CHANDRA REDDY C.J. - (R. C. No. 33 of 1961). - The following questions have been referred to this court for its opinion under section 66 (2) of the Indian Income-tax Act :
'1. Whether on the facts and circumstances of the case there is any material for holding that the family was in fact in existence on the date of the order of the penalty and
2. Whether the penalty levied under section 28 (1) (c) is valid in law ?'
The reference relates to the assessment year 1948-49, the accounting year being the year ended March 31, 1948. In quantum assessment, it was found by the concerned income-tax Officer that there was manipulation of accounts in forward contracts entered into by the assessee and that fictitious losses were claimed. The trading results were also shown to be very poor. So, the Income-tax Officer, Anantapur, issued notice under section 28(3) of the Income-tax Act calling upon the assessee to show cause why penalty should not be levied for concealment of income. An explanation was submitted but it was rejected by the Income-tax Officer and he reached the conclusion that the assessee had concealed his income and deliberately furnished inaccurate particulars thereof. In this view of the matter, he levied a penalty of Rs. 17,500.
An appeal was carried by the assessee to the Appellate Assistant Commissioner, Kurnool, against the order levying penalty contending, inter alia, that the whole penalty proceedings were invalid, as the order under section 28(3) was served on a defunct family. It may be mentioned that this point was not raised before the Income-tax Officer, as could be seen from the agreed statement submitted by the Tribunal. The Appellate Assistant Commissioner rejected this argument on the ground that there was no total disruption of the Hindu undivided family. On the question of the quantum of penalty, he thought that it was not excessive having regard to the circumstances of the case.
A further appeal to the Income-tax Appellate Tribunal proved unsuccessful. The Tribunal concurred in the opinion of the Appellate Assistant Commissioner that, in the absence of an order under section 25A, the family must be treated to be a Hindu joint family. On the question of penalty, the Tribunal also held that there were no extenuating circumstances to warrant any reduction.
The Tribunal, pursuant to our directions referred the questions mentioned above for the decision of this court under section 66 (2) of the Indian Income-tax Act.
The question that calls for decision in this reference is whether the penalty proceedings were bad for the reason that by the time of service of notice under section 28(3) there was a partial partition of the family. It is contended on behalf of the assessee by Sri Ramachandra Rao, his learned counsel, that the partition has resulted in the disruption of the joint family as could be seen from the partition deed and a notice under section 28(3) could not be issued to the members of the defunct family. There is no provision in the Indian Income-tax Act enabling the department to impose penalty on the members of the family, after they became divided, in respect of concealment of income, and the penalty levied could not be recovered from the members after the division in status of the family, continues the learned counsel. This argument is founded on a judgment of a Division Bench of this court in Subba Rao & Nageswara Rao v. Commissioner of Income-tax. We do not think that this argument is sound. Nor has the ruling called in aid by the learned counsel for the assessee any analogy here. The argument is based on the assumption that there has been a disruption of the joint family.
In appreciating the contention, we cannot but remember that an application field by the assessee under section 25A was rejected. What then is the effect of rejection of this application To understand the impact of the order on the petitioner under section 25A, we have to turn to the provisions of that section. That section, in so far as it is of immediate relevancy, is in these words :
'25A. Assessment after partition of a Hindu undivided family. - (1) Where, at the time of making an assessment under section 23, it is claimed by or on behalf of any member of a Hindu family hitherto assessed as undivided that a partition has taken place among the members of such family, the Income-tax Officer shall make such inquiry there into as he may think fit, and, if he is satisfied that the joint family property has been partitioned among the various members or groups of members in definite portions, he shall record an order to that effect :
Provided that no such order shall be recorded until notices of the inquiry have been served on all the members of the family...
(3) Where such an order has not been passed in respect of a Hindu family hitherto assessed as undivided, such family shall be deemed, for the purposes of this Act, to continue to be a Hindu undivided family.'
It is plain from sub-section (3) that the family will be regarded as undivided, until an order has been passed under section 25A recognising the partition. In the absence of such an order, the family will continue in law to be undivided. We must, therefore, proceed on the footing that the Hindu undivided family continues in existence, never having been disrupted. The sine qua non of the claim of the assessee that the joint Hindu family had broken up is an order under section 25A accepting the partition.
The principle of Subba Rao & Nageswara Rao v. Commissioner of Income-tax is not in any way inconsistent with this concept. That was a case where there was an order under section 25A recognising partition unlike the present case where the application was rejected. The judgment in that case is based on the division status. That case, therefore, does not render any assistance to learned counsel for the assessee.
We are supported in this opinion of ours by the remarks of the Supreme Court in Lakhmichand Baijnath v. Commissioner of Income-tax. Their Lordships referred to the necessity for the introduction of section 25A of the Indian Income-tax Act in the following words :
'Under the provisions of the Act as they stood prior to the amendment, when the assessee was an undivided family, no assessment could be made thereon if at the time of the assessment it had become divided, because at that point of time, there was no undivided family in existence which could be taxed, though when the income was received in the year of account the family was joint. Nor could the individual members of the family be taxed in respect of such income as the same is exempt from tax under section 14(1) of the Act. The result of these provisions was that a joint family which had become divided at the time of the assessment escaped tax altogether. To remove this defect, section 25A enacted that until an order is made under that section, the family should be deemed to continue as an undivided family.'
The purpose of this sub-section is apparent from these observations of their Lordships. The intendment of the sub-section is that the department should proceed on the footing that there was no disruption of the joint Hindu family in the absence of an order under section 25A recognising the partition. This is the view taken by a Bench of this count in Kalwa Devadatham v. Union of India. In this situation, we cannot uphold the view that was sought to be pressed upon us by the learned counsel for the assessee that the partial partition had led to the disruption of the joint Hindu family, that at the time of the issue of notice under section 28(3) the family must be deemed to have become defunct and that, as such, notice to the members of the defunct family is ineffective.
We, therefore, answer the reference against the assessee and in favour of the department. But, in the circumstances of the case, we make no order as to costs. Advocates fee Rs. 250.
W. P. No. 706 of 1959.
This writ petition has to be dismissed, as the purpose of the filing of the petition is only to stay the collection of penalty. The parties will bear their own costs.