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Commissioner of Income-tax Vs. Laxmi Dyeing and Finishing Factory - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference Nos. 20 and 21 of 1978
Judge
Reported in[1987]164ITR789(P& H)
ActsIncome Tax Act, 1961 - Sections 171, 263 and 282(2)
AppellantCommissioner of Income-tax
RespondentLaxmi Dyeing and Finishing Factory
Appellant Advocate Ashok Bhan and; Ajay Mittal, Advs.
Respondent Advocate B.R. Atwal,; Bhim Sain and; Avinash Jain, Advs.
Excerpt:
.....t. the order of the commissioner was held to be bad for the reason that after the partition of the hindu undivided family, each member was individually an assessee and the notice served on one of the members of the erstwhile hindu undivided family was not sufficient compliance with the requirement of section 25a of the indian income-tax act, 1922 (now section 171(2) of the act). obviously, these cases have no bearing on the facts of the present case. 2.-learned counsel for the revenue contended that there being no requirement of serving any notice prior to the initiation of the proceedings by the commissioner under section 263 of the act, his order could not be said to be without jurisdiction and, at best, suffered from the vice of non-compliance with the principles of natural justice...........right to share the profits of the said firm was divided equally amongst the four members of the hindu undivided family. on an application made by the assessee under section 171 of the income-tax act, 1961 (for short 'the act'), the income-tax officer, after necessary inquiry, recorded that a partial partition had taken place in the family on april 1, 1971. however, the commissioner of income-tax in exercise of his powers under section 263 of the act being of the view that no partition, in fact, had taken place and the order of the income-tax officer was prejudicial to the interests of the revenue, reversed the same. aggrieved thereby, the assessee approached the appellate tribunal, which confirmed the findings of the commissioner but on merits set aside his order on the technical.....
Judgment:

S.P. Goyal, J.

1. The Hindu undivided family consisting of Shri Sehdev Parsad Jain, the karta, his wife, Shrimati Bimla Devi, and two minor sons, Lalit Kumar and Jatinder Kishore, was the owner of Laxmi Dyeing and Finishing Factory, Ludhiana. According to the assessee, a memorandum of partition was recorded on July 13, 1971, whereby a partial partition was effected with effect from April 1, 1971, and the right to share the profits of the said firm was divided equally amongst the four members of the Hindu undivided family. On an application made by the assessee under Section 171 of the Income-tax Act, 1961 (for short 'the Act'), the Income-tax Officer, after necessary inquiry, recorded that a partial partition had taken place in the family on April 1, 1971. However, the Commissioner of Income-tax in exercise of his powers under Section 263 of the Act being of the view that no partition, in fact, had taken place and the order of the Income-tax Officer was prejudicial to the interests of the Revenue, reversed the same. Aggrieved thereby, the assessee approached the Appellate Tribunal, which confirmed the findings of the Commissioner but on merits set aside his order on the technical ground that all the members of the family were neither issued notice nor afforded any opportunity of being heard. On separate applications under Section 256(1) of the Act filed by both the assessee and the Revenue, the following four questions have been referred to this court:

'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the order of the Commissioner under Section 263 of the Income-tax Act was vitiated for non-issue of notices to the wife and minor sons of the karta of the family ?

2. Whether the Appellate Tribunal, after coming to the conclusion that the order of the Commissioner, passed under Section 263 of the Income-tax Act, 1961, stood vitiated, was right in law in not sending the case back to the Commissioner for passing an order afresh after giving due opportunity to all the members of the family ?

3. Whether the Tribunal was right in law in holding that the right to appropriate profit of the family business is not a distinct property in the hands of the Hindu undivided family and, therefore, that cannot be the subject-matter of division ?

4. Whether the Appellate Tribunal was right in law in holding that a joint concern can be divided only by making division of the capital account '

2. Question No. 1.--The Tribunal, for its opinion that the order of the Commissioner was bad as notice on each of the four members of the Hindu undivided family was not served, relied on a decision of the Andhra Pradesh High Court in T.G. Sulakhe v. CIT : [1960]39ITR394(AP) . In that case and in the other case of this court, CIT v. Ganeshi Lal Sham Lal , total partition was pleaded by the assessee and recorded by the Income-tax Officer. The Commissioner while setting aside that order of the Income-tax Officer did not serve notice on each of the erstwhile members of the Hindu undivided family. The order of the Commissioner was held to be bad for the reason that after the partition of the Hindu undivided family, each member was individually an assessee and the notice served on one of the members of the erstwhile Hindu undivided family was not sufficient compliance with the requirement of Section 25A of the Indian Income-tax Act, 1922 (now Section 171(2) of the Act). Obviously, these cases have no bearing on the facts of the present case. Here, only a partial partition is alleged to have taken place and the Hindu undivided family is still in existence even though its four members were stated to have divided the right to receive profits from the Hindu undivided family business. Even if it may be accepted that there had been a partial partition, the right to share the profits was jointly owned by the four members of the Hindu undivided family and, as such, a notice on any one member of the family would be sufficient by virtue of the provisions of Section 282(2) (a) or (c) or (d) which provide that in the case of a Hindu undivided family, a notice required under the Act may be addressed to any member of the firm or the manager ; in the case of any other association or body of individuals, to the principal officer or any member thereof ; and in the case of any other person (not being an individual), to the person who manages or controls his affairs. Consequently, even if it may be accepted for the sake of argument that the four members of the Hindu undivided family held the right to share the profits of the business not as members of the Hindu undivided family but as co-sharers/joint owners, even then notice served on any one of them would be sufficient compliance with the provisions of Section 171(2) by virtue of the provisions of Section 282(2)(a) of the Act. Question No. 1 is, therefore, answered in the negative, i.e., against the assessee and in favour of the Revenue.

