JAGADISAN J. - There was a Hindu undivided family consisting of one Arunachalam Chettiar, his son, Narayanan Chettiar, and his grandsons by Narayanan, namely, Peria Narayanan, Chinna Narayanan and Ramaswami. Narayanan Chettiar, the son of Arunachalam Chettiar, died on 9th June 1946. The family was carrying on money-lending business at Malacca and Tampin under the vilasam of P.AR.N.AR. and also at Tangak under the vilasam N.AR. In the course of these businesses the family acquired rubber estates which comprise rubber trees and coolie lines. The immoveable properties acquired in the course of the money-lending businesses were treated as the stock-in-trade of the respective business in the course of which they came to be acquired. During the recent world war the properties suffered damage due to enemy action and claims were preferred to the Malayan authorities for payment of the compensation payable under the laws and regulations in that territory. The claim was made on 28th April, 1946. There was a partition among the members of the family on 28th October, 1949. Arunachalam Chettiars son, Narayanan Chettiar, was dead by that time and the parties to the partition were, therefore, the grandfather, Arunachalam, and his three grandson, one of whom, Ramaswami, was a minor. It is now common ground that as a result of this partition one of the businesses referred to above was allotted to Arunachalam and the other two business to the three grandsons in equal shares. On 31st October, 1949, the grandsons formed themselves into a firm of partnership to carry on the money-lending business allotted to them under the partnership. Ramaswami, one of the shares, was then a minor and he was admitted to the benefits of the partnership. This partnership was, however, dissolved on 31st December, 1952. The partners took their respective shares of the money-lending outstanding and of the properties belonging to the businesses at the value and opened separate books of account in their individual names on and from 1st January, 1953. After the dissolution there was no fresh money-lending business done in the erstwhile vilasam of the pre-existing firms. In the calendar year 1953, the relevant previous year for the assessment year 1954-55, a sum of 27,136 dollars was received on 4th September, 1953, as ex gratia compensation or award from the War Damages Commission before whom the original joint family had preferred a claim in respect of the damages suffered by the war. This amount was split up into three equal shares and each of the three grandsons, Peria Narayanan, Chinna Narayanan and Ramaswami, got 9,045 dollars. These amount were credited by them in their respective capital account in their books. In the assessment of these three individual for the assessment year 1954-55 the question raised was whether the sum of 9,045 dollars should be treated as income or capital.
The Income-tax Officer brought the amount to tax on the basis that it was income. The view of the Income-tax Officer was that the sum represented damages received by the assessee in respect of the stock-in-trade of the original family and, being the money equivalent of the stock-in-trade, should be treated as a revenue receipt. On appeal to the Appellate Assistant Commissioner by the three individual assessees the decision of the Income-tax Officer was affirmed. The reasoning of the appellate authority was that the family had opted for the 'special scheme', and that it was admitted that any subsequent receipt of revenue losses allowed under the 'special scheme' would be included in the total income of the appellant. The Appellate Assistant Commissioner observed that the Hindu undivided family having itself in a particular manner by opting for the special scheme, the individual assessees being only legal successors of the family were equally bound. In other words, according to the Appellate Assistant Commissioner, though the receipt should normally be treated as a capital receipt the assessees were disentitled to relief because the family before it become disrupted opted for the 'special scheme'. The assessees went up on further appeal to the Income-tax Appellate Tribunal. The Tribunal agreed with the department in holding that the compensation amount received by the individual assessees were really income taxable. The view of the Appellate Tribunal seems to be that, as the compensation amount is traceable to a stock-in trade, it must be deemed to be income irrespective of the fact whether the family had become divided or not. The Tribunal also observes that the compensation in the question is one of the 'invisible assets' in the nature of a right to recover a bad debt written off, and that therefore the recovery of such a bad debt should be treated as income.
The Tribunal having refused to refer any question of law on an application made to it under section 66(1) of the Act, the assessees moved this court under section 66(2). Thereupon this court directed the Tribunal to refer the following question, namely, 'whether on the facts and in the circumstances of the case the sum of 9,045 dollars being the compensation received from the Malayan Government towards war damages is income liable to be assessed to tax in the hand of each of the three assessees for the assessment year 1954-55 ?'
