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Bhawarlal Nahar and Sons Vs. Fifth Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1984)9ITD37(Mad.)
AppellantBhawarlal Nahar and Sons
RespondentFifth Income-tax Officer
Excerpt:
.....claim resulted in bringing to surface an accepted and well-recognised method of partition of joint family properties, which hitherto was not generally done for income-tax purposes.2. the assessee is a joint family consisting of himself as karta, his two sons, b. lalitchand nahar and b. rameshchand nahar, his wife, smt.bhawar kaver and daughter, b. lalithadevi. the joint family was assessed to tax on income from different sources and that was not in dispute. by a deed of declaration of partial partition executed on 1-11-1978, a sum of rs. 20,000 in cash was taken out and divided by giving rs. 5,000 to son shri lalitchand nahar, and another sum of rs. 5,000 was given to the other son, shri rameshchand nahar and the balance of rs. 10,000 was taken by the assessee's wife and their.....
Judgment:
1. These appeals we have heard today, have given rise to a novel point.

Novel not because it is against the accepted canons of the provisions of any law, but novel because the end result of the acceptance of the assessee's claim resulted in bringing to surface an accepted and well-recognised method of partition of joint family properties, which hitherto was not generally done for income-tax purposes.

2. The assessee is a joint family consisting of himself as karta, his two sons, B. Lalitchand Nahar and B. Rameshchand Nahar, his wife, Smt.

Bhawar Kaver and daughter, B. Lalithadevi. The joint family was assessed to tax on income from different sources and that was not in dispute. By a deed of declaration of partial partition executed on 1-11-1978, a sum of Rs. 20,000 in cash was taken out and divided by giving Rs. 5,000 to son Shri Lalitchand Nahar, and another sum of Rs. 5,000 was given to the other son, Shri Rameshchand Nahar and the balance of Rs. 10,000 was taken by the assessee's wife and their daughter jointly as members of what was described in the deed of partial partition, as 'smaller joint family'. On the very same day, another deed of declaration was executed by which another sum of Rs. 15,000 was divided out of which Rs. 5,000 was allotted to son, Shri Rameshchand Nahar, and the balance of Rs. 10,000 was allotted to the assessee, his wife and their son, Shri Lalitchand Nahar, to hold it as members of what is described as 'smaller joint family' as in the case of the earlier declaration. Yet another declaration of partial partition was executed on the same day, i.e., 1-11-1978, under which a sum of Rs. 30,000 was taken out of the joint family fold, again in cash, of which Rs. 15,000 was allotted to Shri B. Lalitchand Nahar, son of the assessee, and the balance of Rs. 15,000 was allotted to the assessee, his wife and their another son, Shri Rameshchand Nahar, as member of what was designated as 'smaller joint family.' The claim of the assessee was that these three sums of Rs. 20,000, Rs. 15,000 and Rs. 30,000, amounting to in all Rs. 65,000, was taken out of the joint family fold and was allotted to the members in the manner shown in the declaration of partial partitions and that these partial partitions should be recognised under Section 171 of the Income-tax Act, 1961 ('the Act'). The ITO, before whom the claim was made, refused to recognise this partition by his order passed under Section 171, dated 19-3-1983. The reason given by the ITO to refuse the claim was given by the IAC in the instructions under Section 144A of the Act and reproduced below: According to the assessee, a partial partition had taken place in respect of the cash and wants recognition of the same under Section 171 of the Income-tax Act, 1961. Shri Bhawarlal Nahar, karta of the family present and was heard in this connection. I am unable to agree with him that a valid partial partition had taken place within the meaning of Section 171 of the Income-tax Act, 1961, for the following reasons: A partial partition has been defined in Explanation under Section 171 of the Income-tax Act, 1961, as follows: partial partition, means a partition which is partial as regards the persons constituting the Hindu undivided family, or the properties belonging to the Hindu undivided family, or both'.

It appears that it is possible for some members of the family to go out of the family by taking certain assets while the remaining members could continue to be joint. In the present case, however, the assessee with the sole motive of avoiding tax, has attempted to create what, according to him, are 'Four new units of assessment'.

There has been allocation of certain amounts between overlapping groups of members, whose intention does not appear to be partition, either partial with reference to members or partial with reference to property within the meaning of the definition given under the Income-tax Act, 1961.

It is significant to note that the partition could only be partial as regards the persons constituting the HUF or the properties belonging to it. Notably, the word 'group of persons' have not been used in the definition apparently to check avoidance through the strategy which the present assessee attempts.

For these reasons, he felt that the claim of the assessee to recognise the partial partition should be refused. These instructions were passed on to the ITO, obeying which the ITO refused to recognise the partial partition.

3. In the appeal against that order, the AAC practically agreed with the view of the IAC and dismissed the assessee's appeal by pointing out more particularly that since the group of persons was not used in the definition, the allocation of funds to various groups of persons will not entitle the appellant for an order under Section 171.

