1. These are two appeals filed by the assessee. IT Appeal No. 476 is filed against adverse impugned order dated 5-1-1983 passed by the AAC, refusing to recognise the partial partition dated 13-6-1974 in toto. IT Appeal No. 475 was directed against the order of the AAC, dated 25-1-1983 partly allowing the appeal filed. The dispute is regarding the price of the property sold as on 1-1-1954. Both these appeals relate to the assessment year 1975-76 for which the previous year ended by 31-3-1975. As the assessee is common in both these appeals, these can be conveniently disposed of by a common order.
2. Let us first take up the appeal relating to partial partition, i.e., IT Appeal No. 476. The assessee in this appeal is a HUF. There are two coparceners in the HUF during the relevant period and they are related as uncle and nephew. Their relationship would be better understood by the following genealogical tree : Eldest Peda Giddappa Sangappa daughter Sangappa died issueless.
(died in 1943) His wife also Mallayya Sivanandam Daughter (Bhagirathamma) born on 24-11-1942 died on 17-6-1958 | Sangamesh daughter daughter Sangameswara and Sivanandam are two coparceners representing their respective branches in the assessee's HUF. As can be seen, Sivanandam was born on 24-11-1942 and while he was a minor he was looked after by his legal guardian, Smt. Bhagirathamma, who is the mother of Sangameswara Prasad who was the widow of Mallayya. She was discharged as the legal guardian of the minor Sivanandam only in 1966 on his attaining majority.
3. Sivanandam filed a civil suit OS 86 of 1966 on the file of Sub-Court for a general partition of all the joint family properties and for separate possession of his share and also to set aside the alienation (sale deed, dated 12-10-1953 executed) made by late Mallayya in favour of Shri V. Balappa of Personnayapalli village for Rs. 4,000 as not binding on him. The said suit was later transferred to the file of the Additional District and Sessions Judge and was disposed of by him as OS 55 of 1968 on his file. The learned Additional and District sessions Judge granted a preliminary decree in favour of Sivanandam for partition. He was also pleased to set aside the alienation referred to above as not binding on Sivanandam. The date of the preliminary decree, thus, said to have been passed by the Additional District and Sessions Judge is not available from the record nor Shri Syed Zulfakar, the learned Counsel for the assessee was able to provide us the information about it.
4. The assessee-HUF had got besides agricultural wet lands in Anantapur, dry lands in Upperpalli village, two vacant sites and seven houses besides a factory complex known as Sangameswara Oil Mill in the premises of which there are row of houses to its front, all situated in Anantapur.
5. For the assessment year 1975-76, the assessment was originally completed on 8-2-1978 under Section 143 of the Income-tax Act, 1961 ('the Act') on a total income of Rs. 14,810. The sources of income are said to have been derived from house property, lease amounts from factory and agricultural lands. The assessment, thus, made originally was accepted by the assessee-HUF as it was never disputed before anybody. In the return of income there was property income of Rs. 835 and it is said to have been derived on the following four houses. Old and new numbers as well as S. Nos. of the properties with reference to the partition deed dated 13-6-1974 are all given below :S. D.No. (old) D.No. (new) S.No. in the 'C Schedule of partialNo. partition agreement dated 13-6-1974 Subsequent to the assessment, on enquiries by the Inspector of Income-tax, it came to light that the assessee-HUF sold items 1 and 2 mentioned in the above table in the accounting year relevant to the assessment year 1975-76. However, the capital gains derived by the assessee-HUF resulting from the sales were not disclosed in its return for 1975-76. So also, the enquiries further revealed that items 3 and 4 of the above table were also sold in the accounting year relevant, to the assessment year 1976-77 and the capital gains resulting from those transactions also were not disclosed by the assessee-HUF in its return for 1976-77. Then notice under Section 148 of the Act was issued to the assessee-HUF on 21-8-1979 intending to bring to tax the resultant capital gains. The notices were served on the assessee on 21-8-1979.
