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income-tax Officer Vs. A.M. Vaiyapuri Chettiar - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1983)4ITD606(Mad.)
Appellantincome-tax Officer
RespondentA.M. Vaiyapuri Chettiar
Excerpt:
1. these appeals raise the question whether a divided family could constitute a fresh joint family.2. there was originally a joint family consisting of two coparceners, shri vaiyapuri chettiar and his only son shri v. rajkumar. on 1-4-1966, there was a partial partition of some of the movable properties of the family. on 7-2-1967, there was a second partial partition of the other movable properties. on 14-4-1971, there was a total and complete partition of immovable properties. this partition was accepted by the ito by an order passed on 9-3-1973 under section 171 of the income-tax act, 1961 ('the act'). on 1-10-1979 vaiyapuri chettiar and v. rajkumar executed an instrument called 'deed of declaration of reunion' on stamp paper of rs. 5. this document recited the previous partitions in.....
Judgment:
1. These appeals raise the question whether a divided family could constitute a fresh joint family.

2. There was originally a joint family consisting of two coparceners, Shri Vaiyapuri Chettiar and his only son Shri V. Rajkumar. On 1-4-1966, there was a partial partition of some of the movable properties of the family. On 7-2-1967, there was a second partial partition of the other movable properties. On 14-4-1971, there was a total and complete partition of immovable properties. This partition was accepted by the ITO by an order passed on 9-3-1973 under Section 171 of the Income-tax Act, 1961 ('the Act'). On 1-10-1979 Vaiyapuri Chettiar and V. Rajkumar executed an instrument called 'deed of declaration of reunion' on stamp paper of Rs. 5. This document recited the previous partitions in the family and desire and the agreement of the parties for effecting a reunion so as to constitute a joint Hindu family of the parties and to constitute a joint family fund by virtue of such reunion so as to form a nucleus thereof by bringing in any or some of the properties allotted on partition of the erstwhile joint family and under this declaration the father and son brought a fixed deposit of Rs. 50,000 each kept with Rajkumar Chit Fund (P.) Ltd., as their contribution for the reunited joint family and declared their having reunited and the reunited joint family alone having the rights in respect of those assets totalling Rs. 1 lakh. The resultant position was that there were three units: firstly, Shri Vaiyapuri Chettiar with the separated assets claiming to be the karta of a smaller HUF consisting of himself and his wife, secondly, Rajkumar with the separated assets claiming to be the karta of a smaller HUF consisting of himself and his wife and thirdly, the joint family consisting of Vaiyapuri Chettiar, his son and their wives with this asset of Rs. 1 lakh.

3. On these facts, it was claimed that the interest arising from the sum of Rs. 1 lakh referred to above cannot be assessed in the hands of the two smaller joint families, which were being separately assessed on their own income on the ground that the interest accrued to the revived joint family consisting of Vaiyapuri Chettiar and V. Rajkumar. This claim was rejected by the ITO on the ground that the reunion should be wholehearted and whatever assets have been earlier partitioned must be brought back and, therefore, a partial reunion with only some of the assets which had been earlier divided could not be recognised. On appeal, the Commissioner (Appeals) accepted the claim on the ground that it was not necessary that every one of the divided members should bring in property to effect a reunion and, therefore, the reunion though not complete but partial was valid.

4. In these appeals of the revenue, it was contended firstly, that the reunion was a revival of earlier divided family and should, therefore, restore this position to a point of time before the partition by bringing back all the assets that have been divided. Secondly, it was contended that the document expressed an intention to form a new nucleus for creating a fresh HUF which is untenable because a joint family is a creature of law and cannot be created by contract. Thirdly, it was contended that the intention to reunite must be apparent from the motive behind it and when there is no motive relevant for the reunion except for an irrelevant motive of reduction of tax, such a reunion cannot be recognised in law. Lastly, it was submitted that after the recent amendment of the Act by introduction of Sub-section (9) to Section 171, it was not possible as far as the income-tax purposes were concerned to effect a partial partition and it was argued that a reunion with only some of the assets amounted to a full reunion and an immediate subsequent partial partition which cannot be recognised because an assessee cannot be allowed to do indirectly what he could not have done directly.

