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TMI Blog1988 (1) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... ion on behalf of the Hindu undivided family which was assessed as such. The Hindu undivided family was a partner in some partnership firms in which the funds of the Hindu undivided family were invested. On April 13, 1979, a partial partition of certain assets belonging to the Hindu undivided family was effected with effect from that date. A deed of partition evidencing the said partial partition was also executed. An application under section 171(2) of the Act for recognition of the said partial partition came to be filed before the Income-tax Officer. The Income-tax Officer made an order recognising the said partial partition on December 28, 1979, in the assessment proceeding for the assessment year 1979-80. The order read: "During the course of assessment proceedings, it is claimed that partial partition in the family in respect of the credit balance in the three firms (sic). Account copies were filed. Necessary questionnaire have also been filed. These were verified and found correct. The claim of partial partition is, therefore, accepted." 3. A return came to be filed for the assessment year 1980-81 on behalf of the Hindu undivided, family on April 12, 1980, in respect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade in certain partnership firms. This partial partition was recognised by the Income-tax Officer, Tuticorin, by an order dated December 28, 1979. A return for the assessment year 1980-81 was filed disclosing the income earned by the Hindu undivided family for the year ending April 12, 1980, excluding the income from the properties subjected to partial partition. An assessment order came to be passed on January 22, 1981, accepting the return. The Income-tax Officer, however, issued a notice under section 147(b) of the Act for reassessment of the income of the Hindu undivided family. Accordingly, an order of reassessment was made by the Income-tax Officer and the income from the property which was the subject-matter of partial partition dated April 12, 1979, was included in the income of the Hindu undivided family on the ground that having regard to the provisions of section 171(9) of the Act, a partition made after December 31, 1978, had to be treated as null and void and the Hindu undivided family was, therefore, liable to be assessed as if no partial partition had taken place. This reassessment order has been challenged in this writ petition. 7. In both these writ petitions, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been excluded from the assessment of the Hindu undivided family in the assessment year 1979-80, that income cannot then be included in the income of the Hindu undivided family for the assessment year 1980-81. Therefore, it is argued that having regard to the fact that section 171(9) of the Act came into force only with effect from April 1, 1980, the provisions thereof should at best be so construed as to render ineffective any partial partitions made after December 31, 1978, only if the claim under section 171 of the Act is made for the first time in the assessment year 1980-81. Such construction alone, according to learned counsel, would fit in with the scheme of section 171 of the Act. 10. Several counsel have advanced arguments in their respective writ petitions which have been heard along with W.Ps. Nos. 994 and 995 of 1984. 11. The substantial argument in all these cases is that if after a partial partition, the income from the partitioned property does not in fact belong to the Hindu undivided family, then such income cannot be taxed in the hands of the Hindu undivided family and if this is sought to be done by enacting section 171(9), then the provision in section 171( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hindu undivided family could have been fictionally made the owner of the property, which was the subject-matter of partial partition, the amendment had misfired. According to her, when there was a provision requiring the Income-tax Officer not to recognise the partial partition, the status of the recipient of the income from the partitioned property was statutorily fixed-as the Hindu undivided family. The provisions in section 171(9) were only intended to provide for the machinery of levy and collection of tax, according to her. 14. With regard to the challenge on the ground of violation of article 14 of the Constitution of India, the argument was that so long as the classification is not arbitrary or oppressive, a meticulous scrutiny of the impact on different persons or groups could not be made by the court. It was further argued that when Parliament is at liberty to choose more than one date and in its wisdom selects a particular date, the court will not be justified in striking down the law on the ground that Parliament should have adopted another date which, in the opinion of the court, was more reasonable, unless the court is convinced that the particular date adopted was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hindu undivided family. 