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Commissioner of Income-tax Vs. Nathimal Gaya Lal - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 161 of 1970
Judge
Reported in[1973]89ITR190(All)
ActsIncome Tax Act, 1922 - Sections 25A, 25A(1), 25A(3) and 28(1)
AppellantCommissioner of Income-tax
RespondentNathimal Gaya Lal
Appellant AdvocateR.R. Misra, Adv.
Respondent AdvocateR.P. Goel, Adv.
Excerpt:
.....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 thereinto 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.....c.s.p. singh, j. 1. the assessee was in the relevant assessment year 1948-49 a hindu undivided family. its assessment for that year was made by including not only the returned income but by also including certain credits appearing in the books of the assessee, as being income from undisclosed source. in view of the additions made in the income, the income-tax officer issued a notice under section 28(3) of the indian income-tax act, 1922, on february 27, 1958. the penalty proceedings were long drawn out and eventually terminated by an order dated august 22, 1963, by which the income-tax officer imposed a penalty on the assessee for concealing its income. the assessee had while the penalty proceedings were pending, claimed a partition of the joint hindu undivided family as from 6th may,.....
Judgment:

C.S.P. Singh, J.

1. The assessee was in the relevant assessment year 1948-49 a Hindu undivided family. Its assessment for that year was made by including not only the returned income but by also including certain credits appearing in the books of the assessee, as being income from undisclosed source. In view of the additions made in the income, the Income-tax Officer issued a notice under Section 28(3) of the Indian Income-tax Act, 1922, on February 27, 1958. The penalty proceedings were long drawn out and eventually terminated by an order dated August 22, 1963, by which the Income-tax Officer imposed a penalty on the assessee for concealing its income. The assessee had while the penalty proceedings were pending, claimed a partition of the joint Hindu undivided family as from 6th May, 1958. The Income-tax Officer had not accepted the partition, but the assessee went up in appeal against that order, and the appeal was eventually allowed on the 12th December, 19,63, recognising the partition as from 6th May, 1958. Against the order of penalty, the assessee filed an appealbefore the Appellate Assistant Commissioner, but the same was dismissed on April 17, 1967. Thereafter, a second appeal was filed by the assessee before the Income-tax Appellate Tribunal which was allowed. The Tribunal upheld the contention of the assessee, that inasmuch'as on the date of the final order, the Hindu undivided family had disrupted, no order of penalty could in the circumstances be passed.

2. The Commissioner of Income-tax applied for and obtained a reference to this court. On the reference coming up for hearing, the department relied on a decision of this court in Commisssioner of Income-tax v. Gauri Shanker Chandra Bhan, [1972] 83 I.T.R. 83 (All.) (Appendix) and contended that inasmuch as no order under Section 25A(1) of the Indian Income-tax Act, 1922, had been passed on the date when the penalty order was imposed, the order of penalty was justified and the Tribunal erred in cancelling the same. The Bench, however, in view of a large number of decisions of other High Courts to the contrary, doubted the correctness of the decision in Commissioner of Income-tax v. Gauri Shanker Chandra Bhan and, as such, referred the matter after refraining the question to a larger Bench, and. that is how the case has now come up before us. The question referred for our answer is :

' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in cancelling the penalty imposed under Section 28(1)(c) of the Indian Income-tax Act, 1922?'

3. It is not disputed that on the date when the order of penalty was imposed, the Hindu undivided family against which the order of penalty was made was factually not in existence and in fact had been partitioned as far back as the 6th May, 1958. The mainstay of the department's case is based on Section 25A(3) of the Act. The section so far as is relevant may be extracted:

' 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 thereinto 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.'

4. Counsel for the department has strongly relied upon the fiction created by Section 25A(3), and has contended that till such time an order under Section 25A(1) of the Act has not been passed, the family has to be taken to be joint for the purposes of the Act, and inasmuch as the appellate order passed under Section 25A(1) was made after the Income-tax Officer had already imposed penalty, the order in question Was a valid one, and the Tribunal was unjustified in reversing this finding. There is preponderance of authority against the acceptance of this contention, and we propose to refer to these decisions before commenting on the decision of this court in Commissioner of Income-tax v. Gauri Shanker Chandra Bhan.

