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K.V. Satyanarayana Gupta (Huf) Vs. Sixth Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Bangalore
Decided On
Judge
Reported in(1984)9ITD761(Bang.)
AppellantK.V. Satyanarayana Gupta (Huf)
RespondentSixth Income-tax Officer
Excerpt:
.....in holding that the family was in existence.7. on 25-9-1978, when the assessment was made, the assessee-family was not in existence. it had disrupted on 30-6-1976 which has been accepted by the ito by his order dated 13-3-1979 made under section 171. the procedure prescribed under section 171 would apply to a hindu family hitherto assessed as undivided. section 171(1) reads as under : (1) a hindu family hitherto assessed as undivided shall be deemed for the purposes of this act to continue to be a hindu undivided family except where and insofar as a finding of partition has been given under this section in respect of the hindu undivided family.the words 'hitherto assessed as undivided' are very important while considering the section. if the family has already been assessed as a.....
Judgment:
1. The first appeal is preferred by the assessee and the second is by the revenue. For the sake of convenience, they are being disposed of by this common order.

2. We will first take up the assessee's appeal. The main contention raised in this appeal is that before an assessment can be made on an assessee under the Income-tax Act, 1961 ('the Act'), the assessee must be in existence. The facts are as follows : A return was filed on 31-12-1975, showing an income of Rs. 26,167 in the status of individual. Subsequently, on 6-8-1976, a return was filed in the status of HUF showing the same income. It was claimed that there was partition in the family with effect from 30-6-1976.

An application was made on 1-3-1979 under Section 171 of the Act, claiming that the HUF had been partitioned. The ITO passed an order dated 13-3-1979 under Section 171, holding that there was total partition in the family of the assessee on 30-6-1976 which is supported by the entries in the books of the assessee. Thus, he recognised the partition with effect from 30-6-1976. Prior to the assessment year 1975-76, now under consideration, no assessment was made on the HUF. It was contended that since the assessment has to be made on partitioned HUF which was not in existence at the time of the assessment, it can be made only having recourse to the provisions of Section 171. The procedure laid down under Section 171 would be available in respect of HUF which was hitherto assessed as undivided. It is the case of the assessee that the necessary pre-condition for invoking Section 171 is that a prior assessment in the status of HUF must have been made and if it is so made for the purpose of the Act, the family will continue to be undivided. If no assessment has been made in the status of HUF, then the procedure laid down under Section 171 cannot be applied ,for making the assessment on the HUF which is not in existence. The ITO held that the status of the assessee is that of HUF. Accordingly, he completed the assessment in the status of HUF on a total income of Rs. 1,69,650. The assessee preferred an appeal before the Commissioner "(Appeals) who rejected the contentions raised on behalf of the assessee. He held that the return in the status of HUF was filed on 6-8-1976. A declaration was made on 8-12-1976 giving the names of the coparceners who constituted the HUF. It was only on 1-3-1979 that the assessee, by an application under Section 171 addressed to the ITO, claimed that the HUF had been partitioned. The assessment was completed on 25-9-1978, much before application was made by the assessee, stating that the HUF had been partitioned. Held that on the date, when the assessment was made, HUF was in existence as per the declaration made by the assessee on 8-12-1976. In view of this, there was no question of making an assessment on the HUF which was disrupted. Thus, he held that the ITO was justified in completing the assessment in the status of HUF.3. The learned Counsel for the assessee strongly urged that there has been total disruption of the HUF on 30-6-1976 which was accepted by the ITO by his order dated 13-3-1979 under Section 171. Before an assessment can be made on an assessee under the Act, the assessee must be in existence. Assessment cannot be made on an assessee which is not in existence. On 25-9-1978, when the assessment was made, the assessee's family was disrupted and it was not in existence unless there is any provision in the Act for such contingency. Hence, no assessment can be made on the assessee, as the family was disrupted. He submitted that the family was not assessed as an undivided, in the past, prior to the assessment year 1975-76. It was only in the assessment year 1975-76 a return was filed in the status of HUF. Before the assessment was made on 25-9-1978, the family got disrupted. An assessment can be made on the disrupted family only by taking recourse to Section 171. The procedure prescribed under Section 171 would be applicable only in respect of a HUF 'hitherto assessed as undivided'.

Since the assessee was not assessed in the status of HUF prior to the assessment year 1975-76, no recourse can be taken to the procedure prescribed under Section 171 for making the assessment on the assessee, which is not in existence on 25-9-1978 when the assessment was made.

Thus, he urged that the assessment made in the status of HUF should be cancelled. He placed strong reliance on the decision in the case of Roshan Di Hatti v. CIT [1968] 68 ITR 177 (SC), Rameswar Sirkar v. ITO [1973] 88 ITR 374 (Cal.), Shyam Sundar Bajaj v. ITO [1973] 89 ITR 317 (Cal.) and the case in 17 STC 326.