18. The proceeding in which a finding of partition is to be recorded and the procedure to be followed for recording a finding of partition is provided in section 171(2) and section 171(3) of the Act. Under sub-section (2), before a finding of partition is recorded, a claim has to be made at the time when assessment proceedings under section 143 or 144 are taken by or on behalf of any member of a Hindu family which is assessed earlier as an undivided Hindu family. When such a claim is made either of a total partition or a partial partition among the members of such family, the Income-tax Officer has to make an enquiry after giving notice of the enquiry to all the members of the family. The Income-tax Officer has, thereafter, to record a finding as to whether there has been a total or a partial partition of the joint family property and if there has been a partition, the date on which it has taken place (sub-section 3). Under sub-section (4), it is provided that if the finding is that the partition has taken place during the previous year, then the total income of the joint family in respect of the period up to the date of partition has to be assessed as if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore 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 bad 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 partition ; (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, and the provisions of this. Act shall apply accordingly." 19. The effect of sub-section (9) clearly was that a partial partition of Hindu undivided family effected after December 31, 1978, was not to be recognised for tax purposes. According to the Revenue, sub-section (9) was introduced with a view to curb the practice of creating multiple Hindu undivided families by making partial partitions. This provision came into force for the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n could not be included in the income of the Hindu undivided family, the same would now be the position after the enactment of section 171(9), it would be useful to refer to certain decisions with regard to section 25A of the 1922 Act. Section 25A of the 1922 Act which was introduced by the Indian Incometax (Amendment) Act, 1928 (3 of 1928), was enacted for removing a lacuna which the working of the 1922 Act had disclosed. Under the provisions of the 1922 Act, as they stood prior to the amendment in 1928, when the assessee was an undivided family, no assessment could be made thereon if at the time of 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. The individual members of the family could also not be taxed in respect of such income as the same was exempt from tax under section 14(1) of the 1922 Act. The effect was that the Hindu undivided family which had become divided at the time of assessment escaped tax altogether. It was to remove this lacuna that section 25A was enacted which provided that until an order was made u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place, he shall record an order to that effect." 21. The above observations highlight the fact that section 25A of the 1922 Act was introduced to remedy a situation where though a Hindu undivided family was a unit of assessment and had in fact received income, there was no machinery provided under the Act for assessing the tax and enforcing the liability to tax in cases where a Hindu undivided family had received income in the year of account but was no longer in existence as such at the time of assessment. As pointed out by the Supreme Court in Govinddas v. ITO [1976] 103 ITR 123, this difficulty was more acute by reason of the provision contained in section 14(1) of the 1922 Act which said that the tax shall not be payable by an assessee in respect of an income which he received as a member of a Hindu undivided family, with the result that the income of a Hindu undivided family could not be assessed and the tax could not be collected from the members of the family if at the time of making the assessment the family was divided. 22. A comparison of the provisions of section 25A of the 1922 Act and section 171 of the Act was made in Govinddas' case [1976] 103 ITR 123 (SC) in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld obviously include a partial partition also either as regards the persons constituting the undivided family or as regards properties belonging to it, or both, in view of the provisions contained in the other sub-sections of section 171 and the Explanation to section 171, the Supreme Court observed as follows (p. 704): "A transaction can be recognised as a partition under section 171 only if, where the property admits of a physical division, a 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 section 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 partition-total or partial. The consequence will be that the undivided family will be continued t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amily by virtue of sub-section (1) of section 171 of the Act. To put it in other words, what would have been the position of a Hindu undivided family, which had claimed in assessment proceedings under the 1922 Act that a total partition bad taken place and had failed to secure a finding to that effect in its favour under section 25A thereof, would be the position of Hindu undivided family, which has failed to substantiate its plea of partial partition as regards property under section 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 section 171 (1)." 