Allowability of Expenditure incurred wholly and exclusively in connection with transfer of capital asset [Section 48(i)]

Expenditure incurred wholly and exclusively in connection with the transfer of a capital asset is deductible from the full value of consideration. These include any direct or indirect expenses that are incurred during transfer, such as - brokerage, advertising, stamp duty, registration fees, legal expenditure, etc.

Text of Section 48(i)

^[1][48. Mode of computation.

The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely: -

(i)  expenditure incurred wholly and exclusively in connection with such transfer;]

 

KEY NOTE

1.   Substituted by the Finance Act, 1992, with effect from 01.04.1993.

Wholly and exclusively

Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from full value of consideration. The expression “expenditure incurred wholly and exclusively in connection with such transfer” means expenditure incurred which is necessary to effect the transfer.

The main condition that any expenditure has to fulfill for the purpose of being allowed as a deduction is that this has to be wholly in connection with the transfer. It cannot be that there is a small element that is related to the transfer and this leads to the whole amount being considered for the deduction. There has to be an exclusive element of the end use which has to be the transfer of the capital asset. So if there are some vague claims saying that these are incurred for the purpose of the transfer then they are likely to be disallowed. Since the basic conditions are known it is important that there is a proper look at all the conditions to see that they are in line with the requirements.

The word ‘wholly’ refers to the quantum of expenditure and word ‘exclusively’ refers to the motive, objective and purpose of the expenditure. These two words give jurisdiction to the taxing authority to decide whether the expenditure was incurred in connection with the transfer. The expression ‘wholly and exclusively’ however, does not mean and indicate that there must exist a necessity or compulsion to incur an expense before an expenditure is to be allowed.

The words ‘wholly and exclusively’ require and mandate that the expenditure should be genuine and the expression ‘in connection with the transfer’ require and mandate that the expenditure should be connected and for the purpose of transfer. Expenditure, which is not genuine or sham, is not to be allowed as a deduction. This, however, does not mean that the authorities, Tribunal or the Court can go into the question of subjective commercial expediency or apply subjective standard of reasonableness to disallow the expenditure on the ground that it should not have been incurred or was unreasonably large. In the absence of any statutory provision, on these aspects discretion exercised by the assessee who has incurred the said expenditure must be respected, for interference on subjective basis will lead to unpalatable and absurd results. As in the case of section 37 of the Act, jurisdiction of the authorities, Tribunal or Court is confined to investigate and decide as to whether the expenditure was actually incurred, i.e., the expenditure was genuine and was factually expended and paid to the third party.

Word ‘connection’ in section 48(i)

Word ‘connection’ in section 48(i) reflects that there should be a causal connect and the expenditure incurred to be allowed as a deduction must be united or in the state of being united with the transfer resulting in income by way of capital gains on which tax has to be paid. The expenditure, therefore, should have direct concern and should not be remote or have indirect result or connect with the transfer. Practical and pragmatic view in the circumstances should be taken to tax the real income, i.e., the gain.

Deduction of expenditure

Section 48 makes it clear what can be deducted under section 48(i) is expenses incurred wholly and exclusively in connection with the transfer.

In case of sale of a house property

Following expenses are deductible from the total sale price of capital asset:—

(i) Brokerage or Commission paid for securing a purchaser

This is one of the most common expenses that is incurred at the time of the transfer due to the fact that in many cases it is not possible to sell the property or the capital asset without the help of a broker or an intermediary. There would have to be some payment of fees to the broker at the time of the transfer of the asset and hence this would be a part of the total receipt that would have to be reduced in order to arrive at the final figure.

(ii) Cost of Stamp Papers or Registration Fees borne by the Vender (Seller)

There are different ways in which the sale agreement could be structured. At the time of the transfer of the property there would have to be stamp duty or registration fees that have to be paid to the government for the change of name and other details in the property. When this is the case then the next thing to look at is who is going to bear these charges. It could be that the seller is bearing the charges in which case the amount can actually be claimed as a reduction from the amount of the total receipts.

(iii) Travelling Expenses in connection with transfer (Sale)

It could also be that the individual who holds the property is living at some other place and hence would have to travel to the place where the property is located for the purpose of completing the requirements of sale. This would ensure that there are some amounts that are actually spent here which would actually be for the purpose of the transfer process. If this is the case then it would be considered as an amount that is spent for the property and this can be reduced from the amount received in the process of calculation of the gains.

(iv) Litigation Expenses for claiming Enhancement in Compensation

There are different kinds of expenses that are incurred in the entire process of completing the sale of the property and there are situations where there might be some expenses incurred as litigation expenses. This could be for a property where there is a compulsory acquisition so there is some dispute about the valuation and this has been incurred in the process of getting a better compensation or for highlighting a point that has been missed in the calculation. This might also happen in case there is some dispute over the property valuation with the buyer and hence this reason has to be taken carefully into consideration. The whole idea is that the amount should have been spent as a part of the whole process of transfer.

(v) Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of executor, may also be allowed.

(vi) Advertisement cost incurred by the seller to get buyer.

In case of sale of jewellery

Where jewellery is sold and a broker’s services were involved in securing a buyer, the cost of these services can be deducted.

Expenditure allowed under other heads of income

The expenses that deduct from the sale price of assets for calculating capital gains are not allowed as deduction under any other head of the Income Tax, these can be claimed only once. In other words, any expenditure allowed as deduction under any other heads of income, i.e. Income from House Property, Profits and Gains of Business or Profession or Income from Other Sources cannot be allowed as deduction from the sale price of assets for calculating capital gains.

Compensation paid to related parties to get them vacate the land transferred cannot be allowed as deduction under section 48(i) in computing capital gains

• Compensation paid to firm owned 100% by assessee and co-owners of land (mother and sister) and to private company owned 99% by assessee & co-owners for vacating land transferred and obtaining peaceful possession, cannot be allowed as deduction under section 48(i) as expenses incurred wholly and exclusively in connection with such transfer.

• In respect of payment of compensation to firm & Private company, from the uncontroverted factual matrix we note that said claim made by the assessee as deduction under section 48(i) tantamount to diversion of sale proceeds to the related parties who are none other than the co-owners of the land sold under the impugned transaction including that by the assessee.

• The nature of payment which has been claimed to be compensation to the firm and Private Company, is nothing but compensation made to the self since 99% of the share/shareholding is with the co-owners including the assessee.

• The occasion of getting the land vacated will arise only when it is occupied by another third party which is not so in the present case since here the land is occupied by the entities/concerns owned and controlled by the co-owners including the assessee .

• Further, the observation raised in respect of minority shareholders was only a possibility. Also, there is no clarity from the material placed on record as to how the issue relating to minority interest was resolved or were the minority shareholders also compensated in the similar manner. (Related Assessment year : 2015-16) - [DCIT v. Jayapal Sanjay (2022) 142 taxmann.com 120 (ITAT Chennai)]

Tax component on sale of shares to be distributed among all sellers even if entire tax was borne by one seller

Assessee and her husband entered into share purchase agreement to sell her shares in four companies. Assessee submitted that consideration agreed between parties for sale of its shares was Rs. 2,70,32,278/- minus the tax component of Rs. 90,74,103/-. Assessee had agreed to pay tax component as per clause 7(1) of share purchase agreement. She claimed deduction under ‘capital gains’ on tax component under section 48. Assessing Officer did not allow deduction on the ground that the tax component does not fall within the definition of expenditure under section 48(1) of the Act. Commissioner (Appeals) allowed appeal in part and appeal before Tribunal, had been dismissed. Assailing orders passed by revenue, assessee submitted that full value realised by assessee as consideration was amount excluding tax component, therefore, view taken by revenue was unsustainable.

Held : Section 48 of the Income-tax Act provides for mode of computation in terms of which the income chargeable under the head ‘Capital Gains’ shall be computed by deducting full value of the consideration received. The expenditure incurred and cost of acquisition are deductible. The Revenue’s case is, payment of tax does not fall in these two categories. But in the facts of this case, the total amount realised or in other words, which the appellant got in her hand, is Rs. 1.80 Crores. The deduction is claimed based on the agreement between the parties. A careful perusal of the agreement shows that intention of the parties is clear to the effect that the value of the shares shall be the amount agreed between the parties excluding the tax component. However, the contention urged by assessee that tax component should be distributed among both sellers merits consideration. Therefore, appellant shall be entitled for deduction of only 50% of the tax component proportionate to her share holding. In view of the above, this appeal is allowed in part. [Partly in favour of revenue] – [Smt. Durga Kumari Bobba v. DCIT (2022) 142 taxmann.com 31 (Karn.)]

Upholds the disallowance of sum claimed by Assessee under Section 48(i) on account of land vacation expenses and interest on clearance of encumbrance due to cancellation of the Joint Sum paid to remove encumbrance to a property is an allowable deduction while computing capital gains

Any amount paid for removing encumbrance to a property without which sale or transfer could not be effected, is allowable as deduction under section 48(i). Assessing Officer noticed that in original return of income assessee had offered long term capital gain of Rs. 1.49 crores, however, in revised return of income, assessee had reduced long term capital gain to Rs. 81.59 lakhs. Assessee explained that subsequent to sale of property to ‘C’, another party claimed itself as owner of property sold. Therefore, ‘C’ filed a suit for declaration of title. By virtue of consent terms approved by High Court, assessee along with other co-owners had to pay amount to buyer ‘C’ and submitted that, since amount was paid in connection with transfer of capital asset, it was allowable under section 48(i). Assessing Officer, however, disallowed deduction claimed and computed long term capital gain accordingly. It was found that undisputedly, payment made by assessee to ‘C’ was certainly for removing encumbrance and perfecting title over property sold, otherwise, transaction would have failed. Further, payment made by assessee was established on record and hence, could not be disputed. Therefore, amount paid by assessee to ‘C’ was an expenditure in connection with transfer of a capital asset as per section 48(i) and hence allowable. [In favour of assessee] (Related Assessment year : 2013-14) – [Mahesh Pratapsingh Asher v. ACIT (2022) 135 taxmann.com 74 (ITAT Mumbai)]

Assessee as co-owner sold property and while computing long-term capital gain on impugned sale transaction claimed deduction under section 48(i) towards interest for clearance of encumberance on land and payment towards compensation to related parties which was nothing but compensation made to self as 99 per cent of shareholding of property was with co-owners including assessee, disallowance made by Assessing Officer towards claim of deduction was to be upheld

Chennai ITAT allows Revenue’s appeal, upholds the disallowance of sum claimed by Assessee under Section 48(i) on account of land vacation expenses and interest on clearance of encumbrance due to cancellation of the Joint Development Agreement (JDA), by holding that such expenses tantamount to diversion of sale proceeds to the related parties; Assessee-Individual, for Assessment year 2015-16, sold a jointly owned land property at a sale consideration of Rs. 22.11 Cr for his share of 30.93% and computed the long term capital gain claiming Rs. 14.14 Cr under Section 48 wherein Rs.11.58 Cr was on account of land vacating compensation paid to two leaseholders and interest paid on security deposit to Ramaniyam Real Estates for Rs. 2.55 Cr with respect of clearing the encumbrance owing to cancellation of the JDA; Revenue disallowed Assessee’s claim under Section 48 which was set aside by CIT(A) ; On Revenue's appeal, ITAT notes that the entities who were paid compensation for vacating the land, i.e. SAE and BJT are Assessee's related parties as the Assessee with his mother and sister are co-owners of the concerned land and held substantial and significant share i.e., 99% directly or indirectly in the two entities; Observes that the occasion of getting the land vacated will arise only when it is occupied by a third party which is not so in the present case; Holds that nature of payment which has been claimed to be compensation for vacating land and handing over peaceful possession, is nothing but compensation made to the self; Opines that Assessee’s claim of payment of compensation for land vacation under Section 48(i) tantamounts to diversion of sale proceeds to the related parties who are none other than the co-owners of the concerned land, by relying upon jurisdictional High Court ruling in Smt. D. Zeenath in TCA No. 2582 of 2006 dated 03.04.2019; Notes Assessee’s submission that payment of interest on security deposit to Ramaniyam Real Estates was for clearance of encumbrance and explains that, ‘encumbrance’, which is a charge or burden created by transfer of any interest in a property, cannot be created by mere execution of an MOU, agreeing to enter into an agreement to sell the property, or even by receipt of advances or amounts in pursuance of an MOU, and unless by a reason of the statute no burden on the title of the property which diminishes the value of the land is created, it shall not constitute any encumbrance; Observes that in the present facts and circumstances, it is nothing but a ‘self-created encumbrance’ between the co-owners and Ramanaiyam by way of a JDA and that there cannot be an encumbrance created between the two parties who have agreed to transact under a JDA; Points out that nothing is placed on record by the Assessee to demonstrate the efforts put in by them to fulfil the conditions under the said JDA, failing which has resulted into an encumbrance as claimed; Relies on Supreme Court ruling in Sumati Dayal v. CIT (1995) 214 ITR 801 (SC) held that income tax proceedings are civil proceedings and the degree of proof required is to be judged by preponderance of probabilities. Further, the Hon’ble Apex Court in the case of CIT v Durga Prasad More (1971) 82 ITR 540 (SC) has held that the taxing authorities were not required to put on blinkers while looking at the documents produced before them they were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents....The apparent must be considered as real only it is shown that there are reasons to believe that the apparent is not the real and that too taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probability.... Science has not yet invented any instrument to test the reliability of the evidence placed before a court or tribunal. Therefore, the courts and tribunals have to judge the evidence before them by applying the test of human probabilities; Observes that Assessee’s claim is to be examined in the light of real life probabilities instead of adopting superficial approach, sets aside CIT(A) order and upholds the disallowance made by Revenue. [In favour of revenue] (Related Assessment year : 2015-16) – [DCIT v. Jayapal Sanjay (2022) 197 ITD 720 : 142 taxmann.com 120 (ITAT Chennai)]