5. In Commissioner of Income-tax v. Sanichar Sah Bhim Sah, [1955] 27 I.T.R. 307 (Pat.) the claim of the assessee that the partition had taken place with effect from February 13, 1946, was accepted. Penalty proceedings under Section 28(1)(c) of the Act were started subsequently on March 23, 1946. The Patna High Court held that, before an order for penalty could be passed against the Hindu undivided family, it must be a joint undivided family as on the date when proceedings for penalty are started as also on the date when the Income-tax Officer imposed penalty and inasmuch as the Hindu undivided family did not exist on these dates, the order of penalty could not be sustained. One of the reasons that impelled the court to take this view was that before an order for penalty could be passed against the Hindu undivided family, notice had to be given, and an opportunity to show cause had to be afforded and inasmuch as it was not possible either to give notice to the Hindu undivided family or to hear it as disruption had taken place, the order imposing penalty could not be passed. The Patna High Court reaffirmed the view taken by it in a subsequent decision in Jankidas Mohanlal v. Commissioner of Income-tax, [1964] 54 I.T.R. 354 (Pat.). In S. A. Raju Chettiar v. Collector oj Madras, [1956] 29 I.T.R. 241 (Mad.) proceedings for imposition of penalty were initiated while the joint family was in existence. Before the order of penalty was passed, the claim of the assessee under Section 25A had been allowed. The Madras High Court followed the Patna High Court. Placing reliance on the Patna High Court decision* the Madras High Court held that inasmuch as on the date when the order was passed the undivided family had ceased to exist, the imposition of penalty was invalid. When a similar question came up before the Madras High Court in the case of M. R. Chinnaswami Gounder v. Commissioner of Income-tax, [1973] 89 I.T.R. 200 (Mad.) (Appendix) a contttntion was raised that the alleged decision required reconsideration. Their Lordships repelled the contention and reaffirmed the view expressed in S. A. Raju Chettiar v. Collector of Madras . The views expressed by the Madras High Court in these two decisions were reiteratedby that court in two subsequent decisions in P. S. Kandaswamy Mudaliar v. Commissioner of Income-tax, [I969]72 I.T.R. 212 (Mad.) and Commissioner of income-tax v. Suresh Gokuldas, [1970] 75 I.T.R. 62 (Mad.). The Andhra Pradesh High Court took a similar view in Mahankali Subba Rao v. Commissioner of Income-tax, [1957] 31 I.T.R. 867 (A.P.) The Andhra Pradesh High Court reaffirmed this view in a subsequent Full Bench decision in the case of Commissioner of Income-tax v. Tatavarthy Narayanamttrthy, [1972] 83 I.T.R. 58 (A.P.) [F.B.]. The Punjab High Court, in the case of Commissioner of Income-tax -v. Mothtt Ram Prem Chand, [1967] 66 I.T.R 638 (Punj.) has spoken in unison with the decisions of the other High Courts referred to earlier.