3. Question No. 2.--Learned counsel for the Revenue contended that there being no requirement of serving any notice prior to the initiation of the proceedings by the Commissioner under Section 263 of the Act, his order could not be said to be without jurisdiction and, at best, suffered from the vice of non-compliance with the principles of natural justice. He, therefore, argued that even if the notice had not been served individually on all the four members of the Hindu undivided family, the Tribunal after setting aside the order ought to have remanded the case for fresh decision after the service of the requisite notice. In support of his contention, he relied on the following observations of the Supreme Court in CJT v. Electro House : [1971]82ITR824(SC) (headnote):

'Unlike Section 34, Section 33B of the Indian Income-tax Act, 1922, does not require any notice to be issued by the Commissioner before he assumes jurisdiction to proceed to revise an order passed by the Income-tax Officer. The jurisdiction of the Commissioner to proceed under Section 33B is not dependent on the fulfilment of any condition precedent. He is not required to give any notice before commencing the inquiry. All that he is required to do, before reaching his decision and not before commencing the inquiry, is to give the assessee an opportunity of being heard and make or cause to make such inquiry as he deems necessary. These requirements have nothing to do with the jurisdiction of the Commissioner. They pertain to the region of natural justice. Breach of the principles of natural justice may affect the legality of the order made but that does not affect the jurisdiction of the Commissioner.'

4. Learned counsel for the assessee, on the other hand, relying on a Supreme Court decision in CIT v. Scindia Steam Navigation Co. Ltd. : [1961]42ITR589(SC) , urged that as no such point was argued before the Tribunal, this question does not arise from its order. In the alternative, he argued that the order having been passed in violation of the principles of natural justice, was a nullity and rightly set aside; and as such the Tribunal was under no legal obligation to remand the case for fresh decision. Reliance, for this proposition, was placed on a Supreme Court decision in Raja Jagdambika Pratap Narain Singh v. CBDT : [1975]100ITR698(SC) and a decision of this court in CIT v. Sham Lal [198J] 127 ITR 816. In Scindia Steam Navigation's case : [1961]42ITR589(SC) , it was ruled that when a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it. Consequently, although the course adopted by the Tribunal has a direct bearing on the rights and obligations of the parties and the question referred is a question of law, as this question was not raised or considered by the Tribunal, it cannot be said to arise from its order in view of the above authoritative statement of law pronounced by the Supreme Court. Accordingly, the question has to be left unanswered.

5. Question No. 3.--The findings relevant on this question recorded by the Tribunal and contained in the statement of the case are that the agreement dated July 13, 1971, purports to divide the business belonging to the Hindu undivided family amongst its four members in equal shares with effect from April 1, 1971 ; that the dry-cleaning business was the only asset which belonged to the Hindu undivided family and that the capital account of the Hindu undivided family business remained intact, which necessarily meant that the capital assets of the business were not divided. On these findings, obviously no finding of partial partition could be recorded because whereas the agreement purported to partition the business, in fact, it was never partitioned nor the capital divided. However, learned counsel for the assessee sought to put a different interpretation on the terms of the agreement and urged that, in fact, its intent and purpose was to divide the right to receive profits from the Hindu undivided family business which, according to him, was a distinct property as opposed to the business itself. Support for this contention was sought from two Supreme Court decisions in Chanandas Haridas v. CIT : [1960]39ITR202(SC) and Murlidhar Himatsingka v. CIT : [1966]62ITR323(SC) , decisions of the Gujarat High Court in CIT v. Nandiniben Narottamdas [1983] 140 ITR 16 and of the Madras High Court in CWT v. K. Ramachandra Chettiar : [1983]141ITR771(Mad) . The Tribunal rejected this contention of the assessee on the ground that the right to profits of the business belonged to the Hindu undivided family and not to its members, and, as such, they were not competent to bring about any partition of the assets. This view of the Tribunal cannot be sustained. It is the karta of the Hindu undivided family who has brought about the partition and he was fully competent to do so. However, the contention of the assessee has to be rejected for the reasons next following.