Architect’s fees for quantifying transferable area deductible against sale consideration for land development rights

Mumbai ITAT allows Assessee’s appeal, holds architect fees paid to determine the quantum of FSI and area to be transferred to MCGM and MHADA deductible as transfer expenses in computing capital gains;  Assessee-Company sold development rights in land for Rs. 16 Cr. during Assessment year 2007-08 and claimed Rs. 33,67,200/- on sale of development rights of land paid as architect fees as deduction which was disallowed by the Revenue in computing capital gains on transfer of development rights and was confirmed by CIT(A); ITAT finds that the fees were inevitable and were paid to determine the FSI available in order to determine the area to be transferred to MCGM and MHADA in accordance with the development control regulation without which it would not have been possible to transfer the development rights; Notes that the CIT(A) also agreed that the fees were inevitable which was also demonstrated by the Assessee from the copies of agreement and invoice; Thus, allows Assessee’s claim for expenditure incurred toward architect’s fees. Assessment Year: 2007-08 – [Standard Industries Ltd. v. DCIT – Date of Judgement : 28.02.2022 (ITAT Mumbai)]

Property was mortgaged by assessee after he had acquired property, amount paid by assessee to discharge mortgage debt by sale of said property could not be treated as cost of acquisition so as to allow same as deduction under section 48(i)

Mortgage discharge in connection with property sale. Madras High Court upholds ITAT order and denies deduction under section 48(i) to assessee-individual with respect to amount paid towards discharge of mortgage in connection with a property sale during Assessment year 1995-96, holds it as ‘application of income’ over assessee’s claim of ‘diversion by overriding title’; Assessee along with two other co-owners [in capacity as guarantor] had offered property as collateral security, however, upon default by borrower, the property was sold and total sale consideration was paid to the Bank by the purchaser; Rejects assessee’s stand that since the sale consideration had been paid towards the discharge of the loan it was actually the cost of acquisition warranting deduction under section 48, further rejects assessee’s stand that there was a diversion of the sale proceeds towards redeeming the interest of the mortgagor; High Court holds that the consideration was not paid to clear a cloud over the title but was paid to clear the interest or charge over the property which had been offered as collateral security, therefore, upholds capital gains taxability in the hands of the assessee and the two co-owners, relies on Supreme Court ruling in R.M. Arunachalam and V.S.M.R. Jagadishchandran (Decd.); Further, holds that there was no diversion of sale proceeds by virtue of overriding title, but on the contrary, there was only a mere application by the owners themselves of the profits realized on the sale of land towards the discharge of loan obligations, distinguishes assessee’s reliance on Bombay High Court ruling in Abrar Alvi, Shakuntala Kantilal, Supreme Court ruling in Sunil Kinariwala and Kerala High Court ruling in Thressiamma Abraham. [In favour of revenue] (Related Assessment year : 1995-96) – [D. Zeenath v. ITO, Nagapattinam (2019) 413 ITR 258 ; 263 Taxman 569 : 105 taxmann.com 298 : [TS-209-HC-2019(MAD)] (Mad.)]

Legal-fees payment for advising foreign company on transfer of Indian subsidiary’s shares, deductible under section 48(i)

Mumbai ITAT allows deduction under section 48(i) for legal/professional fees paid to Accounting/Law firms for advising/assisting assessee (a foreign co.) in transfer of shares of Indian subsidiary; While computing long-term capital gain on sale of subsidiary’s shares, the assessee had claimed deduction of U.S. $13,27,609 towards legal fees, ITAT notes that the condition precedent for claiming expenditure under section 48(i), is that it must have been incurred wholly and exclusively in connection with the transfer of the capital asset;

Holds that the phraseology “in connection with the transfer of capital asset” used in Section 48(i) is wider in scope than the expression “for the transfer” and that any expenditure intrinsically connected to transfer shall qualify for Section 48 deduction, cites jurisdictional High Court ruling in Shakuntala Kantilal b Kerala High Court ruling in V. A. Vasumathi, Mumbai ITAT ruling in GIC Housing Finance Ltd.; Referring to the correspondences between the assessee and the Advocates/Accounting Firms and the invoices raised, ITAT observes that services rendered were in relation to advise on sale of entire shareholding of the Indian Subsidiary, and includes preparation of share sale/purchase agreement, rendering advise on and preparing necessary closing documentation including board resolution, share transfer forms, etc. (Related Assessment year : 2010-11) - [AIG Offshore Systems Services Inc. v. ACIT - Date of Judgement : 18.01.2019 - (ITAT Mumbai)]

Liquidated damages for cancelling earlier agreement to sell immovable property deductible under section 48(i)

During relevant year, assessee declared long-term capital gains from sale of immovable property. Assessee had earlier entered into agreement to sell for sale of said property with ‘A’. Under said agreement assessee had received certain amount as advance and part payment from ‘A'. Since said sale transaction did not materialise and assessee sold property subsequently to another buyer, she had to pay certain amount as liquidated damages to ‘A’ in terms of earlier agreement to sell. Assessee claimed deduction of payment of liquidated damages under section 48(i). Assessing Officer as well as Tribunal rejected assessee’s claim on ground that payment was not incurred wholly and exclusively in connection with transfer of property to purchaser. Since there was a close nexus and connect between payment of liquidated damages and transfer of property resulting in income by way of capital gains, it had to be treated as expenditure incurred wholly and exclusively in connection with transfer of immovable property and, thus, it is held that Rs. 25,00,000/- paid by the assessee would be deducted under clause (i) to section 48 of the Act while computing capital gains. [In favour of assessee] (Related Assessment year : 1994-95) – [Kaushalya Devi v. CIT (2018) 404 ITR 136 : 255 Taxman 417 : 92 taxmann.com 335 : [TS-198-HC-2018(DEL)] (Del.)]

Assessee paid a certain sum to confirming party for nominating buyers to assessee for sale of a land, payment could only be considered as an expenditure incurred wholly and exclusively in connection with transfer of property

Assessee entered into an agreement with a party regarding sale of a property. While computing long term capital gains, assessee claimed deduction on account of a sum paid to confirming party to said transaction. Assessing Officer did not accept said claim. The payment has directly effected by the purchaser is clear from the receipt memo given at page 28 of the paper book. In such circumstances, we are of the opinion that the payment could only be considered as an expenditure incurred only and exclusively in connection with the transfer of the property. It was an allowable one under section 48(i) of the Act. Such addition therefore stands deleted. [In favour of assessee] (Related Assessment year : 2008-09) – [Vivek Bose v. ITO .(2015) 152 ITD 745 : (2014) 42 taxmann.com 35 (ITAT Kolkata)]

Expenditure for getting no objection certificate (NOC) for sale of flat - Allowable under section 48(i)

Assessee owned a flat in housing cooperative society. During the previous year, the assessee sold the said flat and in computing capital gains claimed a sum of Rs. 4 lakhs as expenditure under section 48, being the payment made to housing cooperative society for getting the NOC from the society for the sale of the flat. The Assessing Officer held that only a sum of Rs. 25,000 was paid as transfer charges and the balance of Rs. 3,75,000 was voluntary contribution to the society and, hence, it was not part of the transaction. He, therefore, disallowed the sum of Rs. 3,75,000. On appeal, the Commissioner (Appeals) confirmed the disallowance.

The memorandum of understanding [MOU] between the assessee and the buyer of the flat provided a condition that the assessee had to make the payment of Rs. 4 lakhs as transfer charges to the society. The letter dated 25.08.1997 written by the assessee to the secretary of the housing cooperative society also indicated that a cheque of Rs. 4 lakhs was sent to the society for taking NOC for the sale of the flat. The cheque had been returned unpaid. Therefore, the society wrote a letter to the assessee on 20.12.1997 indicating that on non-receipt of Rs. 4 lakhs within seven days, the NOC would be withdrawn. There was another letter from the society dated 25.12.1997 directing the assessee to make the payment of Rs. 4 lakhs immediately on the receipt of sale proceeds of the flat. The assessee vide his letter dated 02.01.1998 enclosed a DD for Rs. 4 lakhs stating that it was transfer charges against the sale of flat. All these evidences showed that the society was demanding a sum of Rs. 4 lakhs transfer charges for issuance of NOC. The Assessing Officer and the Commissioner (Appeals) did not examine the society so as to find out as to whether the demand of Rs. 4 lakhs was not in relation to the transfer of flat. In fact, the authorities did not choose to confront the society but merely relied on the accounting entry passed by it to adjust Rs. 4 lakhs in its books of account. So far as the assessee was concerned, it was a consideration for obtaining NOC from the society. The claim of the deduction under section 48 would depend on what was the nature of the transaction between the assessee and the society and not in what manner the society finally adjusted the sum in its books of account. Hence, the sum of Rs. 4 lakhs was a necessary expenditure for transfer of flat and, therefore, allowable under section 48. [In favour of assessee] (Related Assessment year : 1998-99) - [Damodar G. Nagalia v. ACIT (2007) 12 SOT 599 (ITAT Mumbai)]

If without removing any encumbrance, sale or transfer could not be effected, amount paid for removing that encumbrance will fall under clause (i) of section 48(1)

Section 48(1), as it stood in the assessment year 1992-93, while providing for computation of capital gains permitted in clause (i), deduction of the ‘expenditure incurred wholly and exclusively in connection with such transfer’. The expression ‘in connection with such transfer’ is wider than the expression ‘for the transfer’. Any amount, the payment of which is absolutely necessary to effect the transfer will be an expenditure covered by clause (i) of section 48(1). In other words, if without removing any encumbrance, sale or transfer could not be effected, the amount paid for removing that encumbrance will fall under clause (i) of said section 48(1).

In the instant case, the amount was received out of the sale of assets of both the firms under orders of the High Court subject to meeting of the liability of the bank. Unless that liability was met, the transferee could not derive any title. In other words, the sale consideration receivable by the assessee was less the liability of the bank. Thus, meeting the liability of one of the firms, when the entire assets were being sold, was an absolute necessity to effect the transfer. In other words, it was an encumbrance without removing which the sale or transfer could not be effected and the amount spent for removing that encumbrance would definitely attract section 48(1)(i). The sale could not be effected without meeting the liability, as it appeared from the different orders passed by the High Court in the latter suit.

But the orders passed by the High Court directing the sale of the assets of the two firms and confirmation thereof were staring on the face of the inference drawn by the Commissioner (Appeals). Thus, the liability met by the assessee towards the dues of the bank was an expenditure incurred wholly and exclusively in connection with the transfer. The criteria is the perfection of title in order to effect the sale. In the instant case, without removing the liability of the bank, the title of the purchaser could not be perfected. Having regard to the facts and circumstances of the case, and the position in law, the meeting of the liability of the bank relating to the assets of ‘GS’ was an expenditure incurred wholly and exclusively in connection with the transfer.  - [In favour of the assessee] (Related Assessment year : 1992-93) – [Gopee Nath Paul & Sons v. DCIT, Special Range (2005) 278 ITR 240 : 198 CTR 116 : 147 Taxman 629 (Cal.)]

Assessee sold a house property - While computing capital gains assessee deducted amount paid by her to housing society towards repair funds and charity in connection with transfer - Assessing Officer disallowed claim holding that it was voluntary contribution and could not be regarded as transfer fee - Transfer of capital asset itself could not have come about in absence of such payment, irrespective of nomenclature being given to such payment, and, thus, it was an allowable expenditure incurred by assessee wholly and exclusively in connection with such transfer

During the relevant year, the assessee sold a house property. While computing the capital gains, the assessee deducted the amount paid by her to the society in connection with the transfer. The Assessing Officer disallowed the claim holding that the voluntary contribution towards repair funds could not be regarded as transfer fee. However, on appeal, the Commissioner (Appeals) deleted the disallowance. On revenue’s appeal :

Held : The transfer of the capital asset itself could not have come about in the absence of such payment, irrespective of the nomenclature being given to such payment. It was definitely an allowable expenditure incurred by the assessee wholly and exclusively in connection with such transfer and the payment should be deducted while computing the income from capital gains in accordance with section 48(1).