Now the short question is whether the sum of 9,045 dollars received by each one of the assessees as war damage compensation in respect of the stock-in-trade of the original joint family is income receipt or not. In our opinion, there cannot be any doubt that the character of the receipt in the hand of the assessees is only of a capital nature. We have first to reckon with the fact that there was a partition between the members of the family in 1949, no doubt at a time when the claim before the War Compensation Tribunal was pending. The result of the partition was that each member of the family received what was allotted to him only as capital. In a division amongst members of a Hindu undivided family which brings into the hotchpot not merely the capital assets but also the income receipts of the family, the final allotment in favour of the sharers does not carry with it the pre-existing nature of the estate that is divided. The receipt by the sharer of the estate is not the receipt of any income. What the sharer gets is something which is due to him as a result of the operation of law. In Veerappa Chettiar v. Commissioner of Income-tax, this court held that, on a partition of a joint family, the receipt by a sharer of his share in all the family properties with accretions, profits and income is a capital receipt. The observation of Vishwanatha Sastri J., at page 401, may be usefully quoted :
'What is divided at a partition is the entire family estate consisting of the original family estate with all subsequent accretions to that estate in the shape of income or profits, the whole thing constituting one composite property without allocation to capital or profits. On a partition the sole right of a member of the family is to get an allotment of his share in the assets available after discharging the family debts. For the purpose of ascertaining the assets existing at the date of the partition it is quite immaterial whether the family them by way of capital or by way of subsequent accretions in the shape of profit... What is distributed amongst the sharers at the partition is the net residue of the estate payment of family debts... There is no justification for this artificial attribution of profit to the assessee either in law or under the terms of the partition deed now in question.'
Learned counsel for the department contends that the partition did not have the effect of the impressing the dividend stock-in-trade with the character of a capital asset as the business though divided and taken in equal shares by the grandsons was taken as a whole and as a continuing one. It is urged that the partition caused only a succession of the business by the individual sharers from the family as such and that therefore the principle of the decision in Veerappa Chettiars case cited above would not apply. In this connection the learned counsel for the department relies upon the decision of this court in Mettur Sandalwood Oil Co. v. Commissioner of Income-tax. That was a case where after a partition in a Hindu undivided family whereby the family business was allotted to some members, a trade debt of the business was written off as bad. The question arose whether the persons who took over the business as a result of the division could claim to write it off as a bad debt. We held that on the facts of that case there was in fact and in truth only a succession of the business and an original bad debt of the business if written off by the successors would fall within section 10(2)(xi) of the Act. In the present case, indisputably there was a partition and the effect of the partition was that share allotted to the members of the family even in respect of the business asset became a capital of the allottee. At that point of time, the stock-in-trade of the business or any claim in respect of such stock-in-trade assumed the character of capital in the hands of the divided members. No doubt it is open to them to treat such capital as a stock-in-trade by employing it in the business and dealing with it as a stock-in-trade. But such treatment must be borne out by overt acts or by a systematic course of conduct. Learned for the department was unable to point out any such evidence which can lead to the inference of the divided members who formed themselves into a partnership treating the claim to the war compensation damage amount as being in the nature of a stock-in-trade in the business. In the fact there is no reference to this claim either in the partition deed or in the partnership deed. There is nothing on record to impute any kind of intention on the part of the members of the family, who carried on the business after the division regarding the way in which they contemplated to treat this amount which was anticipated to be received and which was however in fact received only in 1953. We cannot draw the inference from this silent conduct of the parties that they must be presumed to have treated it in the same manner as the family would have treated it if it had received the money before its disruption. It must not be overlooked that by reason of the partition of the assets of the joint family, income and capital assumed the character of capital in the hand of the divided members. In our opinion, therefore, the department and the Tribunal went wrong in holding that the sum of 9,045 dollars received by each of the three assessees was revenue receipt taxable as income.
Learned counsel for the department does not support the view of the Appellate Assistant Commissioner that the opting for the 'special scheme' by the family disentitles the individual assessees from claiming these amounts as capital. This aspect of the matter was considered in Muthiah v. Commissioner of Income-tax and, following that decision, we hold that it would not be proper to take that circumstance into account in answering the question in the present case.
The question is answered in favour of the assessees, who will get their costs from the department. Counsels fee Rs. 250.
Question answered accordingly.