4. From a brief resume of the facts, it will be clear that what was operating on the minds of the authorities below, was that allocation of funds to various groups of persons would not entitle the assessee to claim partial partition under Section 171 and since in this case certain amount was allotted to a group of persons, that allotment disentitled the assessee from the recognition of the claim of partial partition. The endeavour of the learned Counsel for the assessee before us was that under the Hindu law, such a claim of partial partition was not only practicable, entertainable, and in certain cases desirable, that there was nothing wrong or illegal in it, if the members of the family have inter se decided to allot certain properties on partition to a group of members to be enjoyed as a group, as tenants-in-common or even jointly.

5. The learned departmental representative, however, relying very strongly upon the decision of the Supreme Court in the case of Kalloomal Tapeswari Prasad (HUF) v. CIT [1982] 133 ITR 690, submitted that the claim made on behalf of the assessee is unrecognisable under the Hindu law and, consequently, under the Act and, therefore, the orders passed by the authorities below should be upheld.6. In this context, we would like to state certain general principles of partition. Under the Mitakshara law, the only property that can be divided on partition is coparcenary property. Separate property cannot be the subject of partition nor can the property which by custom descends to one member of the family to the exclusion of other members.

There are certain properties which are indivisible from their nature, like animals, furniture, etc., in which case, it is permissible to divide them by selling them and either distributing their value amongst the members or retaining by one coparcener exclusively by adjusting the shares of other members. In the case of a well, it may be enjoyed by the coparceners in turns or jointly. In the case of family idols and places of worship, which are not divisible, they may be held by the members by turns or the possession may be given to the senior member with liberty to the other members to have access to them for the purpose of worship. The principle of partition recognised under the Hindu law is that if property can be partitioned without destroying the intrinsic value of the whole property or of the shares, such partition ought to be made. If, on the contrary, no partition can be made without destroying the intrinsic value, then a money compensation should be given instead of the share which would fall to a coparcener by partition. It is the recognition of that principle that finds place in Section 171 when it provided in Section 171(1) Explanation (a) that 'partition' means, where the property admits of a physical division, a physical division of the property, but a physical division of the income without a physical division of the property producing the income shall not be deemed to be a partition under Section 171. On a partition between the members of a joint family, shares are allotted according to the recognised rules, one of which is that on a partition between a father and his sons, each son takes a share equal to that of the father and where a joint family consists of brothers, they take equal shares on a partition. In Section 322 of Principles of Hindu Law by S.T.Desai, 15th edition, it is pointed out that partition, according to the Mitakshara law, consists in a numerical division of the property; in other words, it consists in defining the shares of the coparceners in the joint property; an actual division of the property by metes and bounds is not necessary (even though under the income-tax law, under sec-ton 171, a physical division of property, by metes and bounds, is a must for the purpose of recognising a partial partition). Once the shares are defined, whether by an agreement between the parties or otherwise, the partition is said to be complete, under the Hindu law.

After the shares are defined, the parties may divide the property or they may continue to live together and enjoy the property in common as before. Though this is permissible under the Hindu law, it is doubtful whether it is permissible under the income-tax law for the purpose of recognition of the partition. But whether they do the one or the other, it affects only the mode of enjoyment, but not the tenure of the property. The principle is, the property ceases to be joint immediately the shares are defined and thenceforth, the parties hold the property as tenants-in-common. All that is necessary to constitute a partition is a definite and unequivocal indication of the intention of a member of a joint family to separate himself from the family and enjoy his share in severalty. A. Raghavamma v. A. Chenchamma AIR 1964 SC 136. It was also pointed out in this case by the Supreme Court that there should be an intimation, indication or representation of such intention and that what form that manifestation should take, would depend upon the circumstances of each case. The intention to separate may be evinced in different ways, either by explicit declaration or by conduct. (Dnyaneshwar Krishna Sambhus v. Anant Vasudeo Avachat AIR 1936 Bom. 290). Prima facie, a document expressing the intention to divide brings about a division in status, but it is open to a party to prove that the document was a sham or a nominal one, not intended to be acted upon and executed for some ulterior purpose. (Page 445, Principles of Hindu Law by S.T. Desai, 15th editions).

7. A partial partition between the coparceners is also recognised both under the Hindu law as well as under the income-tax law. While a definition of 'partial partition' has been given in the Explanation to Section 171 and reproduced above while extracting the order of the IAC under the Hindu law, 'partial partition' is defined as a partition between coparceners, partial either in respect of the property or in respect of the persons making it. It is open to the members of a joint family to make a division and severance of interest in respect of a part of the joint estate, while retaining their status as a joint family and holding the rest as the properties of a joint and undivided family. The consequence of this is that, when a partition is admitted or proved, the presumption is that all the property referred to therein was divided and a person alleging that family property, in the exclusive possession of one of the members after the partition, is joint and is liable to be partitioned, has to prove his case--Kumarappa Chettiar v. Adaikalam Chetty [1932] 55 Mad. 483.

