TMI Blog1988 (1) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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." 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 the income of the Hindu undivided family. This income did not include the income from the property which was the subject-matter of the partial partition. The incomes derived from the assets wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. In both these writ petitions, the reassessment orders are sought to be quashed on the ground that the provisions of section 171(9) of the Act are unconstitutional. While W.Ps. Nos. 994 and 995 of 1984 arise out of the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. Several counsel have advanced arguments in their respective writ petitions which have been heard along with W.Ps. Nos. 994 and 995 of 1984. 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(9) must itself be struck down as invalid and unconstitutional. In so far as the constitutional validity of section 171(9) is concerned, it is challenged on the ground of violation of article 14 of the Const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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. 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 capricious, fanciful, arbitrary or clearly unjust. Learned counsel for the Revenue contended that section 171(9) was enacted as measure to prevent tax evasion and must, therefore, be upheld having regard to the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 no partition had taken place and under clause (b) of subsection (4), each member or group of members is made jointly and severally liable for the tax on the income so assessed, notwithstanding anything contained in clause (2) of section 10 and such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce ; (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." 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 first time from April 1, 1980, and became applicable for the first time in the case of assessments for the assessment year 1980-81 and then in the case of subsequent assessments. On a plain reading, the partial partition referred to in sub-section (9) had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22 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 under that section, the family should be deemed to continue as an undivided family. When an order was made under that section, the effect was that while the tax payable on the total income is apportioned among the divided members or groups, all of them were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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. 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 which the changes in the law as a result of the enactment of section 171 of the Act have been pointed out. The principal change was that section 171 applies not only to cases of total partition but also to cases of partial partition. The other change was that by intr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71, 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 to be assessed as such by reason of sub-section (1) of section 171." One of the arguments raised in Kalloomal's case [1982] 133 ITR 690 (SC) was that after there is a partial partition as regards some properties between members of an undivided family, the members of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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)." 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 Incometax Officer is satisfied on making an enquiry that there has been a partition of the joint family property and he records a finding to that effect Section 171, therefore, contemplates that initially it is the Hindu undivided family which is assessed as a unit. This is highlighte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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 416, the Supreme Court, after observing that a decision reached in one year would be a cogent factor in the determination of a similar question in the following year though ordinarily there is no bar against the investigation by the Income-tax Officer of the same facts on which a decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 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 the assessment year 1980-81. To such a case, the provisions of clause (a) will be attracted because the claim is being made for the first time in the assessment year 1980-81. The operation of subsection (9) must, therefore, be restricted only to cases where a claim in respect of a partial par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty (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. 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 same manner as it had hitherto been assessed before the partial partition had taken place. She has pointed out that the words in clause (b) of sub-section (9), " such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken place " were sufficient to au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and owns other properties, the assessment on the basis of Hindu undivided family will be confined to the income from the property so remaining undivided and the income from the property partitioned or alienated will be excluded from the computation of the income for assessment. In Kannan Chetty's case [1963] 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Sita Ram had one wife and two sons. Inclusive of Chandoolal and Sita Ram, the joint family consisted of ten members. A partial partition of the cloth business of the family was made in 1951. This partial partition was accepted by the Income-tax Department and the cloth business was treated as belonging to a partnership firm. On Decemb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmon 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." 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. CIT [1942] 10 ITR 457 (PC), Gordhandas T. Mangaldas v. CIT [1943] 11 ITR 183 (Bom), Waman Satwappa Kalkhatgi v. CIT [1946] 14 ITR 116 (Bom) and Lakhmichand Baijnath v. CIT [1959] 35 ITR 416 (SC) which are all decisions arising under section 25A of the Indian Income-tax Act, 1922. This view of the Allahabad High Court was reversed by the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indu 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 position that the income which does not belong to the Hindu undivided family cannot be taxed in the assessment of the Hindu undivided family, if in fact the income has ceased to be the income of the Hindu undivided family and this has been verified by the Income-tax Officer. We may point out that in so far as the decision of the Kerala High Court in Sar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken 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. 