27. It is, therefore, now well established that notwithstanding the fact that there is a partial partition as contemplated by Hindu law between members of a undivided family, if before the partition, the Hindu undivided family was assessed as a unit, such family would continue to be assessed as a unit unless a claim as contemplated under sub-section (2) of section 171 is made that there has been a partial partition and the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claim that the partial partition has taken place and that the income from the properties have gone to the share of certain members of the Hindu undivided family shall not be enquired into and no finding shall be recorded under sub-section (3). From the scheme of section 171, it is clear that the claim contemplated by section 171(2) can be made only once in the course of the assessment proceedings. If once a claim is made that there is total or partial partition and in so far as partial partition is concerned, particular income is excluded from the assessment of the Hindu undivided family, then for the subsequent assessment years, it is not again necessary to make any fresh claim regarding the same partition. The finding regarding a partition, if recorded, is effective for all the subsequent assessment years unless the finding is set aside by the appropriate authority. Once an order is made as contemplated by section 171(3) of the Act, the Hindu undivided family will cease to be assessable in respect of the income from the property which has been partitioned. While dealing with the provisions of section 25A of the 1922 Act in joint Family of Udayan Chinnubhai v. CIT [1967] 63 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section (3) to that effect whether before or after June 18, 1980, being the date of introduction of the Finance (No. 2) Bill, 1980, shall be null and void " must be read along and harmoniously with the first part of clause (a). The finding referred to in the latter part of clause (a) is, on a claim which is contemplated by the opening words of clause (a). If the opening words of clause (a) refer only to a claim made for the first time in the assessment year 1980-81, then the latter part of clause (a) must also be read as referring to a claim for recognition of a partial partition effected after December 31, 1978, but made for the first time in the assessment year 1980-81. Only such a finding which may have been recorded between April 1, 1980, and June 18, 1980, or after June 18, 1980, will be covered by clause (a). 31. By way of illustration, it may be pointed out that there can be case where a partial partition has taken place after December 31, 1978, and before April 1, 1979, and a claim in respect of such partition could well have been made in the assessment year 1979-80, but has not been made. However, such a claim is made for the first time by the Hindu undivided family in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned by the individual members from the properties which have been partially partitioned cannot be assessed in the hands of the Hindu undivided family as it cannot at all form part of the income of the Hindu undivided family. Mr. Subramaniam has relied on the decision of this court in Kannan Chetty (A.) v. CIT[1963] 50 ITR 601. That was a case in which a divided member of a joint family had alienated his ascertained share in the family properties, though the properties had not been divided by metes and bounds and it was held that notwithstanding the fact that an order bad not been made under section 25A of the Indian Income-tax Act, 1922, the income from the alienated property could not be included in the income of the joint family on the footing that such income still belonged to the joint family. 34. Mrs. Nalini Chidambaram, learned counsel appearing on behalf of the Revenue, has, however, contended that the words of clause (b) of section 171(9) are sufficient to enable income-tax to be assessed in respect of the, income of the property which was the subject-matter of partial partition in the hands of the Hindu undivided family and assessing the Hindu undivided family in the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial partition had taken place. If such a provision was legally permissible, clause (b) of sub-section (9) could be construed as an express provision permitting Hindu undivided family hitherto assessed as a Hindu undivided family to be continued to be so assessed. 36. Our attention has been invited to the decisions of this court in Meyyappa Chettiar (M. S. M. M.) v. CIT [1950] 18 ITR 586 and Kannan Chetty (A.) v. CIT [1963] 50 ITR 601 and the decision of the Kerala High Court in ITO v. Smt. N. K. Sarada Thampatty [1976] 105 ITR 67 in support of the proposition that notwithstanding the provision in section 171(9) of the Act, it is not competent for the Income-tax Officer to include income which is not in fact received by the Hindu undivided family, but is received by a separated member of the Hindu undivided family in the assessment of the Hindu undivided family. In Meyyappa Chettiar's case [1950] 18 ITR 586 (Mad) which arose under section 25A of the Indian Income-tax Act, 1922, this court held that if there is a partial partition or an item of property is alienated to a stranger or an asset of the family is divided and partnership is constituted and the family continues joint a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artitioned does not belong to the Hindu undivided family, such income cannot be assessed in the Hindu undivided family and the position as set out in the decisions in Meyyappa Chettiar's case [1950] 18 ITR 586 (Mad), Kannan Chetty's case [1963] 50 ITR 601 (Mad) and Sarada Thampatty's case [1976] 105 ITR 67 (Ker) must necessarily follow is a consequence of the partial partition notwithstanding the fact that such