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A. Kannan Chetty Vs. Commissioner of Income-tax, Madras. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 209 of 1960 (Reference No. 95 of 1960)
Reported in[1963]50ITR601(Mad)
AppellantA. Kannan Chetty
RespondentCommissioner of Income-tax, Madras.
Cases ReferredSulakhe v. Commissioner of Income
Excerpt:
- .....the aforesaid deeds, viz., nos. i, ii and iii, dated july 31, 1956, is assessable as income of the joint family after the date of the said deeds ?'the assessee is kannan chetty. he was assessed as an individual in respect of the properties covered by the assessment till 1950-51. in the assessment year 1951-52, he made a return describing his status as the karta of a hindu undivided family. this family consisted of himself, his son, namberumal chetty and the sons of namberumal chetty. the family owned house properties in the city besides a business in hardware and money-lending. on december 31, 1950, the business assets referred to were divided between kannan chetty and his son, namberumal. this was followed by the execution of a deed of partnership as between them, these divided assets.....
Judgment:

SRINIVASAN J. - The question referred for the decision of this court is :

'Whether any or all the income from the properties dealt with by the family under the aforesaid deeds, viz., Nos. I, II and III, dated July 31, 1956, is assessable as income of the joint family after the date of the said deeds ?'

The assessee is Kannan Chetty. He was assessed as an individual in respect of the properties covered by the assessment till 1950-51. In the assessment year 1951-52, he made a return describing his status as the karta of a Hindu undivided family. This family consisted of himself, his son, Namberumal Chetty and the sons of Namberumal Chetty. The family owned house properties in the city besides a business in hardware and money-lending. On December 31, 1950, the business assets referred to were divided between Kannan Chetty and his son, Namberumal. This was followed by the execution of a deed of partnership as between them, these divided assets of the business being brought in as the assets of the partnership. This partnership was recognised by the taxing department and that firm was also granted registration. On and after the year 1951-52, in respect of the other properties, Kannan Chetty was assessed as the karta of a Hindu undivided family. It may be mentioned that those other properties were not divided by metes and bounds.

On July 31, 1956, three deeds of trust were executed. The parties who executed these trust deeds were Kannan Chetty, his son, Namberumal Chetty, and also Kannan Chettys wife, Alamelumangaithayarammal. It would be sufficient to state at this stage that by means of these documents the members of the family purported to create trusts in respect of the items of immovable properties owned by the family. One or more of the executants of documents were themselves the trustees thereunder. On foot of these documents, the claim was put forward in the assessment proceedings of the year 1957-58 that the income from the properties covered by these trust deeds should be excluded from the assessment of the Hindu undivided family. The Income-tax Officer rejected this claim and made the assessment upon Kannan Chetty as the karta of the Hindu undivided family. But, on appeal, the Appellate Assistant Commissioner accepted the contention that the items covered by the trust deeds had ceased to be the property of the joint family and the income therefrom should accordingly be deleted from the assessment of the Hindu undivided family. The other contentions raised by the assessee were negatived. A further appeal was taken to the Tribunal by the department. The Tribunal on an examination of the matter came to the conclusion that the documents executed by the members of the family were void and inoperative. The principal reason was that in so far as the right and the interest of the minor children of Namberumal Chetty, that is to say, the grandchildren of Kannan Chetty, the assessee, were concerned, it was not open to the adult members of the family, whether divided or not, to deprive these minor children of the right which they had acquired by reason of birth. The Tribunal held that the Hindu father, that is Namberumal, had no right to deal with his minor childrens interests in the family properties in a manner which altered the ordinary mode of devolution of the properties under the Hindu law. It also repelled the contention that, since the ultimate beneficiaries under these documents, trust deeds Nos. 1 and 2, were the minors themselves, the transactions could be upheld on the ground that even if that were so, the right of the minor children as coparceners to demand partition was defeated by means of those documents. The third document was in favour of a stranger, described as the son of a foster-son of Kannan Chetty. The Tribunal held that it was not open to the father to make a gift of the joint family property. In effect, the result was that all the documents were held to be invalid and inoperative and the conclusion followed that the income from these properties was liable to be assessed in the hands of the Hindu undivided family.

On the application of the assessee under section 66(1) of the Act, the question set out above stands referred to us.