4. The learned departmental representative strongly urged that the assessment has been rightly made in the status of HUF. He submitted that the declaration dated 8-12-1976 clearly shows that there was a HUF on that date. In view of that, the plea that there was disruption of the HUF on 30-6-1976 cannot be accepted. Since there was a HUF in existence, the liability to submit a return had arisen. Hence, the assessment has been rightly made in the status of HUF. He submitted that if, by the subsequent order, partition had been recognised, it does not nullify the assessment made earlier. Thus, he urged that the assessment in the status of HUF has been validly made. He distinguished the cases relied on by the assessee's counsel. He placed reliance on the decisions in Govinddas v. ITO [1976] 103 ITR 123 (SC) and Gauri Shankar Chandrabhan v. CIT [1976] 103 ITR 772 (SC).

5. In reply, the learned Counsel for the assessee submitted that the declaration dated 8-12-1976 only stated what was the position of the family in the assessment year 1975-76. It cannot be construed that on 8-12-1976, the family was still in existence. He drew our attention to the letter dated 1-3-1979 addressed to the ITO wherein it was stated that the family was disrupted on 30-6-1976. He also drew our attention to an affidavit dated 13-8-1976 wherein it is stated that the family is disrupted. He also relied on the partnership deed executed on 1-7-1976 wherein it is clearly mentioned that there was division in the family with effect from 30-6-1976 and the coparceners, thereafter, entered into partnership. He also submitted that the registration has been granted to the firm with effect from 1-7-1976. He placed the assessment orders for 1978-79,1979-80 and 1980-81 to show that registration had been granted. He urged that all these facts would clearly show that there was partition in the family, with effect from 30-6-1976.

6. We have considered the rival submissions. The assessee filed the return on 6 8-1976 in the status of HUF. Prior to the assessment year 1975-76, the assessee was not assessed in the status of HUF. It was only in the assessment year 1975-76, a return was filed in the status of HUF. The assessee claimed partition of the HUF with effect from 30-6-1976. The ITO, by his order dated 13-3-1979, passed under Section 171 accepted the partition with effect from 30-6-1976. In that order, he held that the assessee's claim for total partition of the family on 30-6-1976 is supported by the entries made in the books of the assessee on 30-6-1976. After making necessary enquiries he was satisfied that there was total partition in the family of the assessee on 30-6-1976.

Thus, he accepted the total partition in the family of the assessee with effect from 30-6-1976. This order stands even till today.

Subsequently, after the partition on 30-6-1976, the coparceners of the disrupted HUF constituted themselves as partners in the firm of KVSG & Sons. The said firm came into existence from 1-7-1976. The firm filed an application for grant of registration with effect from 1-7-1976. The ITO has granted registration to the said firm for the assessment years 1978-79,1979-80 and 1980-81. The above facts will clearly show that there was a partition of the family with effect from 30-6-1976. The declaration dated 8-12-1976 was filed for the purpose of the assessment year 1975-76 to show that during that year, the coparceners constituted HUF but that cannot be construed as if that family was in existence on 8-12-1976 when the declaration was made. That was filed only to show the position that existed during the period for the assessment year 1975-76. On the basis of the above letter, the Commissioner (Appeals) was not justified in holding that the family was in existence.

7. On 25-9-1978, when the assessment was made, the assessee-family was not in existence. It had disrupted on 30-6-1976 which has been accepted by the ITO by his order dated 13-3-1979 made under Section 171. The procedure prescribed under Section 171 would apply to a Hindu family hitherto assessed as undivided. Section 171(1) reads as under : (1) A Hindu family hitherto assessed as undivided shall be deemed for the purposes of this Act to continue to be a Hindu undivided family except where and insofar as a finding of partition has been given under this section in respect of the Hindu undivided family.

The words 'hitherto assessed as undivided' are very important while considering the section. If the family has already been assessed as a Hindu family, then, under the above provision, it shall be deemed to continue to be undivided family. In the instant case, prior to the assessment year 1975-76, the assessee-family was not assessed as a HUF.It was only for the first time in the assessment year 1975-76, the status was claimed as HUF as per the return filed on 6-8-1976. Before the assessment was made on 25-9-1978, the family was disrupted. Hence, on 25-9-1978, when the assessment was made, the HUF was not in existence. In such a case, the procedure prescribed under Section 171 will have no application as the assessee was not hitherto assessed as HUF and so, the fiction created under that section to deem it as HUF will not arise. There is no other provision to assess the HUF after disruption. In this connection, it will be very useful to refer certain decisions.

8. In Rameswar Sirkar's case (supra) the following question was considered by the Calcutta High Court : . . But the fundamental question that requires consideration in this application is whether a Hindu undivided family which had never been assessed before under the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, can be assessed as such after the partition of the said Hindu undivided family ....