partial partition is not permitted to be recognised if it is effected after December 31, 1978. Now, undoubtedly, the three decisions relied upon do support the assessees. The argument on behalf of the Revenue is that the effect of the decision of the Supreme Court in Kalloomal Tapeswari Prasad (HUF) v. CIT [1982] 133 ITR 690 is that the law laid down in these three decisions is no longer good law. The decision of the Supreme Court in Kalloomal's case [1982] 133 ITR 690 was an appeal against the decision of the Allahabad High Court in Kalloomal Tapeshwari Prasad v. CIT [1973] Tax LR 697. The Hindu undivided family which was originally assessed as M/s. Kalloomal Tapeswari Prasad consisted of two brothers, Chandoolal and Sita Ram. Chandoolal had five sons and Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of partial partition was not made, was liable to be included in the computation of the income of the Hindu undivided family. The Allahabad High Court held that since December 11, 1963, on which date the partial partition took place, the members of the Hindu undivided family will be deemed to hold the 18 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 and the income derived from these properties was not income received by the joint family, the assessee. The Division Bench, in paragraph 11, observed as follows ( [1973] Tax LR 697, 699): "The income derived from these properties was not income received by the joint Hindu family, the assessee. In accordance with the 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." 38. In support of this view, among other decisions, the Division Bench relied on the decision of this court in Meyyappa Chettiar's case [1950] 18 ITR 586 and the decisions in Sunder Singh Majithia v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been a partition of the properties but there has been no finding accepting the claim for partial partition by the Income-tax Officer. That decision cannot, however, be treated as an authority for the proposition that notwithstanding a provision for recognising a partial partition, the income of separated properties could be treated as income of the Hindu undivided family without even making an enquiry as to whether in fact there has been a partition and whether that partition satisfies the requirements of section 171. This decision cannot also be treated as an authority for the proposition that though there is a partial partition, that partition can be altogether ignored. Indeed, in our view, section 171 is a legislative recognition of the concept that the income which ceases to be the income of the Hindu undivided family consequent upon a partition cannot be assessed in the hands of the Hindu undivided family. The requirement that the claim for partition should be made before the Income-tax Officer and should be accepted by him is only to ensure that there has been a partition as contemplated by the definition of " partition ". That conclusion does not detract from the legal posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te, is liable to be assessed straightaway in the hands of the Hindu undivided family or that the income which does not in fact and in law belong to the assessee can as matter of course be included in his income. Therefore, the main question which arises in these cases is whether it is permissible to enact provision altogether shutting out an enquiry with regard to a partition which has taken place after December 31, 1978, so as to include in the assessment of the Hindu undivided family income which in fact and in law does not belong to the Hindu undivided family. The decision of the Supreme Court in Kalloomal's case [1982] 133 ITR 690 (SC), cannot be of any assistance to the Revenue in so far as the validity of section 171(9) of the Act is challenged on the ground that the income which does not belong to the Hindu undivided family is included in its income without any opportunity being given to show that the said income does not belong to the Hindu undivided family. 44. The validity of the provision in section 171(9) of the Act is also challenged on the ground that the date December 31, 1978, has been arbitrarily fixed and the provision, therefore, violates article 14 of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought into force retrospectively from April 1, 1973, held that the choice of April 1, 1973, as the date of imposition of the tax under the Act could not be assailed as discriminatory under article 14 of the Constitution of India. The Supreme Court, in paragraph 14 of the judgment, has observed as follows (p. 276 of AIR 1980 SC) : "It has however not been shown how it could be said that the Act has taken away or impaired any vested right of the assessees before us which they had acquired under any existing law, or what that vested right was. It may be that there was no liability to building tax until the promulgation of the Act (earlier, the Ordinances) but mere absence of an earlier taxing statute cannot be said to create a 'vested right', under any existing law, that it shall not be levied in future with effect from date anterior to the passing of the Act. Nor can it be said that by imposing the building tax from an earlier date, any new obligation of disability has been attached in respect of any earlier transaction or consideration. The Act is not therefore retrospective in the strictly technical sense. " 46. Specifically dealing with the question as to whether the ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes unevenly on persons or property similarly situated, it may be said that the law offends the equality clause. It will then be the duty of the court to scrutinise the effect of the law carefully to ascertain its real impact on the persons or property similarly situated. Conversely, a law may treat persons who appear to be similarly situate differently; but on investigation, they may be found not to be similarly situate. To state it differently, it is not the phraseology of a statute that governs the situation but the effect of the law that is decisive. If there is equality and uniformity within each group, the law will not be condemned as discriminative, though due to some fortuitous circumstance arising out of a peculiar situation, some included in a class get an advantage over others, so long as they are not singled out for special treatment. Taxation law is not an exception to this doctrine: vide Purshottam Govindji Halai v. Addl. Collector of Bombay [1955] 28 ITR 891 (SC) and Moopil Nair v. State of Kerala, AIR 1961 SC 552. But in the application of the principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw and the principle underlying that different treatment has no rational relation to the object sought to be achieved by the law.' " 51. In Hathising Manufacturing Co. v. Union of India, AIR .1960 SC 923, a challenge was made to the validity of section 25FFF of the Industrial Disputes Act, 1947, on the ground that it was hit by article 14 of the Constitution of India. The contention was that the section made a distinction between employers who closed their undertakings on or before November 28, 1956, that is the date from which the section was brought into force retrospectively, and those who closed their undertakings after that date. Negativing the challenge, the Supreme Court held that the State was undoubtedly prohibited from denying to any person equality before the law or equal protection of the laws, but by enacting law which applies generally to all persons who come within its ambit as from the date on which it becomes operative, no discrimination is practised. It was pointed out that when Parliament passed a law imposing a liability as following from certain transactions prospectively, it evidently makes a distinction between those transactions which are covered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions effected between May 1, 1978, and December 31, 1978, are being treated differently in respect of the same assessment year 1980-81 with reference to the partial partitions which were effected after January 1, 1979, which also were relevant for the assessment year 1980-81 which would be hit by section 171(9). This indicates that having regard to the same year of assessment 1980-81, there is no rationale behind the hostile treatment to be given to certain partitions relevant for the assessment year as compared with certain other partitions which are also relevant for the said assessment year, but were effected before December 31, 1978. This circumstance along with what we have earlier pointed out that partial partition effected after December 31, 1978, but becoming relevant only for the assessment 1979-80 is not affected by section 171(9) clearly, in our view, indicates that the choice of the date December 31, 1978, has no rationale behind it and appears to us to be clearly arbitrary. 53. Though a certain amount of flexibility with regard to a taxing provision is permissible, as pointed out by the Supreme Court in D. G. Gouse & Co.'s case, AIR 1980 SC 271, if the fixation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permit the assessment of income earned by a member of the Hindu undivided family from the separated property in the hands of the Hindu undivided family. The argument is that by enacting section 171(9), what is intended to be done by Parliament is to enlarge the scope of the charging provisions in sections 4 and 5 which is not permissible and assessment of income from the separated property acquired by the individual members in the hands of the Hindu undivided family is violative of article 265 of the Constitution of India. 55. Learned counsel appearing on behalf of the Revenue has, however, justified the enactment of section 171(9) on the ground that the provision was enacted solely with the object of checking tax avoidance and reference is made to the decision of the Supreme Court in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148. In McDowell's case, the Supreme Court has indicated what should be the proper approach when dealing with a provision of a taxing statute which is intended to deal with tax avoidance. In the last but one paragraph, the Supreme Court observed as follows (p. 160): "We must recognise that there is behind taxation laws as much moral sanction as behin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision of general application. It affects all Hindu undivided families and it affects all partial partitions which may or may not be effected with the specific purpose and object of reducing the burden of taxation. Strictly speaking, when a right under the personal law is exercised by a member of the Hindu undivided family, even assuming for a moment that it is exercised with a view to reduce the burden of taxation, it cannot, in our view, be styled as a dubious device if the partition has in fact been acted upon and is not sham or bogus. It appears to us that the effect of section 171(9) is that it virtually negatives the right of partition under the personal law only in certain cases of partition after December 31, 1978. There is no valid basis or justification for treating Hindu undivided families separately in a hostile manner with reference to the date December 31, 1978. 