The Income-tax Officer took the view that the conveyance of family properties to trusts when the family has minor coparceners is in contravention of the principles of Hindu law and that the karta could not alienate the property unless it was for legal necessity. He held that the family continues to exist and as a matter of fact all the members of the family live together. There being also no actual partition of the family properties, notwithstanding that the joint family status was put an end to by the partition of the year 1951. Section 25A(3) permitted the assessment being made as on a Hindu undivided family. On appeal, the Appellate Assistant Commissioner accepted the validity of the first and second of these trusts, principally on the ground that the members having become divided in status participated in the benefits of the trusts not as members of a Hindu joint family but as beneficiaries of the trust. He therefore held that the income from the properties covered by these two trusts should be excluded from the total income of the Hindu undivided family. In the case of the third trust, in the absence of evidence that the funds which went into the creation of the trust formed the separate property of Kannan Chetty, the income therefrom was held assessable as the income of the Hindu undivided family, but to the extent to which any portion of the property covered by this trust was settled upon a stranger to the family, that settlement was held to be void as opposed to Hindu law. He also declined to accept the contention that two items of properties did not form part of the joint family properties having been inherited by Kannan Chetty from his divided brother, the late Ethirajulu Chetty. He held that the income from these properties could be assessed as joint family income.

It is not necessary to refer in detail at this stage to the approach to the question made by the Tribunal in the appeal before it. Broadly speaking, the conclusion of the Appellate Assistant Commissioner was differed from, the income from the properties covered by the first trust and the settlement deed - the third trust were held taxable in the hands of the Hindu undivided family. The same view was taken in respect of the properties settled upon the stranger, though that stranger was a descendant of the foster-son of Kannan Chetty. With regard to certain part of the income, there was a direction that it should be apportioned between the various years of assessment and not brought to tax in this year of assessment 1957-58.

It is not denied that Kannan Chetty and his son, Namberumal Chetty, became divided in status in 1951. In so far as the business assets were concerned, they were made the assets of a partnership between the father and the son and with that partnership income we are not concerned. The genuineness of that partnership and its validity were accepted and registration under section 26A was also granted to that partnership. In so far as the business assets of the family are concerned, there was undoubtedly a partition between the father and the son. The remaining immovable properties of the family remained undivided by metes and bounds. This was accordingly a case of partial which could not be recognised by the taxing department under section 25A of the Act. Had matters stood there, there is no doubt that to the extent of the income derived from the yet undivided immovable properties, it could be brought to assessment as if the Hindu undivided family continued in existence. What we have now to consider is the effect of the deeds of trust and settlement executed by Kannan Chetty and his son, Namberumal Chetty, as divided members of the family.

We shall deal with each of the trusts separately. The first of the trusts was brought into existence on the 31st of July, 1956, by Kannan Chetty, his son, Namberumal Chetty, and the wife of Kannan Chetty, Alamelumanagaithayarammal. It dealt with three items of immovable properties which were admittedly properties which had belonged to the joint family. After stating that movable properties belonging to the father and the son had already been divided and distributed between them, it provided that the movable properties were to be placed under trust to be held by the parties referred to as the trustees for the use and the benefit of the children of Namberumal Chetty. The income from the properties was to be utilised for the education, upkeep and maintenance of the children, then alive and to be born in future, and to be divided and distributed in equal shares to such children on the attainment of the age of majority of the youngest child. The other parts of the trust deed are not immediately relevant.

The second document also executed on the same day by the same parties dealt with four items of immovable properties. Two items set out in Schedule A thereto were joint family properties, the other two items set out in Schedule B were properties which exclusively belonged to Kannan Chetty having been inherited by him from his divided brother, Ethirajulu Chetty, after a division in status had come into existence between Kannan Chetty and his son, Namberumal Chetty. The provisions of this document were that Kannan Chetty should have a life interest in all the items of properties and that after him his wife, Alamelumangaithayarammal, should likewise enjoy a life interest therein. The properties were to be under trust and to be preserved for the benefit of Namberumal Chettys children in the same manner as in the earlier document. The document contained certain other directions with regard to the allotment of the various items of properties to the children of Namberumal Chetty.

The third document dealt with one house. It was executed by Kannan Chetty and his son, Namberumal. The purport of it was that this property, which was formerly joint family property, to moieties in which the executants had become entitled by reason of the division, was placed under trust for the benefit of the children of one Ananthakrishnan who had been brought up by Kannan Chetty as his foster-son.

The question that we have to consider is whether the view taken by the Tribunal that the documents are invalid is the correct one in the circumstances of the case.