It was not at all the case of the department that the transfer of the capital asset in question would have taken place or could have taken place if the said amount had not been paid by the assessee. Moreover, it would also be against common behaviour of the assessee to make unnecessary payment of such huge amount, if she was under no compulsion to do so to get the transfer effected. The facts are self-speaking and it is an un-rebutted practice that amounts are to be disbursed for effective transfer of a house. The appeal was dismissed. (Related Assessment year : 1996-97) – [Addl. CIT v. Mrs. Madhur I. Teckchandaney (2005) 93 ITD 65 : 93 TTJ 721 (ITAT Mumbai)]

Assessees sold their ownership rights in a property and claimed deduction of certain amount paid to their sister for vacating portion of property occupied by her peacefully - Amount paid to sister was a deductible expenditure from sale proceeds for computation of capital gains

In respect of payment made to the sister, the lower authorities had banked upon the will, dated 03.12.1978, which provided that the sister would have no right in the impugned house property. She was given another flat, which was tenanted. According to them, once she had no right in the will, she had no right to receive any compensation. Besides, she had signed an affidavit before the High Court to that effect at the time of taking probate. There were many other important facts attached to the whole episode. Since the other house given to the sister was tenanted, and since beginning she was residing with other family members in the house in question and as the period of stay was more than 12 years there was a possibility that she could have claimed right to property by way of adverse possession in case of a dispute. Her stay in the house was not doubted. The assessees agreed to sell the house with a condition that the same could be sold in vacant possession. The will was not probated; to effect the sale, the same was necessary. The brothers anticipated the situation and a family settlement was arrived at providing that the sister could be given certain amount out of the sale proceeds of the house being sold for vacating the portion of the property occupied by her peacefully. The sister subsequently bought another flat out of the money received and shifted there. After family settlement, probate was applied in the course of which the sister signed an affidavit agreeing to the terms of probate according to will. The swearing of affidavit on the part of the sister could not be questioned as she had the support of family settlement, which was duly executed. She did her part of performance in probate proceedings as agreed in family settlement terms. There was a strong possibility that the sister because of her having possession of portion of the house and family settlement, constituted an encumbrance on the property in question and, therefore, any payment given to clear the same was a deductible expenditure from sale proceeds for computation of capital gains. Therefore, the assessees were entitled to reduce the amount paid to the sister in their respective hands in that behalf. [In favour of assessee] (Related Assessment year : 1994-95) – [Ketan Bolinjkar v. ACIT (2004) 2 SOT 868 (ITAT Mumbai)]

Amount paid for removing encumbrance in order to effect transfer of capital asset, deductible under section 48(i) while computing capital gain

The assessee agreed to sell a plot of land to a company. A dispute arose between them, as a consequence of which the assessee agreed to pay certain amount as compensation to the company. The assessee then sold the same plot to another person and claimed that the amount paid as compensation to the company was liable to be deducted while computing capital gain arising on such sale. Bombay High Court ruled in favor of the assessee, holding that the amount was deductible under section 48. High Court held that any amount, the payment of which is absolutely necessary to effect the transfer (of a capital asset), would be an expenditure covered by section 48(i). In other words, if without removing any encumbrance including the encumbrance of the type involved in this case, sale or transfer could not be effected, the amount paid for removing that encumbrance will fall under clause (i).  [In favour of assessee] (Related Assessment year : 1968-69) - [CIT v. Smt. Shakuntala Kantilal (1991) 190 ITR 56 : 58 Taxman 106 : [TS-6-HC-1991(BOM)](Bom.)]

Expenditure incurred on payment of legal fees, brokerage, commission, etc. in connection with the transfer was allowable as deduction under section 48

Petitioner is a HUP and owns a house named ‘Roop Mahal’ at Mount Abu. Most of it was in use and occupation for the residence of the members of the family. This property was sold along with the furniture and fixtures to the State Bank of Bikaner and Jaipur on 27.08.1976, for a sum of Rs. 2,20,000. The petitioner incurred a sum of Rs. 2,520 in travelling and other legal expenses and claimed as deduction under section 48(i) of the Act, but the same was disallowed by the ITO. On appeal, the Commissioner (Appeals) partly accepted the contention of the petitioner and allowed the relief for Rs. 550 out of expenditure on legal fee but did not allow other reliefs. On further appeal, the Tribunal confirmed appellate order allowing legal expenses but not other item. On application under section 256(2), held that none of the questions mentioned by the assessee were questions of law arising out of the Tribunal’s order. Therefore, the Tribunal was justified in refusing the assessee’s application for reference. - [Sah Roop Narain v. CIT (1987) 32 Taxman 453 (Raj.)]

Expenditure incurred in conducting land acquisition reference case before the Civil Court for enhanced compensation is expenditure incurred wholly and exclusively in connection with the transfer of capital asset and is an allowable deduction

Assesses owned certain agricultural land situated within municipal area. By virtue of the Finance Act, 1970 said land was brought under definition of capital asset with effect from 01.04.1970. Government acquired that land and it was duly transferred during accounting period relevant to assessment year 1973-74.  Amount of solatium received by assesses formed pari of profits or gains arising from transfer of capital asset and had to be taken into account in computation of capital gains. Expenditure incurred by assessee in conducting land acquisition reference case before sub-Judge for getting enhanced compensation was an allowable deduction under section 48. Compensation received by assessee for injurious effect on account of severance to its remaining extent of land was not to be taken into account in computation of capital gains. For purposes of computation of capital gains, cost of acquisition of said land was to be taken as per section 55(2) not as on 01.04.1970 when said land became a capital asset but as on 01.01.1954

The cost of acquisition of a capital asset within the meaning of section 48 is not the cost on the date on which the asset transferred became a capital asset. The incidence of levy under section 45 is on the capital gains to be computed in the manner provided for in section 48 read with section 55(2). The deduction permissible under section 48 is the cost of acquisition of the capital asset transferred for consideration, whether or not it was a capital asset on the date of its acquisition. What is taxable under section 45 are the profits or gains arising from the transfer of a capital asset and the charge of income-tax on the capital gains is as income of the previous year in which the transfer took place. It is clear from sections 45 and 48 that exigibility of capital gains to tax is not on the basis that what was transferred was a capital asset on the date of its acquisition, but on the basis that the subject-matter of transfer is a capital asset within the meaning of the Act. Accordingly, it could not be said that the cost of acquisition of the land should be taken as on the date on which the property transferred became a capital asset.

So far as the solatium amount was concerned, even though solatium is an extra payment provided for under the Land Acquisition Act for the reason of the compulsory nature of the acquisition, it is nevertheless compensation and forms part of the consideration received or accruing as a result of the transfer by way of acquisition of a capital asset within the meaning of section 48. Hence, the solatium received by the assessee as a result of the transfer of the capital asset and forming part of the profits or gains arising there from was exigible to tax under section 45.

In view of the decision of the instant Court in CIT v. Dr. P. Rajendran (1981) 127 ITR 810, in the present case, the Tribunal was right in deducting the expenditure incurred by the assessee before the sub-Judge for getting enhanced compensation in computing the capital gains.

The compensation for severance, for the reason that the acquisition had injuriously affected the property other than the property acquired, could not be treated as part of the consideration received or accrued as a result of the transfer of the capital asset. The compensation for severance was by way of damages for injurious effect of other land belonging to the assessee and was not related to the transfer of the capital asset. This could not, therefore, be considered for computation of capital gains. - [CIT v. M. Subaida Beevi (1986) 160 ITR 557 : 57 CTR 324 : (1987) 30 Taxman 50 (Ker.)]

Amount paid to mother having right of residence in the property, for obtaining relinquishment of such right was deductible under section 48(i)

A property was allotted to the assessees, who were brothers, under a deed of partition. The partition deed conferred a right of residence in the property in favour of the mother of the assessees. Subsequently, the property was sold. The assessees claimed deduction of a certain sum on the ground that they had paid this amount to their mother for relinquishment of her right of residence in the property sold, in order to obtain a fair and reasonable price. The ITO allowed the assessee’s claim but, acting under section 263, the Commissioner set aside the ITO's order. The Tribunal, however, held that the money received by, the mother was for extinguishment of her right of residence in the property and that it could not be included in the computation of capital gains by the assessees. It, therefore, allowed the assessee's claim. On application under section 256(2) :

Held : When the interest of the mother in the property had been purchased by getting a relinquishment for a certain consideration, the said sum could not be taken to be a part of the consideration received by the assessees in respect of their interest in the property. The payments made to the sons towards their interest in the property alone could be taken for the purpose of computation of the capital gains. The Tribunal was, therefore, right in its conclusion that the sum paid to, the mother should be excluded in computing capital gains in the hands of the assessees. Accordingly, there was no justification to direct a reference in this case. The reference petitions are, accordingly, rejected. - [CIT v. Soundararajan (CV) (1984) 150 ITR 80 (Mad.)]

Expenditure in connection with transfer need not necessarily to have been incurred prior to passing of title - Expenditure incurred in litigation for enhancement of compensation before civil courts could be regarded as expenditure wholly and exclusively incurred in connection with transfer of assessee’s property

It is not necessary that the expenditure must have been incurred prior to the passing of the title. It is immaterial whether it was incurred prior or subsequent to the transfer. What is important is, it must be incurred and exclusively in connection with or in relation to the transfer.

The words “in connection with” used in section 48(i) were very wide in their ambit. There was, thus, no warrant for importing a restriction that to qualify for deduction the expenditure must necessarily have been incurred prior to the passing of title. The crucial test was whether the expenditure was incurred wholly and exclusively in connection with the transfer and it was immaterial whether it was incurred prior or subsequent to the passing of title. Further, by virtue of the definition contained in section 2(47), the expression “transfer” would include the compulsory acquisition of a capital asset under any law. Hence, the compulsory acquisition of property under the Land Acquisition Act, 1964, had to be treated as a “transfer” for computing capital gains. The fixation of the quantum of consideration for the transfer was finally effected only by the decision rendered by the civil court. Such fixation formed an integral part of the process of transfer by way of compulsory acquisition provided by the Land Acquisition Act. The Tribunal was, therefore, right in holding that the expenses incurred by the assessee in his litigation before the civil courts to claim enhanced compensation for the compulsory acquisition of his property was an expenditure incurred wholly and exclusively in connection with its transfer. - [CIT v. Dr. P. Rajendran (1981) 127 ITR 810 : 20 CTR 364 : 5 Taxman 311 (Ker)]

Vague claim for expenses is not allowable

In the case of B. N. Pinto, it was observed that what can be deducted under section 48(i) is expenses incurred wholly and exclusively in connection with the transfer. The damages for mental worry and suffer in on account of wrongful withholding and detention of her property cannot, by any stretch of imagination, be said to be expenses incurred wholly and exclusively in connection with the transfer. The claim in respect of lawyer’s fees is also indefinite and vague and is not specific that it was in connection with the transfer, like, for example, drafting of the deed or such purpose intimately connected with the transfer. Similarly, regarding the travelling expenses, it is not specific that it was in connection with the transfer.

Therefore, the nature of expenses as represented by the assessee would not bring them within the ambit of section 48(i) of the Income-tax Act, 1961, so as to be a permissible deduction. We, therefore, answer the question in the affirmative and against the assessee, i.e., that the Tribunal was justified in not deducting Rs. 41,517 while computing the capital gains.” - [B. N. Pinto v. CIT (1974) 96 ITR 306 (Mys)]

 

  

Partition of Hindu Undivided Family (HUF) under Section 171 of the Income Tax Act, 1961

Section 171 of the Income Tax Act, 1961 defines the partition of HUF and deals with the provisions of assessment after its partition.

The Partition of HUF should be recognized as per the Income Tax Act and not as per the Hindu Law. Section 6 of the Hindu Succession Act would govern the rights of the parties but insofar as income-tax law is concerned, the matter has to be governed by section 171(1) of the Income Tax Act, 1961.The Hindu Law does not require that the property in every case be partitioned by metes and bound or physically into different portions to complete a partition. But the Income Tax Law introduced certain additional conditions of its own to give effect to the partition under section 171. Thus a transaction may be treated as severance of status under Hindu Law but not a partition under 1961 Act as physical division of property is necessary under 1961 Act.

 

What is the Partition

Partition is the severance of the status of Joint Hindu Family, known as Hindu Undivided Family under tax laws. Under Hindu Law once the status of Hindu Family is put to an end, there is notional division of properties among the members and the joint ownership of property comes to an end. However, for an effective partition, it is not necessary to divide the properties in metes and bounds. But under tax laws for an effective partition division by metes and bounds is necessary.

Partition means-

Case	Partition
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
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.

An HUF can be partitioned both as regards to persons and as regards to property. This partition can be of two types:

[1]   Partial partition.

[2]   Total or complete partition;

The Partition of HUF can be categorized as under:-

 [1]  Partial Partition

Partition could be partial also. It may be partial vis-a-vis members, where some of the members go out on partition and other members continue to be the members of the family. It may be partial vis-a-vis properties where, some of the properties are divided among the members other properties continue to be HUF properties. Partial partition may be partial vis-a-vis properties and members both.