6. At that juncture the assessee-HUF while furnishing a return of income in pursuance of the notice of reopening on 22-9-1979 put forward a claim for partial partition. It is stated that the partial partition was evidenced by an agreement dated 13-6-1974. It is also stated that Schedule 'C' properties mentioned under the partial partition agreement dated 13-6-1974 were being enjoyed both by Sivanandam and Sangameswara Prasad as co-owners and after the sale of the house in question, they divided the sale proceeds though the house property sold as such was not divided between them. Hence, according to the assessee, no capital gains escaped in the assessment of the assessee-HUF. It is further stated in the statement accompanying the income-tax return that by mistake the assessee-HUF wrongly admitted income derived from the house properties in question in the original return and it had to be excluded in the reassessment proceedings. However, one month's rental income only is to be lawfully retained.
7. On 26-9-1979 Sivanandam filed another income-tax return voluntarily in the status of smaller HUF for the assessment year 1975-76 for the first time admitting half share in the income from house properties.
According to him, the other half share should belong to the other member Shri Sangameswara Prasad. However, in this return neither the whole nor half of the capital gains derived on the sale of the two house properties mentioned above was noted nor any note about it was mentioned in his return. Similar type of return for the assessment year 1975-76 was never filed by Shri Sangameswara Prasad. The income-tax inspector went on record to say that he had contacted Sivanandam on 9-8-1979 and he stated that there was no division either in part or in full in the family so far, however, he refused to give the same information in writing.
8. The ITO refused to recognise the partition under Section 171 of the Act by his order dated 27-3-1981. However, the assessee-HUF carried the matter in appeal before the AAC. The AAC by his orders dated 9-11-1981 set aside the said order of the ITO and directed the matter to go back again to the ITO to consider whether the type of partition effected regarding Schedule 'C' properties under deed dated 13-6-1974 passes muster under Section 171 and directing the ITO to furnish an opportunity to the assessee to substantiate its claim and to pass a speaking order. He further held that the claim for partition can be made at any time during the assessment proceedings either under Section 143(3) or under Section 144 of the Act. Such a claim can be made in any assessment year and it need not be necessarily in the previous year in which the partition took place. He also recorded a finding that the assessee-HUF made a claim for recognition of the partition in the assessment year 1975-76. That means the AAC considered that reopened assessment proceedings under Section 147(a) of the Act is synonymous to the assessment proceedings under Section 143(3). The ITO who later purported to implement the AAC's order gave opportunity to the assessee-HUF to produce further evidence, if any, in support of its claim for partial partition. The assessee-HUF appeared to have filed a copy of the partition agreement dated 29-3-1978 which is in English and another partition agreement dated 1-11-1980 which is in Telugu. He also recorded statements from Sivanandam as well as Sangameswara Prasad on 28-1-1982. As regards Schedule 'C' properties as per the partial partition agreement dated 13-6-1974, both of them appeared to have stated as follows : When asked both the members of the assessee-HUF affirmed in their sworn statements that the properties mentioned in Schedule 'C' of the partial partition agreement dated 13-6-1974 have not been partitioned by metes and bounds but are enjoyed by them as 'co-owners' with equal shares instead of as coparceners. In view of this it cannot be deemed to be a 'partition' within the meaning of Explanation to Section 171, insofar as it relates to the Schedule 'C' properties of the so-called partial agreement dated 13-6-1974.
He held that such a claim at the time of reassessment under Section 147 cannot be considered to be in the course of assessment proceedings under Section 143(3) or Section 144 for any assessment year. According to him, as the claim for partial partition was made in the reopened proceedings but not during the course of assessment proceedings under Section 143(3) or under Section 144, the claim itself is not tenable.
We are constrained to observe that this portion of the order of the ITO is against the clear finding of the AAC whose order he is implementing.
Ultimately for the seven reasons which he has listed out in his orders dated 18-2-1982 the ITO held that the claim for partial partition brought at the time of reassessment under Section 147 is not a genuine claim but only a make-belief one and rejected the same as such. He no doubt seeks to rely upon the Supreme Court decision in Kalloomal Tapeswari Prasad (HUF) v. CIT  133 ITR 690 and claimed to have kept in view the Supreme Court decision in ITO v. Bachu Lal Kapoor  60 ITR 74.
