thereof, is chargeable to gift-tax under the Gift-tax Act, the value of such assets shall not be included in computing the net wealth of the assessee. If it is not chargeable under section 5 of the Gift-tax Act, 1958, for any assessment year, commencing after March 31, 1964, but before April 1, 1972, the value of such assets shall not be included in computing the net wealth of the individual. In the latter case, if it is not char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the judgment of the Supreme Court in Surjit Lal Chhabda v. CIT [1975] 101 ITR 776, to reject the case of the assessee that he, either as the karta of the family or as an individual who had been subjected to the gift-tax, was not liable to pay, for such converted property or property transferred by way of gift to other members of the joint family, on which he had paid the gift-tax, any tax under the Wealth-tax Act. In that case, the Supreme Court was considering whether the income, after the property was thrown into the family hotchpot by the individual, was chargeable to income-tax in the individual's hands as his individual income and not that of the family. Sub-section (2) of section 4 of the Wealth-tax Act, to which we have referred earlier, was not under consideration before the Supreme Court. In the case on hand, the assessee being a member of the Hindu undivided family, had thrown certain property into the common stock of the family and thus, notwithstanding anything contained in any provision of the Gift-tax Act or any other law for the time being in force for the purpose of computation of the taxable gifts made by the assessee, the assessee would be deemed to have mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating the property for any purpose whatsoever, and that the prior right to be maintained out of the income of the property thrown into the hotchpot of the joint family remains what was even after the property was thrown into the family hotchpot, that is the right of maintenance, neither more no less. In the event of a partition claimed by any male member of the family to have a share, the Supreme Court has categorically said in Surjit Lal Chhabda v. CIT [1975] 101 ITR 776 referred to supra : " Thus, Kathoke Lodge may be usefully described as the property of the family after it was thrown into the common stock, but it does not follow that in the eye of Hindu law it belongs to the family, as it would have, if the property were to devolve on the appellant as a sole surviving coparcener. The property which the appellant has put into the common stock may change its legal incidents on the birth of a son but until that event happens the property, in the eye of Hindu law, is really his. He can deal with it as a full owner, unrestrained by considerations of legal necessity or benefit of the estate. He may sell it, mortgage it or make a gift of it. Even a son born or adopted after the al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g into the common stock of the family, whether the assessee in the instant case created any interest in favour of the other family members or not, he had created a common stock of the family. The common stock of the family must be construed to be one which is covered by sub-section (2) of section 4 of the Gift-tax Act. Even if the objection as to the throwing of the property which the assessee possessed into the hotchpot of the family is rejected, it is difficult to deny to him, since his ownership is not taken away, the right to make the gift and thus the validity of the gift cannot be decided on the basis of the transfer of interests of the assessee to the members of the joint family. On a parity of reasoning either the assessee had validly thrown his property into the common stock of the joint family or had not done so legally, but the validity of the gifts required separate determination. There may be good reasons in the instant case for the tax-men to hold that any transfer by the assessee of his property to the joint family stock was not legal and valid. But it was the assessee who acted in making the gift, of course on behalf of the Hindu undivided family. His own right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g after March 31, 1964, but before April 1, 1972. Gifts made earlier would not attract the benefit of the exemption." The two appeals before the Supreme Court related to the gifts falling during the period before the reckoning date, i.e., March 31, 1964. As respects the law in section 4(1)(a) and the proviso, the Supreme Court has stated thus : " The controversy generated on the point leading to the divergence of judicial opinion on the point is attributable to the somewhat inelegant and inappropriate phraseology of the provision. To appreciate the relevant contentions, it is necessary to notice the words of the proviso...." After quoting the proviso and the words later introduced by the Finance (No. 2) Act, 1971, " but before the 1st day of April, 1972 ", with effect from April 1, 1972, to complete the phraseology as quoted above by us, the Supreme Court observed : " The proviso was introduced by the amending Act of 1964, but given effect to from April 1, 1965, by a notification. Under the various clauses of section 4(1)(a), certain transfers of assets made by an individual in favour of, or for the benefit of, the spouse or of a minor child, not being a married daughter, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion 'for any assessment year commencing after 31st March, 1964 ' occurring in the proviso indicates that the transfer of asset must be chargeable to gift-tax under the provisions of the Gift-tax Act for any assessment year commencing after 31st March, 1964, or, where the transfer is not chargeable under section 5 of that Act, then for any assessment year commencing after 31st March, 1964, the proviso would apply. The reason for our coming to this conclusion is that the proviso was really dealing with the effect of the assessment to wealth-tax and what is being dealt within the proviso is that certain transfers which would, subsequent to the proviso coming into effect, be eliminated from the provision of the substantive part of the section. It is true that the location of the expression ' for any assessment year commencing after 31st of March, 1964 ', is not quite appropriate. The punctuation mark is also suggestive of contrary conclusion but, having regard to the provisions of the Gift-tax Act, 1958, and having regard to the purposes for which the proviso came into effect we are of the opinion that the proviso really exempted transfer of assets which were chargeable for any asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lth-tax Act, the assets held by the transferees are clubbed with the assets of the individual, whose spouse or minor children they are and in such a case, the assets held by the spouse of the individual or any minor child, will not bear any additional wealth-tax, but on account of additional wealth by way of transfer. This can be illustrated by an example : If a relative, say, the maternal grandfather or the grandmother, gifted certain assets to the minor child of the individual, the maternal grandfather or the maternal grandmother is chargeable to gift-tax. The individual whose child received the gift is chargeable to wealth-tax. Thus, in our view, for an exception from the general rule, to exclude from the net wealth of the individual, any gift by him to his spouse or his minor child, it must fall under the proviso strictly. Chargeability to the gift-tax is the sine qua non of the transfer of assets by the individual, and such chargeability alone is not enough, it should be for any assessment year commencing after 31st of March, 1964, but before the 1st of April, 1972. The assessee, in the instant case, can legitimately claim exemption of such assets, which are covered by the g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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