Partial partition is not recognized under the Act

Tax Laws do not recognize partial partition of property or/and persons after 30.03.1978 on insertion of sub-section (9) to Section 171 of the Income Tax Act. This restriction was put to avoid creation of multiple HUFs which was a misuse. For instance, say one coparcener is getting certain property in the HUF via setting apart of that asset of HUF on the condition that no further claim in properties will be made by him, is nothing but a partial partition and not a family arrangement and this situation is not recognized in the Act.

Tax implication of Partial Partition of HUF

Section 171, as originally enacted, applied to total as well as partial partition. However, sub-section (9) inserted by Finance (No 2) Act, 1980 recognises only complete partition. A Partial partition took place after 31.12.1978 is not recognized under the Income Tax Act, 1961 (Section 179(9). Thus partial partition effected after this date is not given effect to by the Assessing Officer even though such partition may be legal as per Hindu Law. Hence, for the purpose of income-tax assessment, the HUF shall be deemed to continue notwithstanding the partial partition and the income from all properties shall continue to be assessed in the hands of erstwhile HUF. Therefore even after the Partial partition, the income of the HUF shall be liable to be assessed under the Income-tax Act as if no partition had taken place.

Treatment in case of partial partition took place after 31.12.1978 [Section 171(9)]

Sub-section (9) of section 171 is an exception to sub-section (1) of section 171. For the applicability of sub-section (9) of section 171, two pre-requisites are essential. Firstly, the partial partition should have taken place after 31.12.1978 and secondly, such partial partition must have taken place in a HUF which hitherto before was assessed as a HUF.

Setting apart of certain assets of HUF in favour of certain coparceners on a condition that no further claim in properties will be made by them, is a partition under Income Tax Act

Setting apart of certain assets of HUF in favor of certain coparceners on the condition that no further claim in properties will be made by them, is nothing but a partial partition and not a family arrangement and not recognized in view of section 171(9) of the Act.

Consequences of Partial Partition

Notwithstanding anything contained in the foregoing provisions of this section, where a partial partition has taken place among the members of an HUF after 31.12.1978, then—

(i) no claim that such partial partition has taken place shall be inquired into under section 171(2);

(ii) no finding regarding partition shall be recorded under section 171(3);

(iii) such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken place;

(iv) each member or group of members of such family immediately before such partial partition and the family shall be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under this Act by the family.

NOTE

Liability of any member or group of members aforesaid shall be computed according to the portion of the joint family property allotted to him or it at such partial partition.

[2]  Total or Complete Partition

Assets of HUF are physically divided. In total partition all the members cease to be members of the HUF and all the properties cease to the properties belonging to the said HUF.

Tax Implication of Full Partition of HUF

After the Partition, the assessment of HUF shall be made as per the provisions of Section 171 of the Income Tax Act and order to be passed by the Assessing Officer.

Person entitled to share on partition

Following persons can claim share on partition:

Case	Persons who can claim share on partition
Any	Coparceners
Any	A child in the womb of his mother at the time of partition
Partition between sons after the death of father	Mother - gets an equal share to that of son
Wife - gets an equal share to that of a son (apart from that of husband)	Partition between father and sons

 

NOTE

A child in the womb of his mother is entitled to share of HUF property, on partition.

How a partition can be effected and what is its effect

To constitute a partition all that is necessary is a definite and unequivocal indication of intention by a member of a joint family to separate himself from the family. What form such, intimation, indication or representation of such interest should take would depend upon the circumstances of each case. A further requirement is that this unequivocal indication of intention to separate must be to the knowledge of the persons effected by such declaration. A review of the decisions shows that this intention to separate may be manifested in diverse ways. It may be by notice or by filing a suit. Undoubtedly, indication or intimation must be to members of the joint family likely to be affected by such a declaration.

Modes of Partition

A partition can be made by a definite, unambiguous declaration of intention by any member to separate himself from the family. If this is done it would amount to division of status whatever mode may be used. Partition may be effected:

(a) By institution of suit;

(b) By submitting the dispute as to division of the properties to arbitration;

(c) By agreement to divide the property;

(d) By conduct or by a demand for a share in the properties;

(e) By metes and bounds.

Claim of partition by any coparcener

It is mandatory that any member of the HUF must make a claim of partition at the time of making assessment under section 143/144 of the Income Tax Act, 1961

Distribution of assets at the time of partition of HUF

·          On a full partition of the assets of a Hindu Undivided Family (HUF), all the coparceners get their shares in the property.

·          After the amendment in 2005, of Section 6 of Hindu Succession Act, 1956, daughters are also made coparceners and their rights are equal to those of the sons and therefore sons and daughters get the same share in the HUF property on partition.

·          It is not only all the living members but also the child in the womb which is born subsequently entitled to get share in the HUF property.

·          When partition takes place between father and his child, the mother also gets an equal share that of a son. Likewise, on partition of the HUF property after death of the father, mother gets a shares equal to the share of a son/daughter.

·          The share of each branch of the family will be per stripe and then it will be distributed between the coparceners of the branch per capital.

For Example : 

Suppose Mr. A has an HUF having his wife W and sons B and C as well a married daughter D. Both the sons are married and have two children each. On a partition of the assets of the HUF each one of A, W, B, C and D will get 1/5 share in the HUF assets.

The shares of B and C in the HUF assets will be further shared amongst themselves and their children equally. So each one will get 1/15 share of the HUF assets (1/3 of 1/5 share allotted on the partition).

Rights to be claimed by the coparceners

There is no provision under the Income Tax Act, 1961 regarding the equal or unequal right in share during the partition of HUF. The right of the coparceners in the share during division is governed by Section 6 of the Hindu Succession Act, 1956.

Partition can only be claimed by a coparcener. But, when there is a partition of HUF, the following persons are entitled to a share in the assets of the HUF:

(i) All coparceners.

(ii) Mother is entitled to a share equal to the share of a son in case of death of the father.

(iii) Wife gets a share equal to that of a son if a partition takes place between her husband and his sons. She enjoys this share separately even from her husband.

(iv) A son in the womb of the mother at the time of the partition.

Right of minor to claim partition

A minor can claim partition through his guardian.—[Apoorva Shantilal Shah v. CIT (1983) 141 ITR 558 (SC)]

Physical division by metes and bounds is necessary

Hindu Law does not require division of joint family property physically or by metes and bounds. However, partition as defined under Explanation to Section 171 of the Act means—

(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).

Partition of HUF property can be done either through family settlement or through a partition deed

Partition of HUF property can be done either through family settlement or through a partition deed. Family settlement does not attract stamp duty and is not required to be registered, but partition deed attracts stamp duty and must be registered. To avoid expenses inherent with “Partition deed” family settlement is preferred, but must be ensured that:-

·      The family settlement is bona fide, for fair and equitable division of property amongst the members and to resolve family disputes.

·      It must be voluntary and without any force, threat, coercion, misrepresentation and fraud.

·      Fair and equitable family settlement, though unstamped and unregistered, is final and binding on the family members.

Must have assessed as HUF once

For recognition of a HUF to be partitioned under Section 171 of the Income Tax Act, 1961 it is necessary that the HUF must have once assessed as a HUF. Otherwise, section 171 shall be inapplicable.

Inquiry by the Assessing Officer regarding the partition of HUF

Where, at the time of making an assessment u/s 143 or 144, it is claimed by or on behalf of any member of a Hindu family assessed as undivided that a partition, has taken place among the members of such family, the Assessing Officer shall make an inquiry thereinto after giving notice of the inquiry to all the members of the family.

Satisfaction of Assessing Officer that the total partition has taken place

Where the Assessing Officer is satisfied upon the findings that the total partition of HUF has taken place during the previous year then he shall proceed for the computation of income.

There should be actual partition and not fictional to avoid tax

Partition of a HUF has to be done in such a way that it gives a legal finding to the Assessing Officer that a complete partition has actually been taken place since then only he is authorized to compute the income of the HUF as if the partition has taken in the manner as described under section 171.

Partition of HUF should be recognized as per the Income Tax Act and not as per the Hindu Law

Section 6 of the Hindu Succession Act would govern the rights of the parties but insofar as income-tax law is concerned, the matter has to be governed by section 171(1) of the Income Tax Act, 1961.

Requirement of registered partition

It is not necessary to effect partition by a written partition deed. It can be effected orally and be acted upon. Even a partition of an immovable property can be by an oral agreement. In the case of Popatlal Devram v. CIT (1970) 77 ITR 1013 (Orissa) wherein it was held by the Hon’ble orrissa High Court that Law is well settled that a partition of the joint family properties can be effected by an oral agreement irrespective of the value of the property.

Section 17 of the Registration Act, 1908 talks only when immovable property is transferred. Therefore, family settlement without registration is okay if no immovable property is involved. However, in respect of transfer of immovable property separate registered documents only for immovable property can be made.

Concept of notional partition is non-existent under the Income-tax Act

The concept of notional partition is non-existent under the Income-tax Act. The Income-tax Act recognizes only an actual partition and not the notional partition.

Income-tax Act recognizes only an actual partition and not the notional partition

When a Hindu male dies on or after 17.06.1956 having at the time of his death an interest in coparcenary property, leaving behind a female heir of the class one category, then his interest in the coparcenary property shall devolve by succession and not by survivorship. The interest of the deceased will be carved out over devolution, though there is no actual partition. Such an act is considered as a notional partition under the Hindu Law. The concept of notional partition is non-existent under the Income-tax Act. The Income-tax Act recognizes only an actual partition and not the notional partition.

What is notional partition

When a Hindu male dies on or after 17.06.1956 having at the time of his death an interest in coparcenary property, leaving behind a female heir of the class one category, then his interest in the coparcenary property shall devolve by succession and not by survivorship. The interest of the deceased will be carved out over devolution, though there is no actual partition. Such an act is considered as a notional partition under the Hindu Law.

Physical division of property by way of book entries not permissible

Where a property is capable of physical division, the partition must be made by physical division only. If the property of the HUF does not admit of physical division, the property must be so physically divided as much permits. For example, it is not expected that the utility of the property is lost by compelling a physical partition and in such a case, the property may be divided physically to the extent possible.

This is rule in section 179 to make a valid claim for recognising the partition for Income-tax purposes.

Entries showing division of the property in books of account may be good evidence of a partition more particularly in cases where the property may not be capable of physical division.

Therefore, where credit balances in capital account in books of firm in which assessee HUF was a partner is partitioned, it was held that there was a valid partition.—[Motilal Shyam Sunder v. CIT (1972) 849 ITR 186(All)]

An asset which is not capable of physical division can be partitioned by making entries in books.

It was held that an asset which is not capable of physical division can be partitioned by making entries in books. Here, entries relating to partition were passed in books of HUF and not the partnership firm where HUF was a partner and that would be satisfactory evidence of the partition of such an asset. The partition was held valid.—[CIT v. K. G. Ramakrishnier (1963) 49 ITR 608 (Mad)]

 

Allotment of share on partition

On a partition between the members of a joint family, the shares are allotted as under:—

 

S. No.	Particulars	Allotment of share on partition
(i)	On a partition in an HUF which  includes father, mother and sons,	mother has no right to claim partition but when a partition is actually effected she takes a share equal to the sons.
(ii)	On a partition between a father and his sons where mother is not living,	each son takes a share equal to that of the father. Suppose there are four sons, each son will take 1/5 share of the property.
(iii)	If joint family consists of brothers	they take equal shares on a partition.
(iv)	Each branch takes per stripe as regards every other branch	but members of each branch take per capita as regards each other.
(v)	The daughter whether married or unmarried	With effect from 09.09.2005, daughter whether married or unmarried shall also be entitled to equal share on partition as she has also been treated as coparcener like son.

 

Partition of property under Hindu law and under Income tax Act are different on two accounts:-

(a)      For partition under Hindu law division of the property by metes and bounds is not necessary, but for partition recognized under Income tax Act, division of property by metes and bounds is necessary.

(b)     Partial partition of HUF property, either property specific or member specific is valid under Hindu law, but under Income tax Act, 1961 it is not recognized.

Difference between partition under the Hindu Law and that under the Income-tax Act

There is a difference between a partition under Hindu Law and a partition recognised under the Income-tax Act. Though the concept of partition is the same under Hindu law and tax laws, in two respects, recognition of partition under tax laws differs from that under Hindu Law.