5. On the other hand, the contention of the assessee was that the characteristics of the reunion remain on the same footing as of a|partition and since a partial partition is recognised by law, a partial reunion is also recognisable especially when a reunion of only some of the members is already recognised. Secondly, it was contended that the reunion is very much a contract to revive a joint family and such revival amounts to a creation of a new joint family with a fresh nucleus. Thirdly, it was submitted that when the parties have agreed that they will reunite, the fact that they get a tax benefit cannot invalidate such a reunion. Lastly, it was submitted that the amendment recently introduced cannot affect the transaction when such a transaction was valid in law.

6. On a consideration of the rival submissions, we are of the opinion that there are no merits in these appeals of the revenue. The incidents of a joint family and any partition and reunion thereafter are well recognised. In the case of Bhagwan Dayal v. Mst. Reoti Devi [1962] 3 SCR 440, the Supreme Court gave its full assent to the legal position summarised in Mayne's Hindu Law as follows: As the presumption is in favour of union until a partition is made out, so after a partition the presumption would be against a reunion. To establish it, it is necessary to show, not only that the parties already divided, lived or traded together, but that they did so with the intention of thereby altering their status and of farming a joint estate with all its usual incidents. It requires very cogent evidence to satisfy the burden of establishing that by agreement between them, the divided members of a joint Hindu family have succeeded in so altering their status as to bring themselves within all the rights and obligations that follow from the fresh formation of a joint undivided Hindu family.

The basic proposition of Hindu law on reunion was given by Brihaspati Smriti as: 'He who being once separated dwells again through affection with his father, brother or paternal uncle is termed reunited'. Sastras regarded agnates as joint by nature and when they separate they retain a residual right to recreate their joint status by agreement. The basic tenet given above presumes that just as a joint family may be joint in residence, food, worship and property, reunited family is joint in residence, food and worship and thereby the properties also are held jointly. But we have come a long way from the days of Brihaspati because modern Hindu law recognises that mere separation in residence, food and worship do not by themselves constitute severance in status and persons otherwise separated may hold the property as joint family property. Conversely merely because the persons holding a share of the properties separately after a partition continue to live together and have common food and worship, it would not follow that there is a reunion in status with regard to the property. In other words, the question whether the property is held as joint family property or not depends entirely on the intention of the parties without reference to their jointness otherwise. As observed by the Supreme Court, it is implicit in the concept of a reunion that there shall be an agreement between the parties to reunite in estate with an intention to revert to their former status of members of a joint Hindu family. Such an agreement need not be express but may be implied from the conduct of the parties alleged to have reunited. The Supreme Court has stated that a coparcenary is a creature of Hindu law and cannot be created by agreement of parties except in the case of reunion. In the present case there is a written agreement and in view of the decision of the Supreme Court it creates a coparcenary. Since the agreement expressly declares the unequivocable intention of the parties to reunite and form a joint family with the property brought in as joint family property, it would prima facie appear that there is no reason to disregard such an agreement or its effect in creating a new joint family with the property brought in.

7. The real objection of the revenue is that by the creation of the new joint family, the tax impact may have lessened and, therefore, as an agreement prejudicial to the revenue, it should be avoided. It is appropriate to refer to the observations of the Madras High Court in the case of M.S.M.M. Meyyappa Chettiar v. CIT [1950] 18 ITR 586 in the context of partition that the propriety of the partition, whether it should be effected at all, whether it should be effected at a particular time, what properties should be allotted to the different members, and how the family properties should be divided, are all matters for the coparceners to decide and once a real and de facto partition is found to have been effected, it is not for the revenue authorities to redress alleged inequalities in the partition by professing to ignore it in the interest of the minor coparceners. Again at page 606, it was observed that a coparcener governed by the Mitakshara Hindu law has the undoubted right to get his share separated, and if the separation entails the consequence of reducing the tax in any manner, the partition cannot be impeached on the ground that the motive was not laudable. On the same analogy, the coparcener has a residual right to recreate the joint status by agreement and if the exercise of that right entails the consequence of reducing the tax in any manner, such a contract to reunite on terms agreed to by the coparceners cannot be impeached on the ground that the motive was not laudable. In other words, in the case of a reunion also, it is for the coparceners concerned to agree to the reunion on terms best serving their purpose and it is not for the revenue to question that with regard to any aspect of the terms of the reunion. But in the recent case of Kalloomal Tapeswari Prasad (HUF) v. CIT[1982] 133 ITR 690, the Supreme Court approved the observations of the Madras High Court in the case of A. Kannan Chetty v. CIT [1963] 50 ITR 601: It may be different in cases where the joint family deals with one or more items of property or converts it into a different estate retaining both possession and income in its own hands. That may properly be a case where the department may ignore such a transaction.