6. 'Partition', according to the Explanation to Section 171 of the Act, means-

' (a)(i) 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 ; or

(ii) where the property does not admit of a physical division, then such division as the property admits of, but a mere severance of status shall not be deemed to be a partition ;

(b) ' 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. '

7. In the first place, it is difficult to subscribe to the view that the right to share the profits would be a distinct property without the obligations of bearing the losses as well. If the loss is to be borne by the Hindu undivied family, obviously the receipts have to be first entered in the accounts of the firm and thereafter if the balance shows some profits, the same shall be liable to be divided amongst the four members. The profits, therefore, would not be deemed to have accrued to the four members and such an arrangement can never, by any stretch of reasoning, be termed as partial partition of the property itself within the meaning of the said Explanation. Again, for any arrangement to be termed as a partial partition, it has to be a partition first and it is termed as partial partition only because it may be partial qua the persons constituting the Hindu undivided family or the properties belonging to it. Where the property admits of a physical division, a mere division of the income without the physical division of the property producing the income, shall not be deemed to be a partition, according to the Explanation noticed above. In the present case, admittedly, the capital assets which are the income producing properties have not been divided. Even though, under common law, such a partition may be possible, but by virtue of the provisions of the Explanation, such an arrangement shall not be deemed to be a partition. If such an arrangement is not a partition of any property, it would not be possible to claim it to be a partial partition of any such property as well.

8. The cases cited by learned counsel for the assessee have been rendered on different sets of facts and have no direct bearing on the present case. In Charandas Haridas' case : [1960]39ITR202(SC) , the karta of a Hindu undivided family was a partner in six managing agency firms and the share of the managing agency commission received by him as such partner was being assessed as the income of the family. On December 31, 1945, he acting for himself, his minor sons and his wife entered into an oral agreement of a partial partition by which he gave his daughter a one pie share of the commission from each of two of the managing agencies and the balance from those agencies and the commission from the other four managing agencies were divided into five equal shares between him, his wife and his sons. On these facts, the Supreme Court held that there was a partial partition of the Hindu undivided family to the extent of the commission received by the karta as partner in the six managing agencies. In the first place, this decision was rendered under the Indian Income-tax Act, 1922, which did not contain any other definition of the words 'partition' and 'partial parition' as in the present Act. May be it was because of this very decision that these definitions were introduced. Secondly, the ratio in this decision is that the share of the Hindu undivided family in the managing agencies as partner was not capable of any physical division and as such if the family desired to partition these assets only and no more, there was no other manner in which the same result could be achieved. In the present case, on the contrary, the profit-earning property, i.e., the business, was capable of physical division and, therefore, the decision in Charandas Haridas' case : [1960]39ITR202(SC) , has no bearing.

9. In Murlidhar Himatsingka's case : [1966]62ITR323(SC) , one M, a partner in a registered firm, entered into a sub-partnership with his two sons and a grandson and clause 5 of the deed of sub-partnership provided that the profits and losses of M in the registered firm shall belong to the sub-partnership and shall be borne and divided in accordance with the shares specified therein, but that the capital with its assets and liabilities would belong to M exclusively. This again was a case under the Indian Income-tax Act, 1922, and for the same reasons as recorded above, would not have applicability on the facts of the present case.

10. In Nandiniben Narottamdas' case [1983] 140 ITR 16 , the court, on the peculiar terms of the gift deed, held that the assessee had made a gift of her share in the two firms in favour of the beneficiaries of the trust and the assets giving rise to income had been transferred to them within the meaning of Section 60 of the Act. This case related to a transfer which is governed by the provisions of Section 60 of the Act and not of partial partition as envisaged under Section 171 of the Act. Therefore, it is distinguishable on facts and is of no help to the assessee.

11. K. Ramachandra Chettiar's case : [1983]141ITR771(Mad) , was one under the Wealth-tax Act and was probably relied upon to show that any bundle of proprietary rights would be property as compared to the property itself. That case related to the life interest of the assessee in a number of houses. There can be no dispute that life interest in an immovable property is a distinct property, but no such situation being available in the present case, this decision is hardly of any relevance. We are, therefore, of the considered view that neither a mere right to appropriate profits without the obligation to share losses was a distinct property nor its partition would be partial partition of the Hindu undivided family property within the meaning of Section 171 of the Act. Question No. 3 is accordingly answered in the affirmative, i.e., in favour of the Revenue and against the assessee.

12. Question No. 4.--Learned counsel for the assessee stated at the Bar that there was never a partition of the running business of the Hindu undivided family and, as such, this question does not arise in the present case. This question is, therefore, left unanswered.

13. Reference answered as aforementioned.

14. In the circumstances of the case, the parties are left to bear their own costs.

G.C. Mital, J.

15. I agree.


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