The income-tax law certainly does not prohibit partition of a joint family. If the partition is effected fully in the sense that as a result of the division in status among the members of the family and following thereupon the properties are actually divided and partitioned among the various members or groups of members in definite portions, then the joint family definitely ceases to exist as an assessable entity and the individual members or groups of members become assessable entities. Section 25A of the Act was intended to protect revenue and to make the tax realisable from definite parties, and directed to that end, it provided that where a partition was claimed, the Income-tax Officer was bound to make an enquiry into such a claim and to accept the partition if he was satisfied that the family property had been partitioned in definite portions. Where that position was accepted, the Income-tax Officer was bound to allocate the tax on the income of the year in which the partition took place, though the total income was brought to tax as received by or on behalf of the joint family as such. But subsequently however a different situation arose, viz., that each member or group of members of the family which had become divided in the manner stated was liable to be assessed in that capacity, and not as if the joint family still continued to exist. Sub-section (3) of section 25A provides that where an order had not been made by the Income-tax Officer accepting the partition under section 25A(1), the family shall be deemed to continue to exist as a Hindu undivided family and be assessed in that capacity. This section however does not prohibit alienations by a divided or undivided member of a joint Hindu family. What it enables the taxing department to do in the absence of an actual division of the properties among the members of the family is to treat the family as continuing to exist for the purpose of assessment and levy of income-tax. It places no prohibition upon the capacity of the joint family or the members of the joint family to deal with their properties in accordance with the principles of Hindu law as may be applicable thereto. For instance, if the karta of a family effects an alienation or even makes a gift, in so far as the taxing department is concerned it is the income of the members of the Hindu undivided family that can be assessed, and if by reason of an alienation, whether it is binding upon the members of the joint family or not, an item of property ceases to be in the hands of the joint family, it would not be open to the department to say that they would ignore such an alienation, notwithstanding that the possession of the properties and its income may pass into the hands of a stranger. 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. But, if the family or a member thereof has the authority or the capacity to deal with a part or the whole of the properties of the family, the mere circumstances that an order has not been made under section 25A(1) cannot confer upon the taxing department the power to assess the Hindu undivided family on the whole of the income notwithstanding that it is no longer in receipt of income from that part of the property.

In one of the earliest cases decided by the Privy Council, Sunder Singh Majithia v. Commissioner of Income-tax, the Judicial Committee pointed out :

'Section 25A has no reference at all to any case in which the Hindu undivided family remains in existence at the time of assessment..... Section 25A is directed to the difficulty which arose when an undivided family had received income in the year of account but was no longer in existence as such at the time of assessment.... Section 25A deals with the difficulty in two ways, which are explained by the rule applicable to families governed by the Mitakshara, that by a mere claim of partition a division of interest may be effected among coparceners so as to disrupt the family and put an end to all right of succession by survivorship. It is trite law that the filing of a suit for partition may have this effect though it may take years before the shares of the various parties are determined or partition made by metes and bounds. Meanwhile, the family property will belong to the members as it does in a Dayabhaga family - in effect as tenants-in-common. Section 25A provides that if it be found that the family property has been partitioned in definite portions, assessment may be made, notwithstanding section 14(1), on each individual or group in respect of his or its share of the profits made by the undivided family, while holding all the members jointly and severally liable for the total tax. If, however, though the joint Hindu family has come to an end, it be found that its property has not been partitioned in definite portions, then the family is to be deemed to continue -that is, to be an existent Hindu family upon which assessment can be made on its gains of the previous year.'

Dealing with this case, Kania C.J. pointed out in Waman Satwappa Kalghatgi v. Commissioner of Income-tax :

'The Board held that it was open to the members of a joint Hindu family to separate one of its assets, so as to make it not to belong to the joint family and in respect of which they can enter into an agreement of partnership. If that asset was a business, the income derived from carrying on such a business thereafter would not form part of the joint family income and section 25A would not come in the way of such an arrangement... It must be remembered that section 25A is a machinery section. It is not a charging section. Much less it can be construed as altering the Hindu law as such.'

Again in Sulakhe v. Commissioner of Income-tax, it was observed that the legal effect of a partition by metes and bounds and the declaration under section 25A by the Income-tax Officer was only to constitute the members of the disrupted joint family into assessable entities. It would follow from this that but for this order of the Income-tax Officer, the previously existent assessable entity, viz., the Hindu undivided family, would continue to exist. The decision of the Privy Council was quoted as establishing that it was open in the case of a partial partition for the family to divest itself of any portion of the property and that it is possible for some of the members of the joint family to take one of the assets and hold it as a separate asset either in partnership or as a limited company. In that case, the learned judges say that the family 'no doubt which has not become divided in other respects will be assessed in respect of the asset taken out and a separate will be made on the limited company, as the case may be.'