8. Section 171 also recognising these principles, provided that a Hindu family hitherto assessed as undivided shall be deemed for the purposes of the Act to continue to be a HUF, except where and insofar as a finding of partition has been given under Section 171 in respect of the HUF. The section also provided that where, at the time of making an assessment under Section 143 of the Act, it is claimed by or on behalf of any member of the Hindu family assessed as undivided that a partition, whether total or partial, has taken place among the members of such family, the ITO shall make an enquiry thereinto after giving notice of the enquiry to all the members of the family, and on the completion of the enquiry, the ITO shall record a finding as to whether there has been a total or partial partition of the joint family property, and if there has been such a partition, the date on which it has taken place. Then, it provided that where a finding of total or partial partition has been recorded by the ITO under this section, and the partition took place during the previous year, each member of the group of members shall, in addition to any tax for which he or it may be separately liable, be jointly and severally liable for the tax on the income so assessed. The scheme of this Section 171 is that if a claim of partial or total partition of joint family had taken place, the ITO shall make an enquiry and record a finding as to whether there has been a total or partial partition of the joint family property and also the date on which the said partition had taken place. In this case, the ITO had caused an enquiry to be made and there is no doubt, on that aspect and as a result of his enquiry, he did not come to a finding that there has been no partial partition. That is a very very important aspect to be borne in mind in considering this case. When we say this, we mean that the ITO did not point out that the sum of Rs. 65,000, divided by the three declarations of partial partition, did not effectively leave the joint family fold. In other words, it is not the case of the ITO that the said sum remained the property of the joint family even after the claim of partial partition. On the other hand, the facts we have gathered from the narration given in the books and other attendant facts were that the cash each time was taken out of the joint family assets and was distributed as indicated in the declaration of partial partition and those sums were later on handed over to those persons and they were in enjoyment thereof to the exclusion of the others. The ITO, however, refused to accept the claim of partial partition. In other words, he recorded a finding that there was no partition, not on the ground stated above that there was no physical division of property and the said sums had not left the coffers of the joint family but on the ground that allotment was made to the group of persons which was not contemplated under the Hindu law or under the Act and that the motive for the division was avoidance of tax and that the partition resulted in the creation of four new units of assessment.

These reasons did not appeal to us as supporting the case of the revenue. Situations where allotments of property on partition, either partial or total, are two groups of persons are not difficult to envisage. It all depends upon the various circumstances, how best to effect a cohesive, acceptable and amicable partition without destroying the intrinsic value of the property. In a case where a joint family consisted of business, it is not difficult to envisage that that business may be allotted to one or more members of the family to be carried on jointly or in such shares and on such terms as they may like to enter into. Similarly, in a case where a joint family owns several house properties, it is always possible to have a partition allotting certain properties jointly to certain members of the family. It is for those members of the family to whom the property was allotted on partition, to arrive at the terms of enjoyments of that property and merely because that agreement to enjoy that property would result in the creation of another unit of assessment, cannot militate against the claim of partial partition or jeopardise the claim in any manner. At least, this has no support in Hindu law. Since it is always left to the members of the joint family to divide the properties and to hold them in such a manner as they deem fit, be it individually or commonly or in groups, the mode of allotment, therefore, cannot be a reason to refuse the claim of partial partition or total partition. So long as there is, in fact, a physical, and in law, a total or partial partition and if certain properties are effectively taken out of the joint family fold and are divided among the members, what is to be seen for the purposes of Section 171 is whether the property claimed to have been taken out of the joint family fold, has really been taken out of the joint family fold and henceforth belonged to the persons to whom it is allotted and thenceforth retained in their exclusive possession or whether the property remained joint family property even after partial partition.

If the answer is in the affirmative then, notwithstanding the fact as to the mode of enjoyment of that property after partition or to whom it is allotted, the claim of partial partition has to be accepted. It is no ground to say that because the partial partition has resulted in creation of new units of assessment, the claim would be rejected. That is not the scope of Section 171 nor is it envisaged in that section.

9. At this stage, we have to dispose of another argument advanced by the learned departmental representative based again on the decision of the Supreme Court in the above cited case. It was said in that case that unless the shares are specific, the partition cannot be accepted.

In this case, certain amounts were allotted to the assessee, his wife and sons or daughter, as the case may be. Since their shares were not determined, his submission was that partition would not be recognised.