6. The lone sentinel for the view canvassed on behalf of the revenue is the decision in the case of Commissioner of Income-tax v. Gaun Shanker Chandra Bhan, and it is now necessary to consider this case. The assessee in this case was a Hindu undivided family and was assessed for the assessment year 1946-47, On the 19th March, 1957, an application was moved before the Income-tax Officer under Section 25A claiming that a partition had taken place on the 22nd June, 1956, and the Income-tax Officer passed an order on the 26th March, 1962, recording the partition. In respect of the assessment year in question, penalty proceedings were initiated by the Income-tax Officer by issue of a notice on the 15th March, 1957, and an order imposing a penalty was passed on the 20th March, 1958. The assessee contended that inasmuch as the partition of the family had been accepted with effect from 22nd June, 1956, the order imposing penalty was illegal. This contention was accepted by the Tribunal and the penalty cancelled. The Bench after noticing the decisions of the Madras, Patna and Punjab High Courts and a decision of this court in the case of Jagannath Rameshwar Prasad v. Commissioner of Income-tax, [1968] 68 I.T.R. 358 (All.) referred to a decision of the Supreme Court in the case of Additional Income-tax Officer, Cuddappah v. A. Thimtnayya, [1965] 55 I.T.R. 666; [1965] 2 S.C.R. 91 (S.C.) and being of the view that A. Thimmayya's case clearly posited that the Income-tax Officer had jurisdiction to pass the penalty order, held that the view taken by the Tribunal was incorrect. The main reason given by the Bench for taking this view was that inasmuch as no order recognizing the partition under Section 25A(1) was in existence on the date when the impugned order of penalty was passed the jurisdiction of the Income-tax Officer to pass the order in question remained unaffected. With respect, we are unable to accept the view expressed by the Division Bench. In the first place, A. Thimmayya's case related to assessment proceedings and not to proceedings for imposition of penalty and as such the principles laid down in that case are not apposite in a case of imposition of penalty.The Andhra Pradesh High Court in the case of Commissioner of Income-tax v. Tatavartky Narayanamurthy has given cogent reasons for not extending the principles of A. Thimmayya's case to a case under Section 28 of the Act and we are substantially in agreement with the reasons given by that court. This apart, A. Thimmayya's case does not lay down that an order of the Income-tax Officer imposing a penalty in a case where a partition has been recognised with effect from a date earlier to the order in question could be a valid order, as has been assumed by the Division Bench. In A. Thimmayya's case assessments for the years 1941-42, 1942-43, 1943-44, 1944-45, 1945-46 and 1946-47 were completed by the Income-tax Officer. Pending the assessment proceedings, a claim under Section 25A of the Act had been made, but this was disposed of only on the 30th June, 1962, in favour of the assessee, and partition was recognised with effect from 2nd November, 1946. This order was, however, passed subsequent to the assessment proceedings. Appeals against the assessment were filed right upto the Tribunal, but they failed, and in these appeals no plea was taken by the assessee that the assessment was not valid as partition has been recognised under Section 25A of the Act. Thereafter, as the tax was not paid, the Income-tax Officer made an order under Section 46(5) of the Act calling upon the managing director of the company, which had taken over the business of the family, to withhold the amount of tax from the salaries payable to some of the members of the erstwhile Hindu undivided family, A petition was filed in the Andhra Pradesh High Court challenging the recovery on two grounds, viz., that recovery proceedings could not be taken without an order under Section 25A(2) of the Act, and that the arrears of tax due from the erstwhile Hindu undivided family could not be recovered from the petitioner. It was in this context that the Supreme Court made the following observation on page 671 of the report in A. Thimmayya's case a :

'The scheme of Section 25A is, therefore, clear : a Hindu undivided family hitherto assessed in respect of its income will continue to be assessed in that status notwithstanding partition of the property among its members. If a claim is raised at the time of making an assessment that a partition has been effected, the Income-tax Officer must make an inquiry after notice to all the members of the family and make an order that the family property has been partitioned in definite portions, if he is satisfied in that behalf. The Income-tax Officer is by law required still to make the assessment of the income of the Hindu undivided family, is if no partition had taken place and then to apportion the total tax liability and to add to the separate income of the members or groups of members the tax proportionate to the portion of the joint family property allotted to such membersor groups of members and to make under Section 23 assessment on the members accordingly. If no claim for recording partition is made, or if a claim is made and it is disallowed or the claim is not considered by the Income-tax Officer, the assessment of the Hindu undivided family which has hitherto been assessed as undivided will continue to be made as if the Hindu undivided family has received the income and is liable to be ' assessed.

Failure to make an order on the claim made does not affect the jurisdiction of the Income-tax Officer to make an assessment of the Hindu family which had hitherto been assessed as undivided. The Income-tax Officer may assess the income of the Hindu family hitherto assessed as undivided notwithstanding partition, if no claim in that behalf has been made to him or if he is not satisfied about the truth of the claim that the joint family property has been partitioned in definite portions, or if on account of some error or inadvertence he fails to dispose of the claim. In all these cases his jurisdiction to assess the income of the family hitherto assessed as undivided remains unaffected, for the procedure for making assessment of tax is statutory. Any error or irregularity in the assessment may be rectified in the manner provided by the statute alone and the assessment is not liable to be challenged collaterally.