 

S. No.	Partition under Hindu Law		Partition under section 171 of Income Tax Act, 1961
1.	Partition is a process by which a joint enjoyment is transformed into an enjoyment in severalty. Each one of sharers had an antecedent title and therefore no conveyance is required. CED v. Kantilal Trikamlal (1976) 105 ITR 92 (SC).		Section 171 raises a legal fiction that an HUF, once assessed shall be deemed to continue unless a finding of partition has been given under this section. Consequently, unless a finding is recorded under section 171 that a partition has taken place, the income from the properties would be included in the total income of the family by virtue of sub-section (1) of section 171. (Kaloomal Tapeshwari Prasad v. CIT (1982) 133 ITR 690 (SC))
2.		FOR RECOGNITION OF PARTITION UNDER HINDU LAW DIVISION OF PROPERTIES BY METES AND BOUNDS NOT IS NECESSARY The Hindu Law does not require that the property in every case be partitioned by metes and bounds or physically into different portions to complete a partition. In other words, for recognition of partition under Hindu Law division of properties by metes and bounds is not necessary. Once shares of each share holder are defined, the partition is complete. It is not necessary that it should be by metes and bounds.	HOWEVER, FOR RECOGNITION OF PARTITION UNDER TAX LAWS, DIVISION OF PROPERTIES BY METES AND BOUNDS IS  NECESSARY The Income Tax Law introduced certain additional conditions of its own to give effect to the partition under section 171. For recognition of partition under tax laws, division of properties by metes and bounds is necessary. It was held that where the assets were not divided by metes and bounds, the partition could not be recognised for the purposes of the Income-tax Act. [CIT v. Venugopal Inani (1999) 239 ITR 514(SC)]
3.		Even a single coparcener can separate himself from rest of the family.	It is to be noted that section 171 applies to those HUFs which have been assessed under the Act. So, in my opinion, partial partition can still take place where HUF has not been assessed without invoking this section.
4.		UNDER HINDU LAW PARTIAL PARTITION IS RECOGNISED Partition under Hindu Law, can be total or partial. In total partition all the members cease to be members of the HUF and all the properties cease to be properties belonging to the said HUF. For example, joint family business could be divided while retaining other properties as joint property.	However, in view of provisions of Section 171(9) of Income-tax Act, 1961, partial partitions will not be recognised for tax purposes. Section 171, as applicable from assessment year 1980-81, recognises only complete partition. Explanation to this section recognizes only partition by metes and bounds i.e. the physical division of property is condition precedent. So, there is a departure from Hindu law. Even a decree of court would not be sufficient or binding on Assessing Officer unless physical division takes place. ITO v. N K Sarada Thamptty (1991) 187 ITR 696 (SC); Narender Modi v. CIT (1976) 105 ITR 109 (SC).
5.		Where there is partition between different branches, the respective branches continue to remain in joint	Partition can be effected on demand of coparceners or suo moto by the father in his superior power even without the consent of sons. Such right can also be exercised even where sons are minors. Apoorva Shantilal Shah (HUF) Seth Gopaldas (HUF) v. CIT (1983) 141 ITR 558 (SC).
6.	Since partition can be effected between coparceners only, a family with sole coparcener is not amenable to partition. V. V. S. Natarajan v. CIT 111 ITR 539 (Mad); CIT v. Satpal Bansal 162 ITR 582 (P&H)(FB)		In case of CIT v. Maharani Rajlaxmi Devi 224 ITR 582 SC, the court has held that recording of partition under section 171 is necessary even in case is falling under section 6 of the Hindu Succession Act. It observed: “it must be held that though for the purpose of HUF, section 6 of the Hindu Succession Act, would govern the rights of the parties but insofar as income-tax law is concerned, the matter has to be governed by section 171(1).”
7.			It is mandatory that assessee must make  a claim of partition at the time of making  assessment under section 143/144. If such  claim is made, the Assessing Officer is  required to make an enquiry into such  claim after giving notice to all the members.  After making enquiry, Assessing Officer  is required to record a finding accepting/  rejecting the claim.

The Partition of HUF should be recognized as per the Income Tax Act and not as per the Hindu Law. Section 6 of the Hindu Succession Act would govern the rights of the parties but insofar as income-tax law is concerned, the matter has to be governed by section 171(1) of the Income Tax Act, 1961 —[Add. CIT v. Maharani Raj Laxmi Devi (1997) 91 Taxman 20 (SC)]

Where however, division was not effected of the property the claim was rejected—[Kaluram & Co. v. CIT (2002) 254 ITR 307 (2001) 115 Taxman 499 (Del)]

As per Kalwa Devadattam v. UOI, even where there is complete partition by metes and bounds the family will be deemed to continue (i) if no claim of partition is made by the members at the time of the assessment; or (ii) if a claim is made but no finding is given by the officer recording the partition.—[Kalwa Devadattam v. UOI (1963) 49 ITR 165 (SC)]

Section 6: The Hindu Succession (Amendment Act), 2005 which came into effect on 09.09.2015 and by which daughters in a joint Hindu family, governed by Mitakshara law, were granted statutory right in the coparcenary property (being property not partitioned or alienated) of their fathers applies only if both the father and the daughter are alive on the date of commencement of the Amendment Act.

(i) An amendment of a substantive provision is always prospective unless either expressly or by necessary intendment it is retrospective. In the present case, there is neither any express provision for giving retrospective effect to the amended provision nor necessary intendment to that effect. Requirement of partition being registered can have no application to statutory notional partition on opening of succession as per unamended provision, having regard to nature of such partition which is by operation of law. The intent and effect of the Amendment will be considered a little later. On this finding, the view of the High Court cannot be sustained.

(ii) Contention of the respondents that the Amendment should be read as retrospective being a piece of social legislation cannot be accepted. Even a social legislation cannot be given retrospective effect unless so provided for or so intended by the legislature. In the present case, the legislature has expressly made the Amendment applicable on and from its commencement and only if death of the coparcener in question is after the Amendment. Thus, no other interpretation is possible in view of express language of the statute. The proviso keeping dispositions or alienations or partitions prior to 20th December, 2004 unaffected can also not lead to the inference that the daughter could be a coparcener prior to the commencement of the Act. The proviso only means that the transactions not covered thereby will not affect the extent of coparcenary property which may be available when the main provision is applicable. Similarly, Explanation has to be read harmoniously with the substantive provision of Section 6(5) by being limited to a transaction of partition effected after 20th December, 2004. Notional partition, by its very nature, is not covered either under proviso or under sub-section (5) or under the Explanation.

(iii) Interpretation of a provision depends on the text and the context (RBI v. Peerless (1987) 1 SCC 424, para 33). Normal rule is to read the words of a statute in ordinary sense. In case of ambiguity, rational meaning has to be given (Kehar Singh v. State (1988) 3 SCC 609). In case of apparent conflict, harmonious meaning to advance the object and intention of legislature has to be given (District Mining Officer vs. Tata Iron and Steel Co. (2001) 7 SCC 358).

(iv) There have been number of occasions when a proviso or an explanation came up for interpretation. Depending on the text, context and the purpose, different rules of interpretation have been applied (S. Sundaram Pillai v. R. Pattabiraman (1985) 1 SCC 591).

(v) Normal rule is that a proviso excepts something out of the enactment which would otherwise be within the purview of the enactment but if the text, context or purpose so requires a different rule may apply. Similarly, an explanation is to explain the meaning of words of the section but if the language or purpose so requires, the explanation can be so interpreted. Rules of interpretation of statutes are useful servants but difficult masters (Keshavji Ravji & Co. vs. CIT (1990) 2 SCC 231). Object of interpretation is to discover the intention of legislature.

(vi) In this background, we find that the proviso to Section 6(1) and sub-section (5) of Section 6 clearly intend to exclude the transactions referred to therein which may have taken place prior to 20th December, 2004 on which date the Bill was introduced. Explanation cannot permit reopening of partitions which were valid when effected. Object of giving finality to transactions prior to 20th December, 2004 is not to make the main provision retrospective in any manner. The object is that by fake transactions available property at the introduction of the Bill is not taken away and remains available as and when right conferred by the statute becomes available and is to be enforced. Main provision of the Amendment in Section 6(1) and (3) is not in any manner intended to be affected but strengthened in this way. Settled principles governing such transactions relied upon by the appellants are not intended to be done away with for period prior to 20th December, 2004. In no case statutory notional partition even after 20th December, 2004 could be covered by the Explanation or the proviso in question.

(vii) Accordingly, we hold that the rights under the amendment are applicable to living daughters of living coparceners as on 9th September, 2005 irrespective of when such daughters are born. Disposition or alienation including partitions which may have taken place before 20th December, 2004 as per law applicable prior to the said date will remain unaffected. Any transaction of partition effected thereafter will be governed by the Explanation. —[Prakash v. Phulvati - Civil Appeal No. 7217 of 2013, dated 24.11.2015 (SC)]

Applicability of Capital gain taxation

In a judgement by Karnataka High Court in the case of CIT v.  R. Nagaraja Rao, wherein it was held that the word ‘transfer’ does not include partition or family settlement as defined under the Act. It is well-settled that a partition is not a transfer, What is recorded in a family settlement is nothing but a partition. Every member has an anterior title to the property which is the subject-matter of a transaction, that is, partition or a family arrangement. So there is a adjustment of shares, crystallization of the respective rights in the family properties and therefore it cannot be construed as a transfer in the eye of law. When there is no transfer there is no capital gain and consequently no tax on capital gain is liability to be paid.

In course of appellate proceedings, Tribunal recorded a finding that there was no transfer of assets and amount received by assessee was a part of family arrangement which did not give rise to liability of capital gain tax, said finding being a finding of fact, no substantial question of law arose therefrom

The questions of law raised by the Revenue in this appeal reads thus:

(i)       Whether the consideration received under the family settlement on transfer of right, title and interest in the family property is a transfer under Section 2(47) of the I.T. Act and liable to be taxed as Capital Gain under Section 45 of Income Tax Act?

(ii)     Whether on the facts and circumstances of the case and on true and proper interpretation of the family settlement dated 15th October, 2003 the consideration of Rs. 2,25,00,000/- received by the assessee on transfer of his right, title and interest in the family property to the party of the second part under family settlement is a Capital Gain liable to be taxed under section 45 of Income Tax Act?"

The ITAT in para 19 of its order has recorded thus:

“19. We find that in the instant case there has been a genuine dispute among the family members and several suits were filed and judgements were pronounced. Finally the parties to the suits decided to come to a settlement and the family arrangement was reached and a Consent Decree was passed by the Bombay High Court in Suit No. 4616 of 1998 on 16th October, 2003. The Royalty paid by the Court Receiver was only an interim relief of their share of income from the properties of G.D. Ambulkar, which right arose on account of their preexisting right in the properties as per Will of G.D. Ambulkar. Family arrangement is a device by which dispute between family members as to their respective property rights were settled. Such settlement may involve division of the property as between them and consequently a release of rights by one or the other in favour of the allottees. Conflicting legal claims get so settled. Since the settlement only defines a pre-existing joint interest as separate interests, there is no conveyance, if the arrangement is bonafide. Since there is no conveyance, there is no need for registration of such arrangements, when orally made, even if later reduced to writing.”

The ITAT following the decision of the Apex Court in the case of Maturi Pullaiah v. Maturi Narasinham AIR 1966 SC 1836, held that there is no transfer of assets in the family arrangement and the amount received by the assessee is part of the family arrangement and not towards the transfer of any capital assets and hence no Capital Gains Tax liability arises. In our opinion, the decision of the ITAT is based on finding of facts, hence no question of law arises. Accordingly, the appeal is dismissed. – [CIT v. Sachin P. Ambulkar (2014) 221 Taxman 67 : 42 taxmann.com 22 (Bom.)]

Family members of assessee were holding shares in different business concerns and assessee under a family arrangement had transferred his share held in a firm in favour of a family member, there was no transfer in instant case

Family members of assessee were holding apart from personal properties, family properties and shares in different business concerns. Disputes arose between assessee and other family members. Thereupon a family arrangement was made between assessee and other family members, whereby assessee had resigned from a partnership firm and transferred his share of profit and loss in said firm to a family member for a consideration of Rs. 35,000 being capital balance of firm. Assessee claimed that in instant case there was no transfer, which gave rise to any capital gain. Assessing Officer held that there was a transfer in instant case and consequently there was a capital gain in hands of assessee. Since (i) it is well-settled that a partition is not a transfer, and (ii) what is recorded in a family arrangement is nothing but a partition, there was no transfer in instant case. Therefore, there was no liability of assessee to pay capital gain tax’ [In favour of assessee] (Related Assessment year : 1993-94) – [CIT v. R. Nagaraja Rao (2013) 352 ITR 565 : (2012) 207 Taxman 236 : 21 taxmann.com 101 (Karn.)]

Applicability of Stamp Duty

There is no any specific exemption in the Stamp Duty Acts for levy or exemption upon family settlement. Stamp duty is levied on instrument. So, upon any agreement there may be levy of stamp duty and therefore amount involved in the agreement is very important. Therefore, the stamp duty of the agreement for transfer of immovable property shall be applicable as per law. 

Family business can be partitioned by making necessary entries of division of capital of the family

The family business can be partitioned by making necessary entries of division of capital of the family. Such division must, of course, be effective so as to bind the members. For an asset like family business or share in partnership, there cannot be said to be any other mode of partition open to the parties if they wish to retain the property and yet hold it not jointly but in severalty and the law does not contemplate that a person should do the impossible.—[Chandas Haridas and another v. CIT (1960) 39 ITR 202 (SC)]

It is also open to parties to allot whole house to one member on his undertaking to pay money value of the shares due to other members and the amount paid to other coparcenes will be available to the members in addition to his cost of his share if the house is later sold.—[Lalitaben Hariprasad v. CIT (2009) 180 Taxman 213 : 224 CTR 306, 320 ITR 698(Guj).