8. We may, therefore, be required to look at the terms of the reunion to consider whether the reunion was effective. The contention of the revenue is that because all the properties originally divided have not been brought back, the reunion is incomplete. This contention assumes that it is necessary to bring back all the properties once divided to have a reunion on the footing that the intention to reunite is an intention to annul the earlier partition. Obviously, it is not so because the essence of reunion is an agreement to reconstitute a joint Hindu family in exercise of a residual right to recreate a joint status without regard to the amount, if any, of the original joint family which is contributed by the reunited members. In the case of Venkanna v. Venkatanarayana AIR 1947 Mad. 49, the High Court pointed out that joint status does not depend upon the possession of property and, therefore, it is open to one wealthy coparcener to reunite with another coparcener who has nothing to bring to the joint family. If we keep in mind the fact that today sharing of food, shelter or worship is independent of holding the property jointly, it would be necessary to maintain that the concept of reunion is applicable independently to property alone and that holding of property as joint family property is not a mere consequence of the reunion but the very purpose of the reunion. It would follow that the very intention to reunite would comprise also an intention to reunite with respect to a particular property and not all the properties which were once divided. The Supreme Court has summarised the position in Hindu law with regard to partition as follows in the case of Kalloomal Tapeswari Prasad (supra): Under Hindu law partition may be either total or partial. A partial partition may be as regards persons who are members of the family or as regards properties which belong to it. Where there has been a partition, it is presumed that it was a total one both as to the parties and property but when there is a partition between brothers, there is no presumption that there has been partition between one of them and his descendants. It is, however, open to a party who alleges that the partition has been partial either as to persons or as to property, to establish it. The decision on that question depends on proof of what the parties intended--whether they intended the partition to be partial either as to persons or as to properties or as to both. When there is partial partition as to property, the family ceases to be undivided as regards properties in respect of which such partition has taken place but continues to be undivided with regard to the remaining family property....

The Supreme Court has approved the following observations of the Privy Council in Appovier v. Rama Subba Aiyan [1866] 11 MIA 75 (PC): ... When the members of an undivided family agree among themselves with regard to a particular property, that it shall henceforth be the subject of ownership, in certain defined shares, then the character of undivided property and joint enjoyment is taken away from the subject-matter so agreed to be dealt with; and in the estate each member has thenceforth a definite and certain share, which he may claim the right to receive and to enjoy in severalty, although the property itself has not been actually severed and divided....

From the above observations it is clear that the case of a partial partition also is only an agreement to convert joint tenancy of an undivided family in a particular property into a tenancy in common between the members of that undivided family with the rider that there is no severance in status of the family as such. It is not disputed by the revenue that there can be a partial reunion with reference to some coparceners alone because if five coparceners have separated, it is quite possible for only two of them to reunite. Since the incidents of a partition and the reunion are similar, there should be no reason why there cannot also be a partial reunion with respect to the property also.

9. Our attention was drawn to the decision of the Karnataka High Court in the case of Paramanand L. Bajaj v. CIT [1982] 135 ITR 673 and it was argued on behalf of the revenue that unless there was a junction of the entire estates of the divided coparceners, the reunion cannot be considered to be valid. In that case, the divided coparceners entered into an agreement declaring that they had reunited to form a HUF and any party to that agreement can throw either his self-acquired property or any property got on partition from the family before the reunion.

The Karnataka High Court proceeded on the basis that the reunion is a matter of status and the question whether the properties became joint family properties was a matter of consequence. In that case, no doubt by a further agreement one of the coparceners had thrown certain properties into the newly formed joint family and the Court viewed the ability of the other coparceners also to do likewise as sufficient proof of their intention to reunite. It was further pointed out by the Court that because of the unequivocable declaration of reunion, the income-tax authorities could not dispute that fact though it was open to them to consider the legal effect, namely, that all the properties received by the coparceners on a previous partition became available for common enjoyment among the reunited coparceners. This case has taken note of a decision of the Madras High Court in the case of Manorama Bai v. Rama Bai AIR 1957 Mad. 269. In that case, the facts were that there were two divided brothers, one of whom was issueless but rich. Instead of adopting the son of the other brother, they entered into an agreement of reunion and declared that they had decided to mingle the properties of the first individual with those of the second individual and to live jointly thereafter. The two brothers were killed in a boat tragedy and a dispute arose as to the succession to the properties. The Court held that the properties went by survivorship because the reunion had been proved. In that case, the question was not whether the reunion was bad because there was no proof as to all the properties have been brought back into the reunited family, but whether on the accepted basis of reunion, even the self-acquired properties of the two brothers would go by survivorship. In the course of that judgment, however, the principles relating to reunion have been set out and one of the statements made is that upon reunion what is thine is mine and what is mine is thine showing a complete junction of estates.