In the present, case, claim was undoubtedly made at the time of making an assessment, that the property of the family was partitioned. The claim was not disposed of before making the assessment, and the Income-tax Officer proceeded to assess the income of the family as if the property of the family had not been partitioned. It is true that by order dated June 30, 1952, the Income-tax Officer held that the property of the family was partitioned on November 2, 1946. But, the Act contains no machinery authorising an Income-tax Officer to reopen an assessment of a Hindu undivided family, relying upon an order made by him under Section 25A(1) after the order of assessment is made. In the present case, appeals were filed and it is common ground that no objection was raised as to the regularity or legality of the procedure followed by the Income-tax Officer. The assessment proceedings were taken to the Income-tax Appellate Tribunal and the orders of assessment were confirmed. Thereafter, it was not open to the Income-tax Officer to reopen the orders of assessment, relying upon the order recording the partition, and to seek to subvert orders which had become final under the seal of the Income-tax Appellate Tribunal. The High Court was, in our judgment, in error in holding that an order of assessment which has become final is liable to be reopened under Section 25A(2) by the Income-tax Officer, when an order under Section 25A(1) is passed by him subsequent to the order of assessment.'

7. It will be seen that the challenge to the recovery proceedings failed, firstly, on the ground that the assessment order could not be challenged collaterally, and secondly, there was no machinery provided for in the Act for re-opening of assessment after an order under Section 25A of the Act' was passed and also the assessment if it has become final would sustain the recovery. The reliance by the Division Bench on A. Thimmayya's case for the conclusion which they reached does not, with respect, appear to be well founded. Apart from relying on A. Thimmayya's case the Bench did not give any reasons of its own for dissenting from the view expressed by the Patna, Madras and Punjab High Courts. After a careful consideration of the views of these High Courts, as also the cases referred to earlier, we are of the view that before an order of penalty can be sustained, the assessable entity on which the penalty is being imposed must be in existence on the date of the order.

8. There are other considerations which impel us to take the. view that the fiction created by Section 25A(3) would not be applicable to a case like the present one. We have already extracted Section 25A of the Act in the earlier part of this judgment. It will be noticed that the fiction created by sub-section (3) of Section 25A of the Act comes into play only ' where such an order has not been passed in respect of a Hindu undivided family '. In the present case, an order under Section 25A(1) of the Act has admittedly been passed at the appellate stage, but inasmuch as an appeal is but a continuation of the original proceedings, the order passed by the Appellate Commissioner would be still an order under Section 25A(1). That being so the foundation for the applicability of Section 25A disappears. This interpretation which we seek to put on this sub-clause, has the approval of their Lordships of the Supreme Court in the case of Joint Family of Udayan Chinubhai, etc. v. Commissioner of Income-tax, [1967] 63 I.T.R. 416 ; [1967] 1 S.C.k. 913 (S.C.) where, dealing with this aspect of the matter, their Lordships observed at page 423 as under:

' Under Clause (3) of Section 25A, if no order has been made notwithstanding the severance of the joint family status, the family continues to be liable to be assessed in the status of a Hindu undivided family but once an order has been passed the recognition of severance is granted by the income-tax department, and Clause (3) of Section 25A will have no application.'

9. Moreover, as Section 25A(3) is a provision which creates a legal fiction, we have to interpret the provision in such a manner as would not work injustice to a party, for even when the court steps into the world of legal fantasy, the principle of equity and justice cannot be lost sight of as has been said in Lachmi Narain v. Munni Lal, [1963] A.L.J. 821 (All.) where one of us, speaking for the court, observed as under :

' Fiction is a conscious error, a deliberate falsehood. It can, therefore, never attain apotheosis, nor can it be used to work injustice. As an illustration, the fiction of corporate personality has never been used to conceal the fraud or illegality committed by the agents of a corporation. Courts may use a legal fiction as a crutch to help reach justice.

According to Blackstone :

'. . . . these fictions of law though at first they may startle the student, he will find upon further consideration to be highly beneficial and useful; especially as this maxim is ever invariably observed, that no fiction shall extend to work an injury, its proper operation being to prevent a mischief or remedy an inconvenience that might result from the general rule of law. So true it is, that in fictione juris semper subsislit acquitas (in a fiction of law equity must always subsist) (Blackstone s Commentaries, abridged by George Chase, IV edition, page 637).

Stone J said;

' While fictions are sometimes invented in order to realise the judicial conception of justice, we cannot define the constitutional guarantee in terms of a fiction so unrelated to reality without creating as many tax injustices as we would avoid,' Curry v. McCanless, 83 L.Ed. 1339, 1351: see also G. T. Helvering v. Stockholmes Enskilda Bank, 79 L.E.I. 211.