This argument also, in our opinion, is of no avail to the revenue because what was allotted by way of cash is to a group of persons which is, from the discussion made elsewhere in this order, permissible under the Hindu law and it is the agreement between those persons as to how they should enjoy that amount when it comes to enjoyment of that sum in person arises. So far as there is definite allotment to a group and so long as money has gone out of the joint family fold, what is to be seen at that point of time is whether the amount has gone out of the joint family fold or not. The observations made by the Supreme Court, were made in a totally different context and we do not think they apply here.

10. Secondly, the allotment of property to various groups of persons was not contemplated and, therefore, such allocation of property would disentitle the assessee to the recognition of partial partition, is a self-defeating assertion on the part of the revenue because the very Section 171 recognises allotment of properties to groups of members. As we have already pointed out, Section 171(4)(b) refers to allotment of property to group of members for the purpose of fixing liability jointly and severally for the tax on the income assessed up to the date of partition. Similarly, Sub-section (7) of Section 171 lays down that for the purposes of Section 171, the several liability of any member or group of members thereunder shall be computed according to the portion of the joint family property allotted to him or it at the partition, whether total or partial, which clearly signifies that allotment of property to group of members on partition, either partial or total, is certainly permissible, possible and contemplated. This objection of the revenue is, therefore, totally unsustainable. Again Sub-section (9) of Section 171 refers to groups of members, when it lays down that a partial partition which has taken place after 31-12-1978, would not be recognised. Thus, since this ground on which greatest stress was laid by the IAC and also by the ITO, is not available to the revenue to reject the claim of partial partition and since there is no finding recorded by the revenue that there is no physical division of the property and that the said sum of Rs. 65,000 had not gone out of the joint family fold, the claim made by the assessee has, in our opinion, been erroneously refused. Further, the departmental representative claimed that there cannot be a creation of HUF or a mini-HUF as claimed in the deed of partial partition and at least on that ground, the partial partition should be held not to have taken place. This again is not acceptable to us for the very simple reason that in what status the members after partial partition should be assessed in respect of the property obtained on partition, is not a matter germane to the enquiry whether a partial partition under Section 171 had taken place or not.

If, as claimed by the assessee, a partial partition has taken place, in what form and in what mode and in what status the properties divided were to be held or agreed to be held, is to be decided in the context of assessmem of that income for the purpose of income-tax and not at this stage. At this stage, it is purely premature, if we may use the expression, if no mini-HUF as claimed by the assessee has come into existence. We do not think the department is shut out from so holding while making the assessment on that mini-HUF. It is open to the department to say at that stage as to what should be the status of that particular entity. It can be 'AOP', it can be 'BOI', it can be again HUF, it can be partnership, it can be an individual. Therefore, it cannot be now projected and said that because a mini-HUF has come into existence, the claim of partial partition should be rejected. What happened in this case was that certain amounts from the joint family fold were taken and allotted in certain proportions to certain units.

11. Then the case decided by the Supreme Court in Kalloomal Tapeswari Prasad (supra) is also, in our opinion, not available to the revenue to project its claim. The Supreme Court laid down in that case that the properties which admitted of physical division, if not divided, that would militate against the claim of partition. The Supreme Court, therefore, pointed out that there was no material to show that the assessee never seriously attempted to make a physical division of the property as required by law and, therefore, the case clearly fell within Sub-clause (i) of Clause (a) of the Explanation to Section 171.

The Supreme Court further held there that the income from those properties even though claimed to have been divided under the Hindu law, could still be included in the assessment of the family because an order recognising partial partition was not and could not be passed under Section 171. The principle laid down by the Supreme Court in this case was, therefore, that where there is no claim that a partition--total or partial--had taken place, or where it is made and disallowed, a HUF which is hitherto being assessed as such will have to be assessed as such notwithstanding the fact that a partition had in fact taken place as per Hindu law. This principle, far from helping the revenue's case, helps the assessee's case, because here there was a claim of partial partition made and we are of the view that such a partial partition had taken place with the consequence that the income attributable to that partitioned asset is not the income of the joint family any more and could not be included. The fiction enacted in Section 171(1) that even if a partition had taken place, the family shall be deemed to continue to be the owner of the property and the recipient of the income derived from it, except where and insofar as a finding of partition has been given under Section 171, does not apply to the facts of this case. Considering the above, we are of the opinion that the claim of the assessee that there has been a partial partition as mentioned in the declarations of partial partition, is correct, that the partial partitions did take place with effect from 1-11-1978 and that has to be recognised by the department and the order passed by the lower authorities refusing to recognise such a claim under Section 171, is erroneous and is cancelled. The result is, the appeal filed by the assessee is accepted.

12. As a consequence of our finding that a partial partition had taken place, the income, if any, attributable to the partitioned assets, is not to be included in the assessment of the joint family. The inclusion of such income is, therefore, deleted. This will be our finding insofar as the appeal against the quantum of income in IT Appeal No. 2405 (Mad.) of 1983 is concerned.


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