Another case referred to is also that of the Madras High Court in the case of Venkanna (supra) where the reunion was challenged on the ground that one of the coparceners who had reunited having lost all his properties, had nothing to contribute to the joint family. In that case on the facts, no doubt, it was held that when there was no property available, contribution of the property received on earlier partition could not be insisted upon for accepting the reunion as valid. At the same time the principle on which that decision was arrived at was that joint status did not depend upon possession of property.

10. It is often said that a decision can be an authority for only what it decides. In the above cases the question before us, namely, whether because all the properties have not been brought back the reunion would be invalid, did not come up for consideration. We have, therefore, necessarily to consider whether a reunion which was held by the Supreme Court in the case of Bhagwan Dayal (supra) is a matter of contract, should have as a necessary condition the junction of estates to validate it. We may look at this question from two points of view. From the point of view of the decision of the Karnataka High Court the contract of reunion would merely establish a joint status and the junction of estates, that is, bringing back all the properties once divided and available for being brought back would only be a necessary consequence whether the parties intended it or not. From this point of view the junction of estates being a legal implieation of the agreement to reunite, the coparceners reuniting cannot avoid that consequence by contracting out of that implication as such a condition enabling the coparceners to keep out any of the proper-tics would be void. In such an event the coparceners having unequivocally declared their intention to reunite, the properties once divided automatically become the property of the reunited family and it would be necessary to consider whether the reunion is limited to any particular property. As long as the reunion is accepted, income from any property which has once been divided and which the coparceners claim should belong to the reunited family would have to be accepted as joint family income. The income from other properties which had also been divided earlier and which the assessee has not claimed to belong to the reunited Hindu family would not form part of the subject of this case and need not concern us, though as observed by the Karnataka High Court it may be open to the department to deal with that matter within the scope of their powers.

From a different point of view, namely, that the agreement to reunite could even be with respect to specific property, the question will be whether the contract to reunite could be confined to certain properties alone without offending the basic tenets of Hindu law. As we have noted above, judge made Hindu law has accepted that specific properties could be converted from joint tenancy into tenancy-in-common and there is a division in status because the undivided family becomes a divided family with respect to that property alone. If the reunion is a reversal of that process, there could be no objection to a reconversion of the tenancy-in-common into joint tenancy with respect to a particular property with a corresponding reunion of status with regard to that property alone. The objection of the revenue to this proposition is that even if reunion is considered as a matter of contract, there is a legal implication that all the divided properties are so converted from tenancy-in-common to joint tenancy and any agreement to the contrary would vitiate the contract. In other words, the contention of the revenue is that the contract to reunite would itself be void unless that contract has an explicit or implied agreement to bring back all the properties which were once divided. We are unable to agree to this objection because though the junction of estates may be a corollary of reunion, there is nothing in any of the cases cited on behalf of the revenue to suggest that an agreement to keep out any property from the reunited family will be void. Under Section 23 of the Contract Act every agreement of which the object or consideration is unlawful is void. The consideration or object of an agreement is lawful unless it is forbidden by law or is of such a nature, that if permitted, it would defeat the provisions of any law, or is fraudulent, or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. It cannot be the case of the revenue that the object of the contract of reunion is fraudulent or opposed to any public policy, nor is it forbidden by law. The contention of the revenue is confined to the question whether if such a contract is permitted, it would defeat the provisions of the Hindu law. But when Section 23 refers to an object of defeating the provisions of Hindu law the concept we have is of an agreement restraining the rights and powers granted by Hindu Law. For instance, under the rules of Hindu Law adoption has to be made only by affection and not for any consideration and, therefore, an agreement to adopt in lieu of considerations given to the natural parents would not enable the natural parents to recover the consideration (see the cases cited at note 70 at page 213 of Pollock & Mulla's Indian Contract and Specific Relief Acts, Ninth Edition). In the present case the condition restraining the property being brought back to the reunited family merely waives the rights available to the coparceners in consideration of a similar waiver by the other coparceners. This is similar to a case where coparceners agree to divide the property unequally or a coparcener renounces his share, which will not be considered agreements defeating the provisions of Hindu law because they relate only to adjustments of rights in properties in respect of which the law preserves freedom of contract.