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 Constitution of India. The argument is that the " previous year " relevant for the assessment year 1980-81 would earliest be the previous year beginning from May 1, 1978, and ending on April 30, 1979, and the " last year " would be the year beginning from April 1, 1979, and ending with March 31, 1980. The argument is that having regard to the fact that once section 171(9) of the Act becomes oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. " Specifically dealing with the question as to whether the choice of April 1, 1973, as the date of imposition of the building tax could be assailed as discriminatory with reference to article 14 of the Constitution of India, the Supreme Court has observed as follows (p. 277 of AIR 1980 SC): " Nor can the choice of April 1, 1973, as the date of imposition of the building tax be assailed as discriminatory with reference to article 14 of the Constitution. It will be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 discretion to the Legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the Legislature to classify is of 'wide range and flexibility' so that it can adjust its system of taxation in all proper and reasonable ways." In Bihari Lal v. Chief Settlement Commissioner, AIR 1965 SC 134, it was pointed out by the Supreme Court that every law must have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho 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 Act and those which are not covered by the Act, because they were completed before the date on which the Act was enacted. This differentiation, however, does not amount to discrimination which is liable to be struck down under article 14. It was also pointed out that article 14 strikes at the discrimination in the application of the laws between persons similarly circumstanced, and it does not strike at a differentiation which may result by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 the date is arbitrary and capricious, such an enactment would be open to attack on the ground of infringement of article 14 of the Constitution of India. The substantial challenge to the provisions of section 171(9) which needs consideration is whether notwithstanding a partial partition and not withstanding the fact that the Hindu undivided family does not receive any income from the property which is the subject-matter of a partial partition, the Hind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d family is violative of article 265 of the Constitution of India. 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 behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the-transaction is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 is the charging provision. Sub-section (1) of section 4 reads as follows : " 4. Charge of income-tax.-(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year or previous years, as the case may be, of every person: Provided that where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 subject to the finding on the fact of partition, no income which does not belong to the Hindu undivided family can be taxed in the hands of the Hindu undivided family. The proposition that income which does not belong to the individual cannot be taxed in his hands is well settled. In Sir Sundar Singh Majithia v. CIT [1942] 10 ITR 457, the Privy Council pointed out that section 25A of the Indian Income-tax Act, 1922, had no reference at all to any case in which the Hindu undivided fami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 family has ceased to exist in the eye of the Hindu law still it may continue in the eye of the Income-tax Act, and till all the properties have been partitioned, the income received by the karta from the properties still not partitioned will still be the income of the joint family. But all the same it must be found as a fact that the joint family as recognised by the Income-tax Act has received the income which is sought to be assessed. " In Meyappa Chettiar v. CIT [1950] 18 ITR 586, this court held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 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. 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 that, as pointed out by the Supreme Court in Kalloomal's case [1982] 133 ITR 690, " as long as a finding is not recorded under section 171 holding that partial partition had taken place, the Hindu undivided family should be deemed for the purposes of the Act to be the owner of the property which is the subject-matter of partition and also the recipient of the income from such property ". The argument is that the provision now made in section 171(9) which debars the Income-tax Officer from recording such a finding is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 171(9) which, according to learned counsel, was specifically enacted as a measure to check tax evasion. Now, it must be remembered that the provisions in section 64 of the Income-tax Act, 1961, were enacted with the specific purpose of checking tax evasion. Section 16 of the 1922 Act was the predecessor of section 64 of the 1961 Act. Considering the provisions of that section, in Balaji v. ITO [1961] 43 ITR 393 cited supra, the Supreme Court, while dealing with section 16(3)(a)(i) and (ii), after referring to the provisions for re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to avoid taxation if as a result of exercising a right vested under the personal law, a genuine partial partition has been brought about. 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 of B. This was in reply to the argument of Mr. Sastri that section 23A of the 1922 Act was incompetent as it purports to tax the shareholders on the income of the company in which they held shares. The argument was that section 23A of the 1922 Act did not give a right to a shareholder, on an order being made under section 23A, to realise from the company the dividend which by the order is deemed to have been paid to him and the submission was that the income remains the income of the company, and a shareholder was taxed on a portion of it representing the dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. 