58. Even otherwise, we are inclined to take the view that under the garb of not making the machinery provision in sectional applicable to partial partitions effected after December 31, 1978, Parliament has purported to enlarge the scope of the provisions of sections 4 and 5 of the Income-tax Act. Section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son or accrues or arises or is deemed to accrue or arise to him in India during such year or accrues or arises to him outside India during such year. The proviso is not material for our purpose. Therefore, the normal rule is that unless the income is received or is deemed to be received by the person who is the assessee in India or accrues or arises or is deemed to accrue or arise in India, a receipt cannot fall within the scope of " total income ". It cannot be doubted that in the case of an individual who has acquired some property as result of partial partition which originally belonged to the Hindu undivided family and the income from which was, prior to partial partition, assessed in the hands of the Hindu undivided family, that income ceases to be the income of the Hindu undivided family from the date of partition and cannot be brought to tax under sections 4 and 5 in the hands of the Hindu undivided family. This position is recognised by the enactment of section 171 itself except that the exclusion of income from the income of the Hindu undivided family is subject to a finding with regard to partial partition. Section 171, therefore, recognises the legal position that subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out by the Privy Council in Majithia's case [1942] 10 ITR 457, that the scheme of the section was to tax joint family income as a unit if it was received as such by the joint family, even though at the date of the assessment there may have been a partition. " 63. In the same decision, Chagla J. (as he then was) made it clear that in the case of a partial partition, the Hindu family must be considered to be joint for the purposes of the Income-tax Act to the extent of those assets which had not been partitioned, and to the extent it had parted with the assets, those assets can no longer be considered to be assets of the family or forming part of the total income of the family or that the family was liable to pay tax thereon under section 25A(2). Referring to the provisions of section 25A(2) of the Indian Income-tax Act, 1922, the learned judge observed as follows (p. 128): "But what has got to be remembered is that under sub-clause (2) of section 25A, what has got to be assessed is the total income of the joint family. Therefore, in every case, the Income-tax authorities have to ascertain what is the total income of the joint family. It is true that although the joint famil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or any part of it, a Hindu undivided family had not been disrupted and that during that period it had received income, that income could be assessed, even though at the time of the assessment the Hindu undivided family had ceased to exist. It was pointed out that by legal fiction, the section enables the assessment of an entity which had really ceased to exist, treating it as in existence. 67. As already pointed out, all these decisions were referred to by the Supreme Court in Kalloomal's case [1982] 133 ITR 690 and with regard to partial partition, the Supreme Court pointed out that 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 the total income until a finding is recorded under section 171. 68. Now, even on behalf of the petitioners, it is not argued, and rightly so, that the income from the separate property obtained by an erstwhile member of a Hindu undivided family as a result of partial partition, should be independently assessed in the hands of the individual member even without a finding as contemplated by section 171. The petitioners do not dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed principles of penal jurisprudence. A provision of law which has the effect of fastening such a penal liability in respect of something over which the Hindu undivided family has no control, cannot but be construed as arbitrary. 70. Learned counsel for the Revenue has herself chosen to treat the provisions of section 171 as not being on par with the provisions made in Chapter 5 of the Act which specifically deals with income of other persons included in assessee's total income. According to learned counsel for the Revenue, the provisions of section 171 cannot be equated with the provisions of section 64, under which the total income of an individual includes the income of spouse or minor children which arises directly or indirectly if they fall in any of the sub-clauses' (i) to (vii) of section 64(1). Learned counsel contended that when Parliament includes income of a third person in the income of the assessee, it is conscious of the fact that the property as well as the income belongs to the third person, but nevertheless, such income was included in the assessee's income. This provision, in section 64, according to learned counsel, stands on a footing different from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a partial partition, the right to effect which flows unconditionally from Hindu law. While in the case of a partnership between a minor son, wife and the assessee himself, the income substantially remains the income of the assessee himself, in the case of a partial partition, the income in fact and in law ceases to be the income of the joint family. The members of the Hindu undivided family were under their personal law entitled to have a part of the property separated and such partial partition could not, therefore, be treated as a dubious device to avoid taxation if as a result of exercising a right vested under the personal law, a genuine partial partition has been brought about. 