Hence, such a condition cannot be considered to have defeated the provisions of Hindu law. Even assuming that such a condition would be opposed to the principles of Hindu law, it would not affect the validity of the contract of reunion itself since it is a condition which is severable from the main object of reuniting which relates to the status of the family. If this condition is avoided the result will be that the general rule of Hindu law that there is a junction of the entire estate which was originally the property of the family before division would come into play. Once again we arrive at the position that the contract to reunite is a valid contract and in any event the properties which the assessees have brought to the reunited family belong to the reunited family either as agreed by them under the contract or as a consequence of the reunion in accordance with the principles given in the judgment of the Karnataka High Court.

11. The second contention of the revenue that separated coparceners cannot create a new nucleus and thereby create a fresh joint Hindu family is directly opposed to the observations of the Supreme Court cited above that a coparcenary is a creature of Hindu law and cannot be created by agreement between the parties except in the case of reunion.

12. The third objection of the revenue that the reunion could not be recognised because its real object was not to reunite with affection but only to reduce the impact of tax again ignores the current position in law relating to joint family status confined to property alone.

Since the coparceners can reside separately with separate food and worship and yet hold joint family properties, it is too late in the day for the revenue to challenge such holdings on the ground of lack of any affection among the coparceners. The question of partition or reunion with reference to joint family properties has to be considered purely from the economic angle and the financial implication. As observed by the Madras High Court in the case of Aruna Group of Estates v. State of Madras [1965] 55 ITR 642, avoidance of tax is not tax evasion and it carries no ignominy with it, for it is sound law and, certainly, not bad morality, for anybody to so arrange his affairs as to reduce the brunt of taxation to a minimum. Therefore, neither is it immoral nor can it be considered to be illegal for the separated members of a joint family to reunite with reference to certain properties alone to so arrange their affairs as to reduce the burden of tax on them. For that reason alone it cannot be said that either the reunion was mala fide or illegal especially when there is no provision in the Act unlike statutes of other countries, such as Australia, where any arrangement with a motive to avoid tax would be prima facie considered to be against public policy and void.

13. The last contention of the revenue that the reunion was in effect a partial partition cannot also be countenanced. We may recall the off-quoted passage in Henriksen v. Grafton Hotel Ltd. [1943] 11 ITR (Suppl.) 10 (CA): . . .It frequently happens in income-tax cases that the same result in a business sense can be secured by two different legal transactions, one of which may attract tax and the other not. This is no justification for sayjng that a taxpayer who has adopted the method which attracts tax is to be treated as though he had chosen the method which does not, or vice versa....

Therefore, it is not possible to go behind the agreement of reunion to assume that its real motive was to bring back all the properties together and then have a partial partition and thereby ignoring it by invoking Section 171(9). We have to go by the agreement as such and since it is an agreement of reunion not prohibited by any provision of the Act, it is not possible for the revenue to ignore it.

14. We are reminded by the revenue that the Bombay High Court has held in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589 that the Tribunal has to respect the law laid down by the High Court, though of a different State, so long as there is no contrary decision of any other High Court on that question and, therefore, the decision of the Karna-taka High Court in the case of Paramanand L. Bajaj (supra) should be followed. As noted above, in that case it was held that where the declaration of reunion was accepted as valid it would follow as a consequence that all the properties divided earlier would become the property of the joint family notwithstanding the fact that some of them have not been brought into the common hotchpot. When this proposition was put to the learned Counsel for the assessee, he stated that he had no other option but to take the consequence in view of the judgment of the Karnataka High Court. We have already held that the declaration of reunion given by the parties before us was valid. It follows that the AAC was right in accepting the reunion as valid and effective in respect of the properties/wealth brought in the recreated joint family and directing the exclusion of the income/wealth from the total income/wealth of the divided coparceners. As the question whether the income/wealth relating to the reunited family should be separately assessed and to what extent, falls outside the scope of these appeals, we can perhaps give no direction except to observe that the decision of the Karnataka High Court must govern the issue. In the circumstances we confirm the orders of the AAC. The appeals are dismissed.


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