9. Aggrieved against the total dismissal of the partial partition claim made by the assessee-HUF, the matter was carried in appeal to the AAC.The AAC by his impugned orders held that there was partial partition in respect of properties in Schedule 'A', Schedule 'B' and item 1 of Schedule 'C' (Sangameswara Oil Mill premises) in terms of Section 171 and the rest of the properties were not partitioned in terms of the Act. As against items of properties regarding which partial partition was recognised the revenue was not in appeal. The assessee only was in appeal as regards properties with regard to which the claim of partial partition was negatived. Now the assessee-HUF's claim is restricted to items 2 to 9 of Schedule 'C' properties under the partial partition agreement dated 13-6-1974.
10. We heard Shri Zulfakar, the learned Counsel for the assessee and Shri V.R. Rao, the learned departmental representative. Firstly, it is sought to be contended that though there was no physical division of properties between the coparceners regarding items 2 to 9 of Schedule 'C' properties, the agreement clearly shows that they agreed to enjoy them as co-owners, that Sivanandam was to be incharge of those properties and he was given powers to arrange for sale of those properties, and the two coparceners agreed to share the sale proceeds of those properties after their sale and in the meanwhile they wanted to enjoy those properties as co-owners and not as coparceners.
According to the learned Counsel for the assessee, it is a well-known method of division between the coparceners and it should be held to be valid partition which can be recognised under law. Therefore, according to him, the lower authorities went wrong in not according recognition to such partition. The learned Counsel for the assessee also argued that at no time there was any agreement between the two coparceners for an amicable partition of these items of properties and this is made clear in the following portion of the preamble to the partial partition agreement.
Whereas the parties hereto have also been frequently clashing over the division of the other properties described in Schedule 'C' and held in joint as co-owners, from time to time, ever since they started living separately, as none of the parties hereto wants to forego any of the said valuable properties (which have been fast growing in their values).
It is also argued by Shri Zulfakar, the learned Counsel for the assessee, that agreement to share the sale proceeds is one of the known methods of partitioning the properties as per the decision of the Gujarat High Court in CIT v. Govindlal Mathurbhai Oza  138 ITR ... though the parties to the partition did not effect a partition by metes and bounds of the land, they decided to divide the sale proceeds of the land which G had agreed to sell to P, which was the legitimate course which the parties could have adopted, inasmuch as the only right which the HUF had under the agreement was to receive the sale proceeds and the partition could be effected only of the sale proceeds. The parties to the instrument were co-owners of the property and they agreed to divide by a partition deed the property in severally, their shares were ascertained and in anticipation of the realisation of the sale proceeds, G executed promissory notes of the respective amounts falling to the shares of the other members of the family, in pursuance of which the amounts were paid to each of them. It could not be said that there was any transfer of property in the sense of the transactions being sale. It was for all intents and purposes a change in the mode of enjoyment. Therefore, the transaction by which the parties agreed to divide the sale proceeds of the land for purposes of effecting partition of the land was a valid partial partition of the property and the ITO was bound to recognise and record it.
The learned departmental representative argued that the Gujarat High Court decision in the case of Govindlal Mathurbhai Oza (supra) is clearly distinguishable on facts and in case we do not agree with him he went on to argue it is against the ratio of the decision of the Supreme Court in Kalloomal Tapeswari Prasad (HUF's) case (supra) and, therefore, the ratio of the Gujarat High Court should be held to be no longer good law and it must be deemed to have been overruled by the Supreme Court. The Gujarat High Court decision is already distinguished by the AAC when it was quoted before him in his impugned orders. We fully approve the points of distinction adopted by him. Firstly, we hold that on fact there is difference between the Gujarat High Court decision and the case on hand. In Govindlal Mathurbhai Oza's case (supra) at the time of partition itself the manager of the HUF already executed the agreement of sale in favour of a third party with regard to an item of HUF and as such the property which the HUF sought to be partitioned was only a right to receive consideration under the agreement. But, however that is not the case here. At the time of partition in this case the house properties were never sold under an agreement or otherwise. After the partition only the houses were sold.Further, there is no scope for the Gujarat High Court to consider the decision of the Supreme Court in Kalloomal Tapeswari Prasad (HUF)'s case (supra) as the Gujarat High Court decision was rendered on 16-3-1981 whereas the Supreme Court decision was rendered on 12-1-1982.