In that case, the HUF was never assessed to tax before and it was a joint family in respect of the year where it was sought to be assessed but at the time when the proceedings for assessments were taken up, it had disrupted. The Calcutta High Court considered Section 171 and particularly the words 'family hitherto assessed as undivided' occurring in Section 171(1). It was held as under : ...In the context of the position, therefore, that apart from Section 171 of the Income-tax Act, 1961, and perhaps to a certain extent, Sub-section (4) of Section 170 of the Income-tax Act, 1961, there is no machinery to assess a Hindu undivided family which had disrupted and the said machinery provides only in the case of 'families hitherto assessed as undivided', it is difficult to find any machinery to assess a Hindu undivided family which had never been assessed before, after it had disrupted. A Hindu undivided family is a taxable entity and is a juristic person. It can only be proceeded against in the manner provided in the Act or under the general principles of the Hindu law after the disruption of the family. The general law does not provide for any machinery to determine the liability of the individual members of the undivided family before disruption ...

...Unfortunately, the machinery provisions of Section 171 and the corresponding provisions in Section 25A are limited in scope to tax only the Hindu undivided family, which has been 'hitherto assessed'.

Undoubtedly, after 1958, this Hindu undivided family had disrupted and in the view of the fact that proceedings were taken in 1964, it must be held, therefore, that the proceedings were irregular and without jurisdiction. The notice under Section 148 on the undivided Hindu family must, therefore, be quashed.

This decision was again followed by the same High Court in Shyam Sundar Bajaj's case (supra). It was held therein that if the HUF which has not at all been assessed, had been disrupted, the assessment on the said family could not be reopened after disruption for the period when it was joint. In Roshan Di Hatti's case (supra) the Supreme Court had occasion to consider the expression 'hitherto assessed as undivided' in Section 25A of the Indian Income-tax Act, 1922 ('the 1922 Act') but the Supreme Court did not express any opinion as it was a case of an appeal from the High Court, refusing to direct the Tribunal to refer a question. But the Supreme Court observed that in Kalwa Devadattam v.Union of India [1963] 49 ITR 165 the Supreme Court laid down that a family not previously assessed to tax may be assessed after partition in the status of a HUF until an order under Section 25A is passed by the ITO. It was also observed that, in that case, the Court was not called upon to interpret the expression 'hitherto assessed as undivided' in Sub-sections (1) and (3) of Section 25A. The decisions of the Calcutta High Court clearly hold that a HUF which has never been assessed before under the 1922 Act or under the 1961 Act cannot be assessed as such after a partition in family. The above ratio squarely applies to the instant case. In the instant case, the assessee has never been assessed as HUF prior to the assessment year 1975-76, now under consideration. There has been partition in family on 30-6-1976.

The family was not in existence on 25-9-1978 when assessment was made.

Thus, the assessee cannot be assessed as HUF after the partition in the family. Thus, assessment made on the assessee as HUF is not valid and has to be cancelled.

9. The decision in Govinddas's case (supra), on which reliance was placed on behalf of the revenue, has no application to the facts of the instant case. The question in that case was whether the provisions of the 1922 Act would apply or the provisions of the 1961 Act would apply.

The issue before us did not come up for consideration in that case. The decision in Gauri Shankar Chandrabhan's case (supra) also has no application to the facts of the instant case. That was a case where the assessee was assessed as HUF in the past. On 25-3-1958, when penalty was imposed, there was no order under Section 25A(1). On those facts, it was held that there was no bar for the imposition of penalty. In the instant case, the assessee was never assessed as HUF prior to 1975-76, the year now under consideration. Thus, that case has no application.

Thus, we are of the view that the assessment made on 25-9-1978 on the assessee as HUF is not valid as on that date, the HUF was not in existence. Thus, we cancel the assessment made on the assessee in the status of HUF.10. The assessee has raised other grounds, i.e., that the IAC had no jurisdiction while acting under Section 144B(4) of the Act to change the basis of the assessment order from one of addition to the valuation of closing stock to an addition on the ground that gross profit was inadequate and, hence, the Commissioner (Appeals) should have cancelled the addition made on that ground and that having regard to the method of accounting regularly adopted by the assessee, the book results should have been accepted. It was also pointed out that the IAC never asked the assessee about the gross profit addition. It is submitted that by going to the IAC, the assessee cannot be placed in a worse position than what he was before.

11. In the view we have taken in cancelling the assessment made, the above grounds of the assessee relating to the gross profit addition does not survive for consideration and need not be considered. Hence, we are not considering the same.

12. Now, we will take up the departmental appeal. The only ground in the departmental appeal is with regard to the gross profit addition reduced by the Commissioner (Appeals). The ITO estimated the gross profit at 35 per cent whereas the Commissioner (Appeals) has estimated it at 15 per cent. Since we have cancelled the assessment made on the assessee in the status of HUF, the present ground raised in the departmental appeal need not be considered and, accordingly, we are not considering the same. The departmental appeal becomes infructuous as we have cancelled the assessment.

13. In the result, the assessee's appeal is allowed and the departmental appeal is dismissed.


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