10. In case the interpretation canvassed for on behalf of revenue is accepted, certain inequitable consequences follow. An order under Section 25A of the Act is appealable, and it is open to the appellate authorities to recognise a partition which has not been accepted by the Income-tax Officer. It is quite common for orders of penalty being passed by the Income-tax Officer against a Hindu undivided family whose claim for partition under Section 25A is upheld subsequent to the imposing of penalty, and in case the contention of the department is accepted, the result would be that the assessee would be deprived of the benefit of the appellate order, Such a situation would inflict undue hardship and injustice and has to be avoided. This consideration apart, it seems to us that unless we substitute the word 'until' for the word 'where' occurring in Sub-section (3), the contention made on behalf of the revenue cannot succeed, for if the word ' where ' occurring in Sub-section (3) is interpreted as it is, all that is required to take a case out of Sub-section (3) is the existence of an order under Section 25A. It is not permissible to make such a substitution where the language of the statute is clear and unambiguous. The Madras High Court in two cases, namely. Commissioner of Income-tax v. K. M. N. N. Swaminathan Chettiar, [1947] 15 I.T.R. 430 (Mad.) and S. A. Raju Chettiar v. Collector of Madras, has negatived such an approach. Patanjali Sastri J., in Swaminathan's case, on page 439, observed as under :

'On the other hand, Mr. Rama Rao Saheb for the Commissioner suggested that Sub-section (3) of Section 25A could operate independently of Sub-sections (1) and (2) and as the order of the Appellate Assistant Commissioner accepting the partition was passed only on the 17th August, 1942 the family which had till then been assc:sed as undivided must be deemed to have continued to be undivided on the 6th July, 1942, when the notice under Section 34 was issued to the assessee, so that the assessment made on that basis was in order. We are unable to agree with either of these views of the matter. The contention on behalf of the Commissioner assumes that the words ' where such an order has not been passed in respect of a Hindu undivided family hitherto assessed as undivided cover every case of a joint family sought to be assessed in respect of which the income-tax authorities have not till then recorded an order that a partition has taken place, and that until the date of such an order all such families should he dealt with as undivided. We do not think that this is a correct view of Sub-section (3). As pointed nut by their Lordships in Sundar Singh Majithia v. Commissioner of Income-tax, [1942] 10 I.T.R..457 (P.C.) Section 25A relates only to Hindu undivided families which have been disrupted and the opening words of Sub-section (3) quoted above refer to cases where a claim that a partition had taken place has been made under subsection (1) and such claim has been rejected by the Income-tax Officer. Thus Sub-section (3) is complementary to Sub-section (2) and both deal with cases falling under Sub-section (1). Nor is it correct to say that the family should be deemed to continue undivided till the date of the Income-tax Officer's order under the section. Where an order is made accepting the partition alleged by the assessee the family must ho regarded as having become disrupted on the date of partition as put forward by the assessee. In the present case, therefore, when the notice under Section 34 was issued to the assessee on the 6th July, 1542, the family must be taken to have ceased to exist though the partition which was put forward as having taken place on the 21st January, 1940, wa.s accepted only on the 17th August, 1942. '

11. Apart from this, a Division Bench of this court in the case of Jagannath Rameshwar Prasad v. Commissioner of Income-tax, has taken the view that Section 25A(3) does not contemplate a case where a claim has been made under Section 25A{1) and is pending consideration. In the present case too, the claim of the assessee under Section 25A(1) of the Act was pending consideration before the Appellate Assistant Commissioner, at the time when the penalty order was passed, and as such the dictum of that case would apply to the present controversy and the mere fact that in the case of Jaganwath Rameshwar Prasad v. Commissioner of Income-taxthe claim under Section 25A of the Act was pending before the Income-tax Officer and not in appeal, would, in our view, make no difference, as an appeal is but a continuation of the original proceedings. We, however, express no final view on this aspect. We are thus of the view that the fiction created by Section 25A(3) does not come into play in a case where an order under Section 25A of the Act has been passed. To put a different interpretation on Section 25A(3) would work unnecessary hardship and injustice on assessees for the reasons already indicated.

12. We are, therefore, of the view that the case of Commissioner of Income-tax v. Gattri Shanker Chandra Bhan was not correctly decided. We, therefore, answer the question in the affirmative and in favour of the assessee. Theassessee is entitled to its costs which we assess- at Rs. 200. Counsel's fee is assessed at the same figure.


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