The purport of the ratio of the Gujarat High Court decision is that the transaction by which the parties agree to divide the sale proceeds of the land for purposes of effecting partition of land was a valid partial partition of the property and the ITO was bound to recognise and record it. As against the above the Supreme Court is categorical in laying down the following law : Though under the Hindu law an item of property need not in every case be partitioned by metes and bounds or physically into different portions in order to effect a partition, and disruption of status can be brought about by one of several modes, income-tax law introduces certain conditions of its own to give effect to the partition under Section 171 of the Act. The ITO can record a finding that a partition has taken place only if the partition in question satisfies the definition of the expression 'partition' found in the Explanation to Section 171. A transaction can be recognised as a partition under Section 171 only if, where the property admits of a physical division, a physical division of the property has taken place. In such a case a mere physical division of the income without a physical division of the property producing the income cannot be treated as a partition. Even where the property does not admit of a physical division, such division, as the property admits of, should take place to satisfy the test of a partition under Section 171.
Mere proof of severance of status under Hindu law is not sufficient to treat such a transaction as a partition. If a transaction does not satisfy the above additional conditions, it cannot be treated as a partition under the Income-tax Act even though under Hindu law there has been a partition--total or partial.
It can be seen from the above that according to the Supreme Court, a mere physical division of the income without a physical division of the property producing the income cannot be treated as a partition for the purpose of the Act. Thus the ratio of the Hon'ble Supreme Court, in our humble opinion, is diametrically opposite to the ratio laid down by the Gujarat High Court. Therefore, we are unable to give credence to the Gujarat High Court decision.
11. Then Shri Zulfakar tried to contend that the properties under consideration do not admit partition and if partition is effected then the whole value of the asset of that property would be lost. In support of his contention he brings to our notice a recital in a registered relinquishment deed dated 24-5-1974, copy of which is filed before us.
This relinquishment deed is executed by the mother and three sisters of Sangameswara Prasad in favour of Sangameswara Prasad relinquishing right in the scheduled properties. In that deed it is mentioned that all the four executants of the deed together got one-tenth share. The further recitals go to show that they demanded their one-tenth share from the properties. However, it is mentioned in the said deed as the properties do not admit division they relinquished their right after accepting Rs. 15,000 from Sangameswara Prasad. The recitals in the vernacular are as follows : Therefore, from the above recitals of the contemporaneous deed dated 24-5-1974, physical division of the properties is not possible unless we are ready to sacrifice the whole worth of the property or unless we are prepared to render the properties useless. We are unable to agree with this contention. The persons who had relinquished had got only one-fourth in the half share which Sangameswara Prasad had got to his branch. His mother as well as his sisters claimed only under his branch. Virtually, the four persons relinquishing their shares are entitled only to one-twentieth share all put together. Therefore, dividing one-twentieth share or one-eightieth share in the whole in favour of each of the persons relinquishing may result in carving out an insignificant portion of each property which may not carry any commercial value at all. So in that sense the partition of their share would render the property valueless. But we are not prepared to admit the plea that each of the properties cannot be physically divided into two halves. The AAC clearly found that the properties in question clearly admit of physical division. He further held that if by physical division the market value of the properties merely comes down but the result would not render the property wholly valueless, in such cases it cannot be said that the property does not admit of physical division.
We entirely agree with this reasoning. Even under the Partition Act, 1893, only the property which is not partible and whose partition renders the property valueless is considered to be not partible. Simply because the value of the property comes down a little by partitioning, it does not mean that it is not partible. Therefore, after following the ratio of the Supreme Court in Kalloomal Tapeswari Prasad (HUF)'s case (supra) [we are of the opinion that items 2 to 9 of Schedule 'C' properties in the partition agreement dated 13-6-1974 clearly admit of physical division and inasmuch as admittedly no such division took place between Sivanandam and Sangameswara Prasad, we are of the view that mere severance: in status does not bring about partition and there is no partition in this case by virtue of the fact that there is no physical division of the property which the properties admit of between the coparceners. Therefore, as far as the appeal for recognition of partial partition is concerned, we are of the opinion that there is no ground to interfere with the order of the lower appellate authority and the appeal bears no merit.
12. to 14. [These paras are not reproduced here as they involve minor issues.]