Validity of partition between widow-mother and sole surviving coparcener-son

A wife or mother has no right to claim partition, but if a partition is effected a mother or the wife gets a share equal to that of the son.

The property which devolves on a Hindu under section 8 of the Hindu Succession Act would be individual property. Thus individual property shall continue to be individual property on inheritance and HUF property on partition shall be that of the joint Hindu family subject to the existence of family during the relevant assessment year (Refer CWT v. Chander Sen (1986) 161 ITR 370(SC); CIT v. P.L Karuppan Chettiar (1992) 197 ITR 646(SC).

Ownership of Property received by a member on a total partition of HUF

The property received by male member on total partition will retain its character as a joint family property. If he is single, it will be HUF property on the marriage.—[CIT v. Arun Kumar Jhunjhunwala and Sons (1997) 223 ITR 45 (Gau)]

Partition on death of coparcener

A partition is an act effected inter vivos between the parties agreeing to the partition. A death of partner cannot bring about an automatic partition and on such a death, the other surviving members continue to remain joint. However, under the provisions of Hindu Succession Act, 1956, there is a deemed partition for a limited purpose of determining the share of the deceased coparcener for the purpose of succession under the Act.

Procedures for recognition of partition

The procedure by which the partition gets its recognition are as follows:—

(a) The HUF, which has been hitherto assessed, must make a claim to the assessing officer that the Hindu undivided family (HUF) properties have been subjected to total partition.

(b) Then, the Assessing Officer will make an inquiry into the claim after giving notice to all members of the HUF; and

(c) if he is satisfied that the claim is correct, then, he will record a finding that there was a total partition of the HUF, and he will also mention the date on which it has taken place.

No necessity of other coparceners to agree in order to entitle a coparcener to claim for a partition

It is not necessary that other coparceners should agree to the partition sought by one of the coparceners.

But merely because one member severs his relations with others there is no severance between others.—[CIT v. Govindlal Mathurbhai Oza (1982) 138 ITR 711 (Guj)]

There can be an oral partition

It is not necessary to effect partition by a written partition deed. It can be effected orally and be acted upon. Even a partition of an immovable property can be by an oral agreement.—[Popatlal Devram v. CIT (1970) 77 ITR 1073 (Orissa); Padam Lochan v. State of Orissa (1972) 84 ITR 88 (Orissa)]

What shall be the nature of the property received on partition?

The nature of the joint family property on partition shall be as that of joint family property as and when the recipient person is married. Hence the character of the property shall remain that of the joint family property. Such property shall be assessed as individual property, as long as the recipient is unmarried or is reduced to a single person.

There can be an unequal partition

It is at the sweet will of the co-parceners and members as to whether to allot on partition in accordance with the share specified under the Hindu Succession Act or to allot lower or more to anyone or more persons. The partition in the family could not be considered to be a disposition conveyance, assignment, settlement, delivery, payment or other alienation of property. A member of a Hindu undivided family has no definite share in the family property before division and he cannot be said to diminish directly or indirectly the value of his property or to increase the value of the property of any other coparcener by agreeing to take a share lesser than what he would have got if he would have gone to a court to enforce his claim. - [CGT v. N. S. Getti Chettiar (1971) 82 ITR 599 (SC)]

A complete partition with unequal shares as may be agreed between the parties is not illegal and can be final. However, an unequal partition between karta as the sole adult member and the minor children may be challenged at the instance of the minor children on attaining majority or having a partition reopened by the Court. Such a reopening however, will only be permitted if the division is unjust and unfair.

NOTE

In the light of the said law, it can be a sound tool of tax planning by giving larger share to the less financially sound coparcener and lesser share to the affluent.

Partition is not a transfer

Distribution of the assets of an HUF in the course of partition, would not attract any capital gains tax liability as it does not involve a transfer. There would be no clubbing of incomes under section 64 as it would not involve any direct or indirect transfer.

Partition does not give a coparcener a title or create a title in him, it only enables him to obtain what is his own in a definite and specific form for purposes of disposition independent of the wishes of his formal co-shares .—[Girija Bhai v. Sadha Shiv Dund Raj AIR 1916 (PC) 104]

In view of the unit of ownership and community of interest of all coparceners in a joint Hindu family business the position on partition of the joint Hindu family business, whether it be partial or complete, is very similar in law to the position on dissolution of a partnership firm. On partition the shares of the coparceners in the joint family business become defined and their community of interests is separated. Division of assets is a matter of mutual adjustment of accounts as in the case of a dissolved partnership firm. The property which so comes to the share of the coparcener, therefore, cannot be considered as transfer by the joint family to a coparcener or the extinguishment of the right of the joint family in that property, the joint family not having its own separate interest in that property which can be transferred.—[CIT v. S. Balasubramanian (1988) 230 ITR 934 (SC)]

An order under section 171 is not required when an HUF has not been hitherto assessed

Section 171(1) of the Act starts with the expression “a Hindu Family hitherto assessed as undivided”. Hence, if an HUF has not been assessed to tax, section 171 shall be inapplicable. Section 171 of the Income Tax Act, 1961, has no application to a case of a Hindu undivided family which has never been assessed before as a joint family i.e. as a unit of assessment. In other words, this section has application to a Hindu undivided family which has been assessed before as a joint family and if the Hindu undivided family has never been assessed to tax, this section has no application.

It was held that the term “hitherto assessed as undivided” will mean as assessment made by the ITO meaning “actually assessed”. The Supreme Court further held that it will not include a case in which return has been filed and the proceedings for the assessment are pending.—[Roshan Di Hatti v. CIT (1968) 68 ITR 177 (SC)]

Responsibility to pay Tax After partition of an HUF up to the date of partition

As per section 171(6), every member of the HUF before partition shall be jointly and severally liable for the tax on the income assessed of the HUF. The same section empowers the assessing officer to recover the tax due on completion of the assessment on the disrupted HUF from every person who was member of the HUF before partition. Further, as per section 171(7), the several liability of the member shall be computed according to the portion of the joint family allotted to him at the time of the partition.

It may however be noted that joint liability of the member is personal and distinct from the personal and several liability as found by the Supreme Court in the case of Govinddas v. ITO (1976) 103 ITR 123 (SC). As such a member of an HUF before partition is not personally liable, after partition in respect the liability of HUF, ex-members liability is personal.

Also, unlike the several liability, the joint liability is not limited to the asset received by the member on partition as noticed by the Supreme Court in the case of Addl. ITO v. A.S. Thinmaya (1965) 55 ITR 666 (SC).

Validity of Penalty on HUF after a total partition

The provisions of section 171(8) give the mandate to an assessing officer to levy penalty on an HUF disrupted after partition. The levy of such penalty has also been upheld by the Allahabad High Court in the case of CIT v. Raghuram Prasad (1983) 143 ITR 212 (All).

Assessee legal heir of late A, inherited land and received a part of it as per oral partition, since during lifetime of late A, family was never assessed as a HUF, section 171 would not apply even when there was a division/partition of property as such partition would not answer to definition of ‘partition’ in Explanation to section 171

Assessee was one of surviving legal heirs of late A who inherited agricultural land. Said land was divided as per oral partition among legal heirs and sale proceeds from sale of parcel of said land was received by assessee in proportion with his respective share in land. Assessee claimed deduction under section 54F which was allowed by Assessing Officer. Commissioner disallowed said exemption in hands of assessee on ground that aforesaid division of income and property was without physical division of property and would not amount to partition under section 171 and therefore, capital gains should have been assessed in hands of estate of HUF. Since during lifetime of late A, family was never assessed as a HUF, section 171 would not apply even when there was a division or partition of property as such partition would not answer to definition of 'partition' in Explanation to section 171. [In favour of assessee] (Related Assessment year : 2008-09) – [A.P. Oree v. ITO (2021) 436 ITR 3 : 282 Taxman 57 : 127 taxmann.com 740 (Mad.)]

Land held as stock, transferred upon HUF-partition, does not tantamount to “conversion into ‘capital asset” under section  45(2)

C. Ramaiah Reddy (assessee-Individual) was engaged in real estate business. The assessee filed return of income on 20.11.2006 declaring total income of Rs.1,37,71,300/-The case was selected for scrutiny and a notice under section 143 (2) of the Act was issued.  The assessee in the profit and loss account had shown purchase and sale of sites and net profit of Rs. 1,13,18,182 was shown and was declared as income from business.  The land received by the assessee under the family arrangement were treated as stock in trade in his books and were sold in previous year.   A query was made to the assessee by the Assessing Officer that capital   gains on sale of such properties is attracted under section 45 (2) of the Act and since, no capital gains were offered to tax therefore, the assessee was asked to clarify why such capital gains were not computed. The assessee was further asked to furnish original cost of acquisition of land along with purchase deeds.

Assessing Officer by an order dated  31.12.2008 inter alia held that once family partition takes place, the asset which comes  in the  share of the assessee partake the character of  the assets in the  hands of assessee as capital gains  and therefore, conversion of capital  assets into stock in  trade  and capital gains attract  the provision of Section 45 (2) of the Act. Assessing Officer determined the total income of Rs. 8,61,37,451/- after making an addition of Rs. 6, 78,41,691/- on account of long-term capital gains under section 45 (2) of the Act on sale of lands and other assets. Assessee filed an appeal before CIT(A) who dismissed the appeal of the assessee.

Assessee filed an appeal before ITAT where, ITAT held that there was no conversion of capital assets to stock in trade either by the assessee or the joint family and therefore, the provisions of Section 45 (2) of the Act were not attracted to the fact situation of the case. Hence, ITAT set aside the order passed by the Assessing Officer and allowed the appeal of the assessee.

Aggrieved Revenue filled an appeal before Bengaluru High Court. Karnataka High Court holds land received by assessee-individual upon partition of HUF (both assessee and HUF engaged in real estate business) as stock-in-trade and not capital asset and hence, provisions of 45(2) (capital gains on conversion of capital asset into stock-in-trade) not applicable; Rejects Assessing Officer’s view that once family  partition  takes  place, the asset which  comes  in the  share  of the  assessee  partake  the character of  the  capital assets   and therefore,   its sale during subject Assessment year tantamounts to conversion   of capital  assets into stock in trade attracting capital gains taxation under section 45(2);  Assessee received certain lands under a partition of HUF (held as stock-in-trade) and treated the same as stock-in-trade, ITAT denied applicability of Section 45(2) noting that there was no conversion of capital assets into stock-in-trade either by assessee or by the HUF; High Court observes on perusal of memorandum of partition that assets which were  taken over  by assessee were  forming  part of  stock in trade   of  real  estate business   and  continued  to  be  in nature  of  stock  in trade  in the  hands  of  the assessee; States that the character  of assets received on partition did not  change, further, clarifies that there is no provision in the  Act  to indicate  that assets  received on  partition are capital   assets, as  no deeming provisions have been enacted by the Legislature”. – [CIT(C) v. C. Ramaiah Reddy [TS-333-HC-2020(KAR)] – Date of Judgement : 25.06.2020 (Karn.)]

SLP dismissed against ruling that where assessee-company waived off its right to receive sale consideration of a property jointly held by its director with other family members in order to avoid deadlock in management of company on account of any disputes arising between family members who were also its shareholders, in view of fact that an order to that effect was passed under section 171 and, moreover, amount was duly written off in books of account, assessee’s claim for deduction of said amount as bad debts was to be allowed

Assessee was a private limited company consisting of two directors. Even though there was a partition effected between brothers of one of directors, other brothers were demanding a share in properties. One of such properties, standing in name of director was purchased by assessee-company. Entire property was divided into three blocks. First two blocks were reserved for sale to outsiders, whereas third block was sold to members of Hindu Undivided Family (HUF) of director. Subsequently, a family settlement arrangement was arrived between members of HUF and company and it was decided therein that assessee would waive right to recover dues of sale consideration. According to assessee, said decision was taken in order to avoid future deadlock in management of company on account of any disputes arising between family members who were also its shareholders. An order was also passed under section 171. Assessee filed its return claiming sale consideration waived off as bad debt. Assessing Officer opined that mere possibility that there could be future disputes/quarrels/differences between members of HUF, could not constitute a ground to hold that amount in question was bad debts. He, thus, rejected assessee’s claim. Tribunal, however, allowed claim raised by assessee. High Court by impugned order held that, on facts, revenue could not contest assessee's claim even after passing of order under section 171 and, further, even otherwise, since only requirement of law was that amount should have been written off in books of account of assessee which was admittedly done, Tribunal was justified in allowing assessee’s claim. Special Leave Petition filed against impugned order was to be dismissed. [In favour of assessee] (Related Assessment years : 2003-04 and 2004-05) – [CIT v. Millennia Developers (P) Ltd. (2019) 266 Taxman 186 : 109 taxmann.com 94 (SC)]

Finding of Tribunal in search case of assessee-Karta of his HUF in respect of change of his status from Karta to individual on partition of his HUF, could not be a finding necessary for change of status in case of coparceners from individual to Karta of their respective HUFs