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 enquiry it is found that there is in fact no partition, then justifiably, the assessment had to be continued in the name of the Hindu undivided family. But once a partial partition has been found to be genuine and when under the Hindu law the motive for the partition is not relevant, it is difficult to see how merely because there is a reduction of tax liability as a result of such partition, the Legislature could deny to the members of the Hindu undivided family the benefit which must necessarily follow from the fact of partition. There was no justification whatsoever to treat pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 under any guise... " (underlining ours) This decision of the Gujarat High Court has been affirmed by the Supreme Court in CIT v. Sakarlal Balabhai [1972] 86 ITR 2. The above observations will, therefore, indicate that where even as a part of tax planning, the assessee genuinely parts with an income producing asset and such a transaction has the effect of reducing his tax burden, because then no part of the income from that asset comes into the hands of the assessee, and that income accrues to some other person, such an arrangement will not be hit by the ratio in McDowell's case [1985] 154 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result from the expenditure for which Parliament grants specific tax relief. 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. 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. Section 99 does apply to tax avoidance. Income-tax is avoided and a tax advantage is derived from an arrangement when the taxpayer reduces his liability to tax without involving him in the loss or expenditure with entitles him to that reduction. The taxpayer engaged in tax avoidance does not reduce his income or suffer a loss or incur expenditure but nevertheless obtains a reduction in his liability to tax as if he had." This decision clearly shows that when courts adopted the approach of looking upon with disfavour the schemes intended at tax avoidance, such an approach did not rule out the permissibility of mitigating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 scheme was summarised by Lord Wilberforce at page 455 of [1981] 2 WLR as follows: " In each case two assets appear, like 'particles' in a gas chamber with opposite charges, one of which is used to create the loss, the other of which gives rise to an equivalent gain which prevents the taxpayer from supporting any real loss, and which gain is intended not to be taxable. Like the particles, these assets have a very short life. Having served their purpose, they cancel each other out and disappear. At the end of the series of operations, the taxpayer's financial position is precisely what it was at the beginning, except that he has paid a fee, and certain expenses, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding 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. " With regard to these principles, Lord Wilberforce undoubtedly pointed out that these principles did not exclude the new approach, but what is important is that the new approach was applicable in a case where the tax consequence emerged from a series of transactions and all those transactions had to be considered to see whether they were entered into only as a part of a scheme of tax avoidance. In Ramsay's case [1981]2 WLR 449 (HL), all the transactions which were part of a scheme were regarded together and Lord Wilberforce found that from the beginning they were designed to produce neither gain nor loss. As pointed out by Lord Fraser at page 470, the taxpayer in the two cases before the House of Lords bought a complete scheme for which he paid a fee and thereafter he was not required to produce any more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 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 between form and substance is one which can usefully be drawn in determining the tax consequences of composite transactions and one which will help to free the courts from the shackles which have for so long been thought to be imposed on them by Westminister's case. " The approach to be adopted in a case of tax avoidance was restated by Lord Brightman in the concluding part of the judgment when the learned law Lord observed as follows at page 543 : " But for my part I have no doubt that the correct approach in this type of case, where inferences have to be drawn, is for the commissioners to determine (infer) from their findings of primary fact the further fact whether there was a single composite transaction in the sense in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indu 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. 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 bar of sub-section (9), therefore, operates only in respect of a partial partition among the members of a Hindu undivided family which was an assessee prior to the assessment year 1980-81 if the partition has taken place after December 31, 1978. That bar, however, does not operate if there is a partial partition among members of a Hindu undivided family which is not an assessee for the assessment year 1980-81. In a case where the Hindu undivided family is not assessed to any tax prior to the assessment year 1980-81, a partial partition between members of such family, even if it takes place after December 31, 1978, would be permissible and outside the mischief of section 171(9). In the case of such partition, the income of a member of a Hindu undivi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 171(9) of the Income-tax Act, 1961, will not fasten any liability in respect of a partial partition which has already been recognised in the assessment year 1979-80, and a finding recorded in respect of such a claim for the assessment year 1979-80 will not be affected by the invalidating provision in clause (a) of sub-section (9) of section 171 of the Act. Having regard to the aforesaid conclusions, we proceed to dispose of the individual writ petitions as follows: W.Ps. Nos. 992 and 993 of 1981.-These writ petitions are allowed and the notice of demand made under section 156 of the Income-tax Act, 1961, on the footing that the claim for partial partition is not allowed as the partial partition took place after December 31, 1978, is quashed. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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