We have said enough to indicate that in so far as the taxing department is concerned, it is not in all cases open to it to question the legality or the validity of a transaction entered into by a member of a joint Hindu family or the karta thereof. If the transaction is void ab initio and is of no legal effect, such a transaction can certainly be ignored not only by the persons interested in the family properties of the joint Hindu family but even by other persons including the taxing department. But we certainly can find no authority countenancing the principle that in a case where a transaction by a karta or a member of a joint Hindu family is voidable at the instance of the other members of that family, it is open to the income-tax department to refuse to recognise the transaction and insist that transaction must be regarded as not having taken place for the purpose of levy of tax. For example, if a Hindu father who has the undoubted right to effect a partition of the family properties not only as between himself and his sons but among his sons as well, chooses to make an unequal partition, that would be a matter which would be principally for the affected parties, viz., the sons, to question. They may or may not question it. But on the ground that an unequal partition had been effected by the father, there would be no warrant for the income-tax department to take up the cudges on behalf of the affected sons, whether they themselves choose to question the transaction or not. The very fact that a transaction is only voidable sufficiently establishes that it is valid for all purposes till it is set aside according to law, and if that is so, till such an event takes place, the income-tax department is equally not entitled to question the validity of such a transaction.

With particular reference to the facts that obtain in this case, Kannan Chetty was a divided member of the family, but the properties had not been divided by metes and bounds. The right of a divided member to alienate his ascertained share in the family properties can hardly be questioned. It may no doubt be that an alienee from such a divided member can only sue for actual division by metes and bounds of the share of his alienor in the family properties and may not be in a position to obtain joint possession of the properties with other members of the family. But if the other members of the family consent to separate the portion that would fall to that member on partition and give possession thereof to the alienee and honour the commitment entered into by the member of the family, there is nothing in law which prevents such a course being adopted, and solely for the reason that there was not an actual division before the member alienated the property, the taxing department cannot say that it would continue to assess the income from the alienated properties as still belonging to the joint family. It is true that in so far as the order under section 25A is intended to operate, the joint Hindu family, notwithstanding that a division in status has taken place, is deemed to continue to exist so long as the properties themselves are not divided by metes and bounds. But even the power to deem the joint Hindu family to be in existence does not extend to deeming that even the alienated properties would continue to be in the possession and enjoyment of the members of the family. What properties the joint Hindu family, even a deemed one by reason of section 25A, possesses at any point of time is a question of fact which has to be determined and which certainly will vary from time to time.

As we said, Kannan Chetty was a divided member of the family and to the extent to which he purported to alienate his share of the properties and place them under a trust the validity of which was accepted by the other divided member of the family, Namberumal Chetty, it seems to us that to that extent the joint Hindu family, though it may be deemed to continue in existence, was not in possession of those items of properties. The matter is beyond controversy in so far as the two items of separate properties of Kannan Chetty are concerned. There can be no question that the Hindu undivided family that is deemed to exist cannot be assessed in respect of the income from those properties; nor from what we have said above can Kannan Chettys half share of the family properties be treated, in the circumstances of the case, as property in respect of which an assessment can be made in the name of the Hindu undivided family.

We have now to deal with the half share of Namberumal Chetty. In so far as this half share of Namberumal Chetty in the joint family properties is concerned, it is undoubtedly ancestral property in his hands in which his minor sons have a right by birth. Their right extends to demanding partition and to obtaining separate possession of their individual shares in that property. But what Namberumal Chetty did was to place the entirety of his properties on trust and transfer the properties to that trust, though for the benefit of the minor sons of his. It seems hardly necessary to emphasise that the karta of a Hindu family is not competent to dispose of the joint family properties in this manner. Despite the fact that the trust was created for the benefit of the minor sons, undoubtedly the minor sons have been deprived of the rights which their personal law confers on them. The transaction in so far as these properties are concerned is not only voidable but void ab initio. The position then would be that to the extent of the properties which are allocable to the share of Namberumal Chetty, it continues to be property of the joint Hindu family of which Kannan Chetty is the karta and which, in the absence of an order under section 25A, is deemed to continue in existence, and an assessment can very properly be made in respect of the income from those properties in the hands of the karta, Kannan Chetty. What we have said above is sufficient to establish that by the creation of a trust in respect of Kannan Chettys own half share, the half share of the joint family properties and of his separate properties, they have ceased to be property belonging to the joint Hindu family, the creation of the trust by Kannan Chetty being a perfectly valid transaction. It would follow that the income from those properties will have to be assessed not in the hands of the deemed Hindu undivided family but in the hands of the trustees of the trust.

The question is accordingly answered partly in favour of the assessee and partly in favour of the department. There will be no order as to costs.


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