The business of money lending was being carried out by the assessee as Karta of HUF. A search operation was carried out under section 132 against the assessee-karta. Tribunal found that in partition of assessee’s HUF business years back his wife and sons were given equal shares and HUF business came to an end. According to Tribunal, after partition, status of assessee-Karta became sole surviving coparcener in his HUF and, thus, converted into an individual while on receipt of property, his sons who were married having wife and children, acquired status of HUF. Since assessee wrongly continued to file return in status of HUF and his sons in status of individuals, Tribunal directed Assessing Officer to make their assessment in new status for past years. It was found that direction of Tribunal would have effect of lifting bar of limitation prescribed for reopening assessment/completing assessment - Further, Apex Court has held that a finding necessary for disposal of a particular case, i.e., in respect of a particular assessee and in relation to particular assessment year is not a finding necessary for disposal of case pertaining to others. Since direction given by Tribunal was clearly contrary to law, it deserved to be quashed. [In favour of assessee] – [CIT v. Harnarayan Bhagat (HUF) (2019) 111 taxmann.com 514 (MP)]

No co-coparcener (son) has a right to challenge the sale made by the Karta of his family

Once the factum of existence of legal necessity stood proved, then, in our view, no co-coparcener (son) has a right to challenge the sale made by the Karta of his family. The plaintiff being a son was one of the co-coparceners along with his father-Pritam Singh. He had no right to challenge such sale in the light of findings of legal necessity being recorded against him. It was more so when the plaintiff failed to prove by any evidence that there was no legal necessity for sale of the suit land or that the evidence adduced by the defendants to prove the factum of existence of legal necessity was either insufficient or irrelevant or no evidence at all. - [Kehar Singh (D) Thr. L.Rs. & Ors. v. Nachittar Kaur & Ors. - Date of Judgement : 20.08.2018 (SC)]

Asset was disposed in favour of six minor daughters of Karta in form of fixed deposits, interest thereafter could not be treated as part of wealth of assessee-HUF and would not be taxable in hands of HUF

Family arrangement of assessee-HUF provided for allotment of a sum to each of six minor daughters of Karta in form of fixed deposits. Assessee claimed deduction of interest that accrued on fixed deposits receipts. Assessing Officer held that document did not amount to partial partition and though it was a family arrangement, it did not have effect of taking away corresponding wealth from purview of HUF, and, accordingly, he treated interest as income of HUF. Once HUF had settled a sum in favour of six minor daughters of karta, corresponding amount ceased to be wealth or assets of HUF. Amount could not be treated as part of wealth of HUF. [In favour of assessee] (Related Assessment years : 1991-92 to 1996-97) – [P. Shankaraiah Yadav (HUF) v.  ITO (2015) 371 ITR 386 : 232 Taxamann 757 : 59 taxmann.com 263 (Andhra Pradesh and Telangana)]

Before section 171 can be invoked so as to assess property of Hindu undivided family even after partition, as a Hindu undivided family, it should have been assessed as a Hindu undivided family before such partition

The assessee was a Hindu undivided family (HUF). According to it, a partial partition had taken place on 30.04.1978 whereby the assets of the HUF, both movable and immovable, had been divided among the coparceners. Thereafter, the property in question was sold and proceeds were invested in fixed deposits. On maturity of the fixed deposits on 08.09.1996, the monetary shares were apportioned among the members of the HUF. For the relevant assessment year, the Assessing Officer made assessment of the assessee in the status of HUF by invoking section 171. On appeal, the assessee contended that the original property in the hands of the HUF, after partial partition thereof on 30.04.1978, could not be assessed to tax under section 171. In the alternative, the assessee contended that since it never hitherto before (i.e., prior to the assessment year 1997-98) had been assessed as an HUF, there was no question of it being assessed as an HUF. The Commissioner (Appeals) allowed the assessee’s appeal holding that it could not be assessed as an HUF under section 171. On the revenue’s appeal, the Tribunal held that the property was liable to be assessed in the hands of the assessee as an HUF under section 171(9). On appeal to the High Court :

Held : At some point of time the assessee was a HUF, but there was no dispute whatsoever that it had not been assessed as a HUF prior to the assessment year 1997-98. Section 171 caters to a situation where a HUF has been partitioned. It deals with assessment after the division of the HUF. Thus, before section 171 can be invoked, so as to assess the property of the HUF even after partition, as a HUF, it should have been assessed as a HUF before such partition.

Sub-section (9) of section 171 is an exception to sub-section (1) of section 171. For the applicability of sub-section (9) of section 171, two pre-requisites are essential. Firstly, the partial partition should have taken place after 31.12.1978 and secondly, such partial partition must have taken place in a HUF which hitherto before was assessed as a HUF. In the instant case, the assessee had not been assessed as a HUF ever before the assessment year 1997-98. Therefore, the second essential ingredient for the applicability of sub-section (9) of section 171 could not be treated to have been fulfilled in the facts and circumstances of the instant case. Therefore, sub-section (9) of section 171 would be clearly inapplicable to the facts of the instant case. In view of the above, the order passed by the Tribunal was to be set aside and the assessee’s appeal was to be allowed. [In favour of assessee] (Related Assessment year : 1997-98) – [Tirlochan Singh v. CIT (2010) 228 CTR 390 : (2009) 180 Taxman 640 (P&H)]

 

Order under section 171 not required where an HUF has not been assessed to tax

The wordings of section 171 show that the section has no application to an HUF, which has not been hitherto assessed. – [CIT v. Hari Krishnan Gupta (2001) 117 Taxman 214 (Del.)]

Where properties (investments and monies deposited with bankers) which are capable of division are not actually divided, partial partition cannot be recognised

The assessee-HUF claimed that partial partition in terms of section 171 had been effected in respect of certain properties of the family comprising of cash in hand, shares and various deposits, etc. It further claimed that though these properties were not divided by metes and bounds but only visionally, it was permissible to do so under the law in respect of partial partition of properties invested in business, in the case of continuing business. The claim was rejected by the Tribunal but the High Court allowed the assessee’s claim, holding that the said assets being employed in business were not capable of division and, therefore, it was possible for the family to have partial partition with regard to them without physically dividing them. On appeal :

The members of a HUF may continue doing the business and at the same time notionally divided the properties among the various constituents of the family. As a proposition of law, the contention may be correct but turning to the facts of the case, it was found that each of the items of properties was capable of physical partition. This was not a case where the HUF itself was carrying on its business before partial partition with these assets. There was no reason why the parties could not divide these assets by metes and bounds.

Although mere severance of the status of the family may tantamount to partition under the Hindu law of Joint family, the requirement of the Income-tax Act is a little more. A partition to be recognised under the Act must lead to physical division of the joint properties. The decision of the High Court was erroneous. If the properties belonging to a HUF are not partitioned at all by dividing them among the members, even though capable of division, then the members of the family cannot say that so far as those properties are concerned they stand divided. In the case of Kalloomal Tapeswari Prasad (HUF) v. CIT [1982] 133 ITR 690/ 8 Taxman 5 (SC), a partial partition was effected in respect of properties which were not physically divided. The ITO declined to record the partition. It was held by the court that mere severence in status was not sufficient to establish partition. The requirement of the Hindu law and the requirement of the Income-tax Act are different in this regard. The basic principle appearing from the section itself is that in order to claim partition in respect of any property, division of the property is a pre-requisite. The HUF cannot say that it stands divided in respect of the property and at the same time enjoy the property jointly. Whatever may be the position under the Hindu law, section 171 of the Income-tax Act is quite clear in this regard. In that view of the matter these appeals were allowed. The judgment under appeal was to be set aside. – [CIT v. Venugopal Inani (1999) 107 Taxman 258 (SC)]

Groupwise division is permissible

When partial partition qua the persons is permissible under the law, the members of the HUF can divide themselves groupwise and it is not necessary to define the share of each member of each group. When a property is held by two groups and if the share of each group is well defined, the requirement of partial partition will stand fulfilled. From the memorandum of partition, it was manifest that the share of each group of the two was well defined and thus the legal requirement was fully satisfied. For the above reasons, the view taken by the Commissioner in his order under section 263(1) did not commend to be accepted. The Tribunal was correct in holding that a valid partition had been made between the members of the HUF, who divided themselves in two groups defining the share of each group in regard to the HUF's interest in the firm. [In favour of the assessee] (Related Assessment year : 1972-73) – [CIT v. Shrawan Kumar Swarup & Sons (1998) 232 ITR 123 : 147 CTR 305 (All.)]

Partition of HUF under Income Tax Act, 1961 and its assessment after Partition - Finding is necessary even in deemed partition - Even in cases of deemed partition under section 6 of Hindu Succession Act, 1956 in absence of claim and finding of partition in terms of section 171(1), no part of income of HUF should be excluded from assessment

Maharaja P. P. Singh of Balrampur was being assessed as an individual up to and including the assessment year 1964-65. He had no issue of his own. On 28.12.1963, he adopted Mahraja Dharmendra Pratap Singh, who was a minor, as his son. After the said adoption, the status of Maharaja P.P. Singh was taken as that of HUF. Maharaja P.P. Singh died on 20.06.1964. Thereafter his wife, Maharani Raj Laxmi Devi, became the karta of the HUF consisting of herself and the aforesaid minor son, Maharaja Dharmendra Pratap Singh. For the assessment year 1966-67, the assessee filed a return declaring the total income of the HUF as Rs. 28,935. Subsequently she filed another return showing the total income as Rs. 25,288. The difference between the original and revised returns was explained on the basis that the revised return had been filed by the HUF after excluding one-sixth share belonging to the minor son, Maharaja Dharmendra Pratap Singh, as an individual, because according to section 6 of the Hindu Succession Act, 1956, one-third share of Late Maharaja P.P. Singh in the HUF property devolved on his two heirs Maharaja Dharmendra Pratap Singh (minor son) and Maharani Raj Laxmi Devi (wife). The ITO held that the Act is a separate, distinct and complete statute in itself and under the Act a change in the HUF status can be effected only by claiming partition either partial or complete and that such partition could become operative if a claim of partition has been preferred and after examining the evidence produced, an order under section 171 of the Act accepting the claim of partition has been accepted by the ITO, and that in the case of the assessee both the elements were missing. He, therefore, held that the assessee-HUF continued to be as it was before. The said view was followed by the ITO in the assessments for the subsequent assessment years 1967-68 to 1970-71. The said view of the ITO was upheld in appeal by the AAC. On further appeal, the Tribunal reversed the said view and held that the case of the assessee was not of a partition contemplated in section 171 and, therefore, no claim was necessary and absence of an order under section 171 does not mean that the whole estate should be deemed to belong to the assessee-HUF. The Tribunal, following the decision of the Allahabad High Court in the case of Kalloomal Tapeswari Prasad (HUF) v. CIT, further held that assuming the assessee’s case came under section 171 the estate of the assessee-HUF having been diminished in terms of section 6 of the Hindu Succession Act, 1956 but with regard to which an order accepting the claim for partial partition has not been made, the income from such property could not be included in the computation of the income of the HUF. The Tribunal referred the question above-mentioned to the High Court for its opinion and the said question was answered by the High Court in favour of the assessee and against the revenue. On reference, the High Court upheld the view of the Tribunal. On appeal to Supreme Court:

Though for the purpose of HUF, section 6 of the Hindu Succession Act would govern the rights of the parties but insofar as income-tax law is concerned, the matter has to be governed by section 171(1). Therefore, in the instant case, one-sixth income from the computation of income of the assessee-HUF could not be excluded. - [In favour of revenue] (Related Assessment years : 1966-67 to 1970-71) - [Addl. CIT v. Maharani Raj Laxmi Devi (1997) 224 ITR 582 : 139 CTR 487 : 91 Taxman 20 (SC)]

It is obligatory for Assessing Officer to make an enquiry after giving notice of inquiry to all members of HUF and record a finding as to whether there was or was not a total or partial partition of Joint family property and date of partition, if any – The assessing authority can reject the claim for partition only after holding an inquiry as envisaged by the law, and recording the finding about non-existence of the partition - A finding without such inquiry is no finding in eye of law

The assessee was being assessed as HUF. During the relevant assessment years, the assessee claimed the benefit under section 171. It was asserted that there was a partial partition in the family by which a coparcener had separated from the family by taking a house and another house was given to the wife of the karta of the aforesaid family. This claim was based on the deeds of relinquishment without consideration. It was held that these deeds did not constitute partial partition and manifested mere severance of status. The Tribunal, therefore, rejected the assessee’s claim under section 171. On reference :

Partition is not a transfer but total severance of status brought about by physical division of property. In a joint Hindu family property, each coparcener has an antecedent title. On partition, this antecedent, i.e., joint title is transformed into separate titles of individual coparceners. The nature of the transaction is not a transfer, but creates a division of jointness into separation.