74. The Supreme Court in Balaji's case [1961] 43 ITR 393, referred to the fact that the question as to whether the Legislature had power to levy tax on one person for the income of another, was left open in Sardar Baldev Singh's case [1960] 40 ITR 605. It may be pointed out that one of the arguments of the learned Solicitor-General in Sardar Baldev Singh's case [1960] 40 ITR 605 (SC), was that entry 54 in List I permitted tax on income and that it also authorised taxing of A on the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax evasion. 77. Now, an inference of tax evasion does not automatically follow from the fact that the assessee has exercised his legal right to have a partial partition effected, even though such a partial partition has the effect of reducing the tax burden. It cannot be overlooked that in exercise of right under the personal law, a member of a Hindu undivided family can legitimately ask for a partial partition and if as a result of such partial partition the tax liability is reduced, it cannot be called a device in the sense that there is something sinister about such partition. There cannot be a wholesale assumption that all partial partitions have been made merely to evade taxes. Such an assumption implies that all partial partitions after December 31, 1978, are an eyewash to hoodwink the Income-tax Officer and that the income from the separate property of member of a Hindu undivided family is in fact the income of the Hindu undivided family. There is no rational basis for such an assumption. If, in fact, the partial partition is a sham and is not acted upon, the Legisture had made sufficient provision in section 171 itself which enabled an enquiry to be made and if on an enq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned judge quoted with approval the observations in the decision of the Gujarat High Court in CIT v. Sakarlal Balabhai [1968] 69 ITR 186, which were as follows (p. 200): "Tax avoidance postulates that the assessee is in receipt of amount which is really and in truth his income liable to tax but on which he avoids payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person, at the same time making it available for use and enjoyment to the assessee as in a case falling within section 44D or mask the true character of the income by disguising it as a capital receipt as in a case falling within section 44E or assume diverse other forms... But there must be some artifice or device enabling the assessee to avoid payment of tax on what is really and in truth his income. If the assessee parts with his income producing asset, so that the right to receive income arising from the asset which, therefore, belonged to the assessee is transferred to and vested in some other person, there is no avoidance of tax liability : no part of the income from the asset goes into the hands of the assessee in the shape of income or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his income. If the settlement is irrevocable and satisfies certain other conditions, the reduction in income reduces the assessable income of the taxpayer. The tax advantage results from the reduction of income. 85. Where a taxpayer pays a premium on a qualifying insurance policy, he incurs expenditure. The tax statute entitles the taxpayer to reduction of tax liability. The tax advantage results from the expenditure on the premium. 86. A taxpayer may incur expense on export business or incur capital or other expenditure which by statute entitles the taxpayer to a reduction of his tax liability. The tax advantages result from the expenditure for which Parliament grants specific tax relief. 87. When a member of a specified group of companies sustains a loss, section 191 allows the loss to reduce the assessable income of other members of the group. The tax advantage results from the loss sustained by one member of the group and suffered by the whole group. 88. Section 99 does not apply to tax mitigation where the-taxpayer obtains a tax advantage by reducing his income or by incurring expenditure in circumstances in which the taxing statute affords a reduction in tax liability. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts of the Burmah Oil Co. Ltd.'s case [1981] 54 TC 200 and in Ramsay's case [1981] 2 WLR 449 (HL). In Burmah Oil Co. Ltd.'s case [1981] 54 TC 200, the House of Lords refused to accept that a taxpayer had achieved the result of creating a tax loss that was not a real loss at all. In Ramsay's case [1981] 2 WLR 449 (HL), capital gains tax was sought to be avoided by making a deductible loss matched by a non-chargeable gain and setting off the loss against a pre-existing chargeable gain, when in reality the taxpayer did not make any loss at all. 92. Thus, in our view, even in the light of the new approach laid down in McDowell's case [1985] 154 ITR 148 (SC), every attempt by a taxpayer to reduce his tax burden cannot be rejected as impermissible on the ground that it is intended to avoid tax. The permissibility of a legitimate attempt to reduce the tax burden is indeed approved even in Ramsay's case [1981] 2 WLR 449 (HL). The scheme which became the subject-matter of scrutiny in Ramsay's case which consisted of a number of steps to be carried out, documents to be executed, was found ultimately to result in neither gain or loss. The effect of the sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Special Commissioners that the transaction in question in that case was a bona fide commercial transaction and that it was legitimate to have regard to all the arrangements as a whole. In the earlier part of the judgment, Lord Wilberforce had set out certain principles which flowed from the earlier decisions and one of the principles stated by him was as follows (p. 456 of [1981] 2 WLR): " A subject is entitled to arrange his affairs so as to reduce his liability to tax. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. It must be considered according to its legal effect. It is for the fact-finding commissioners to find whether a document, or a transaction, is genuine or a sham. In this context, to say that document or transaction is a 'sham' means that while professing to be one thing, it is in fact something different. To say that a document or transaction is genuine, means that, in law, it is what it professes to be, and it does not mean anything more than that. " 95. With regard to these principles, Lord Wilberforce undoubtedly pointed out that these principles did not exclude the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd will be found. " 97. The difference between the approach in Westminster's case [1936] AC 1 in which there was only one transaction in question and Ramsay's case [1981] 2 WLR 449 (HL) where there were a series of interdependent transactions designed to produce a given result, was referred to by Lord Bridge and the departure from Wesiminster's case was put by Lord Bridge as follows at page 535: "When one moves, however, from a single transaction to a series of interdependent transactions designed to produce a given result, it is, in my opinion, perfectly legitimate to draw a distinction between the substance and the form of the composite transaction without in any way suggesting that any of the-single transactions which make up the whole are other than genuine. This has been the approach of the United States federal courts enabling them to develop a doctrine whereby the tax consequences of the composite transaction are dependent on its substance, not its form. I shall not attempt to review the American authorities, nor do I propose a wholesale importation of the American doctrine in all its ramifications into English law. But I do suggest that the distinction betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided family, the said partition cannot be termed as a device adopted by the Hindu undivided family which is the assessee. The right to partial partition being inherent in the member of the Hindu undivided family, the Hindu undivided family has no right to resist the demand for a partial partition and, therefore, the Hindu undivided family as an assessee cannot be charged with resorting to a dubious device for the purposes of tax avoidance. It is, therefore, abundantly clear that the validity of section 171(9) cannot be sustained on the ground that it is measure to counteract the tendency to tax avoidance. Consequently, inasmuch as the income which does not belong to the Hindu undivided family but in fact and in law belongs to a member of the Hindu undivided family consequent upon a partial partition, is brought to tax in the hands of the Hindu undivided family, the provision in section 171(9), in our view, necessarily suffers from legislative incompetence. 101. There is one more aspect of the question which requires to be noticed. Section 171(9) refers to a partial partition which has taken place among the members of a Hindu undivided family "hitherto assessed as undivided". The b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undivided family to be assessed in the hands of the Hindu undivided family. The provision thus enlarges the scope of sections 4 and 5 of the Act and is, therefore, invalid. (4) Section 171(9) of the Income-tax Act, 1961, has the effect of fastening a penal liability on the Hindu undivided family when in fact, in the case of a partial partition, the liability for concealment of income is that of the member of the Hindu undivided family who earned the income in his own right and not of the Hindu undivided family. (5) The effect of section 171(9) of the Income-tax Act, 1961, is that it virtually negatives the right of partition under the personal law only in certain cases of partition after December 31, 1978, and there is no valid basis or justification for treating Hindu undivided families separately in a hostile manner with reference to the date December 31, 1978, the choice of the date being clearly arbitrary. (6) The operation of section 171(9) of the Income-tax Act, 1961, is restricted only to cases where a claim in respect of a partial partition which is effected after December 31, 1978, is made for the first time in the assessment year 1980-81. (7) The provisions of se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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