In terms of section 171, the Assessing Officer was required to make an inquiry and record a finding as to whether there had been a total or partial partition of the joint family property, and if so, the date on which it had taken place. The provision of law thus obligates the Assessing Officer to make an inquiry after giving notice of inquiry to all members of the family. The expression used in this provision is that the Assessing Officer shall make an inquiry. Indisputably, no such inquiry was made in the instant case before recording the finding that there was no partition. A finding without the inquiry is no finding in the eye of law. In these circumstances, it could not be said that the ITO rightly rejected the assessee's claim under section 171. It was, therefore, necessary that the appropriate authority should hold an inquiry into the claim as set up in terms of the aforesaid provision and then record the finding whether or not there was partition and if so whether the properties were required to be included in the assets of the HUF for the purposes of wealth-tax. [In favour of assessee] (Related Assessment year : 1976-77) – [Ramchandra Gopalji Sugandhi v. CIT (1996) 217 ITR 647 (MP)]

Hindu undivided family to continue to be assessed as such until enquiry and order recognizing partition - T was karta of HUF comprising himself, his wife B and his son S and daughter-in-law - On his death his widow acquired limited interest which was enlarged into absolute right under Hindu Succession Act - On death of B, her son S inherited her share in property - He adopted a son N in 1961 and gifted property inherited from his mother to adopted son in 1969 - Gift was recognised by gift-tax authorities - S claimed that after aforesaid gift in 1969 only 50 per cent income was assessable in HUF's hand and rest in N’s hands - In view of deeming fiction contained in section 171 unless an enquiry is undertaken and existence of partition is found as a fact and recorded so, in eye of law HUF continues to be assessable as if there has been no change in situation - Therefore, in instant case, there being no such enquiry and finding regarding partition, entire income from property inherited from his mother by S was assessable in hands of HUF of S

On a plain reading of section 171(1) it becomes clear that a Hindu family which is assessed as undivided has, for the purposes of the Act, to be deemed to continue as such unless there is evidence of partition and a finding is recorded to that effect under the Act in respect of such family. Before this finding is recorded an inquiry has to be undertaken on the question whether there has been a total or partial partition of the joint family property and if there has been any such partition, the date on which it took place. The expression ‘partial partition’ ‘as been defined in clause (b) of the Explanation as a partition which is partial as regards the persons constituting the HUF or the properties belonging to the HUF or both.

In the instant case, admittedly, no inquiry was undertaken on the question whether there had been a total or partial partition of the joint family property and, if yes, the date on which it had taken place. That being so, in view of the language of section 171(1), the HUF would be liable to be taxed as undivided notwithstanding the effect of section 14(1) of the Hindu Succession Act.

Unless an inquiry is undertaken by the department and a finding is recorded as required by sub-section (3) of section 171 read with the definition of the expressions ‘partition’ and ‘partial partition’ in the Explanation to that provision, there could for the purposes of the Income-tax Act be no partition and the HUF would continue to be a HUF assessable to tax as if the property continues to belong to the HUF; this is the position which emerges on a plain reading of section 171 and that too for the limited purposes of the Act only.

The contention of assessee that since in the previous orders the ITO had held that S had become the owner of his mother’s share in the property which share was later transferred by gift inter vivos to his adopted son, the HUF could only be taxed on 50 per cent of the interest and no more and the remaining 50 per cent would have to be reckoned as the income of the adopted son, could not be accepted. Thus, the entire income from property including income from property gifted to adopted son was assessable in the hands of the HUF of S. (Related Assessment years : 1972-73 to 1975-76) – [R.B. Tunki Sah Baidyanath Prasad (1995) 212 ITR 632 : 126 CTR 262 : 80 Taxman 71 (SC)]

Order is binding on all parties - An order under section 171 is a judicial order to be passed after full detailed enquiry, and is to be binding between the parties till the same is set aside in accordance with law

As regards the petitioner’s contention that an order under section 171 having been passed by the ITO recognizing the partition, it was not permissible for him to ignore the same subsequently and assess the family as undivided without setting aside that order. It was contended by the revenue that this order was passed on insufficient grounds and the correct facts were not disclosed. The only important fact relied upon by the respondent was that in the account books of the firm the capital continued to stand in the name of the petitioner and no partition was effected in the books of that firm. As this fact had been brought to the notice of the ITO concerned, this contention was not accepted to be true. The order dated 27.11.1971 mentioned the manner of partition stating that this had been effected by dividing the amount in the personal set of account books of HUF, meaning thereby that the ITO knew that in the books of the firm the capital remained as it was or he could have with reasonable efforts found out the same. The order was passed in the assessment proceedings of the petitioner-individual and the partition was recognised year after year till the impugned notice was issued. Further, the provision in sub-sections (2), (3) and (4) of section 171 indicate that an order under section 171 is a judicial order to be passed after full and detailed enquiry and is to be binding between the parties till the same is set aside in accordance with law. Admittedly, in the instant case, the order dated 27.11.1971 had not been set aside and, therefore, as long as that order was effective, the ITO could not take any steps to assess the erstwhile HUF by ignoring the said order.

The contention of the revenue that the sons of the petitioner were minors and, therefore, he could not effect a partition was not tenable because the Supreme Court in its decision in Apoorva Shantilal Shah v. CIT (1983) 141 ITR 558 (SC) had upheld the authority of a father to effect even partial partition of some of the family properties and consent of the sons was not held to be necessary. In the instant case, however, the partition effected by the petitioner of the property received on the partition of the bigger HUF was a complete partition and not a partial partition and the same could not be challenged on the ground of lack of authority of the karta. For the above reasons, the writ petition was allowed and the impugned notice dated 30.03.1980 issued to the petitioner by the respondent under section 148 for the assessment year 1971-72 was to be quashed. [In favour of assessee]– [Gokul Chand v. ITO (1995) 211 ITR 738 : 175 CTR 146 : (1994) 77 Taxman 320 (All.)]

 

Respondent formed assessee - HUF with his wife and sons - He inherited share in properties of his deceased father which had been allotted to him on partition of HUF in which respondent was also a member - Income from properties inherited by respondent was not assessable as income of assessee - HUF

There was one ‘P’ who, along with his wife, ‘A’, their son, ‘K’ and their daughter-in-law, constituted a HUF. There was a partition in this family on 22.03.1954, under which ‘P’ was allotted certain properties as and for his share and he got separated. Thereafter ‘K’, son of ‘P’, and his wife and their subsequently born sons and daughter constituted a HUF.

‘P’ died on 09.09.1963 leaving behind his widow and ‘K’, this son, who was also the karta of the assessee-HUF as his legal heirs. These two persons succeeded to the properties left by ‘P’ under section 8 of the Hindu Succession Act, 1956 and divided the same between themselves.

In the assessment made on the assessee - HUF, the ITO included in the computation of the total income, the income received from the properties inherited by ‘K’ from his father. The AAC affirmed the order of ITO. The Tribunal, however, held that properties inherited by ‘K’ did not form part of joint family properties so that income therefrom could not be assessed in the hands of assessee - HUF. The High Court upheld the order passed by the Tribunal. On appeal to the Supreme Court:

Held : In view of decision of this Court in CWT v. Chander Sen (1986) 161 ITR 370, it was to be held that the income from the properties in question was not assessable in the hands of the assessee - HUF. [In favour of the assessee] (Related Assessment year : 1977-78) - [CIT v. P. L. Karuppan Chettiar (1992) 197 ITR 646 (SC)]

Provisions of section 171 has no application to a case of a Hindu Undivided Family which has never been assessed before as a joint family, i.e., as a unit of assessment

A HUF, consisting of two coparceners, one of whom was KA underwent partial partition on 30.03.1970. Lands were allotted to KA, the Karta, his wife and two minor sons, which, thus, became properties of the KA-HUF being the assessee-HUF. Under Government Notification under section 4 of Land Acquisition Act, dated 15.01.1970 abovesaid lands were acquired for Gujarat Housing Board. After partial partition, the assessee-HUF entered into an agreement with the said Board on 05.05.1970 for the transfer of the abovesaid lands at the rate of Rs. 17.75 per Sq. Yd. On 14.09.1970, there was partial partition of the properties of the assessee under which lands were divided amongst the members of the assessee-HUF.

The assessee-HUF, after said partial partition, did not file return of income for the assessment year 1971-72 as, according to it, it had not earned taxable income. However, the ITO held that it had earned income by way of capital gain on acquisition of land. Therefore, it was liable to make return under section 139 and consequently issued notice under section 148, read with section 147(a). The assessee-HUF filed a return showing income of Rs. 99 on 22.04.1974, pointing that partial partition had taken place on 14.09.1970, and lands were divided amongst the HUF's members and it was after partial partition that the land was transferred to Gujarat Housing Board. The ITO, however, held that since the partial partition was not by metes and bounds, it was an afterthought. According to the ITO, the partition was contrary to section 171 and, hence the partial partition was not genuine. He determined the value of land as on 01.01.1964 at Rs. 3 per Sq. Yd. and accordingly worked out the capital gains. Relying upon his assessment order passed under section 143(2), read with section 147(a), for the assessment year 1971-72, he held that since the partial partition was not valid, the interest income earned on account of compensation paid to the members of the assessee was taxable in the hands of assessee-HUF in the assessment years 1972-73 to 1975-76.

KA had invested his share of compensation in firm KTB and became a partner in this firm. According to the ITO that amount which KA had invested in the firm, was not his individual money, but money belonging to HUF and, therefore, share of profits received from the said firm was also assessable in the hands of a HUF. On appeal, the AAC held that as the assessee-HUF was not assessed to income-tax any time prior to 1971-72, the provisions of section 171 were not applicable and the entire proceeding was misconceived. He determined the value of land as on 01.01.1984 and directed the ITO to work out capital gains on that basis. On appeal by the revenue, the Tribunal held that since the assessee-HUF was not previously assessed, section 171 had no application. The partial partition was genuine and there was no material on record to show that partial partition was a sham and the revenue had not challenged the partial partition on any ground other than the legal ground, namely that it had to be invalid under section 171. It held that it was not necessary for it to enter into the question of the value of the land as on 1-1-1984. The Tribunal, relying on its earlier decision, was of the view that the question of the value of land as on 01.01.1984 was required to be re-examined and, therefore, for statistical purposes it allowed the cross-objections of the revenue. On reference:

Held : Section 171 has no application to a case of Hindu family which has never had been assessed before as joint family. In the instant case, since HUF-KA was never assessed to income-tax in the past, section 171 had no application at all to the facts of the instant case.

Genuineness of the partial partition had not been challenged on any ground other than the legal ground of section 171. Therefore, the partial partition was valid and, thus, the capital gains was not assessable in the hands of HUF-KA. It followed as a necessary corollary that income earned on the compensation amount received by the members of the HUF would not be taxable in the hands of HUF-KA. Again KA admittedly invested his share of the compensation amount in the firm KTB and became a partner therein. The amount invested by KA did not belong to HUF and, therefore, share income earned from the firm of KTB was not assessable in the hands of HUF-KA (the assessee). Hence, the Tribunal’s decision was to be upheld. (Related Assessment years : 1972-73 to 1975-76) - [CIT v. Kantilal Ambalal (HUF) (1991) 192 ITR 376 : 98 CTR 105 : 59 Taxman 232 (Guj.)]

Section 171 does not recognise a partition even if it was effected by a decree of court unless there is a physical division of properties by metes and bounds 

The definition of partition given in Explanation to section 171 does not recognise a partition even if it is effected by a decree of court unless there is a physical division of the property and if the property is not capable of being physically divided then there should be division of the property to the extent it is possible. Otherwise the severance of status will not amount to partition. In considering the factum of partition for the purposes of assessment it is not permissible to ignore the special meaning assigned to partition under the Explanation, even if the partition is effected through a decree of the Court. Ordinarily decree of a civil court in a partition suit is good evidence in proof of partition but under section 171 a legal fiction has been introduced according to which a preliminary decree of partition is not enough, instead there should be actual physical division of the property pursuant to final decree, by metes and bounds. The Legislature has assigned special meaning to partition under the aforesaid Explanation with a view to safeguard the interest of the revenue. Any assessee claiming partition of a HUF must prove the disruption of the status of a HUF in accordance with the provisions of section 171 having special regard to the Explanation. The assessee must prove that a partition effected by agreement or through court's decree, was followed by actual physical division of the property. In the absence of such proof partition is not sufficient to disrupt the status of a HUF for the purpose of assessment of tax.

Under the Hindu law members of a joint family may agree to partition of the joint family property by private settlement, agreement, arbitration or through court's decree. Members of the family may also agree to share the income from the property according to their respective share. In all such eventualities joint status of family may be disrupted but such disruption of family status is not recognised by the Legislature for purposes of income-tax. Section 171 and the Explanation to it, prescribes a special meaning to partition which is different from the general principles of Hindu law. It contains a deeming provision under which partition of the property of a HUF is accepted only if there has been actual physical division of the property. In the absence of any such proof, the HUF shall be deemed to continue for the purpose of assessment of tax. Any agreement between the members of the joint family effecting partition, or a decree of the Court for partition cannot terminate the status of HUF unless it is shown that the joint family property was physically divided in accordance with the agreement or decree of the Court.

In the instant case, there was no dispute that prior to the assessment year 1967-68 the assessment was made against the HUF of which the respondent was a member. The assessee for the first time raised the plea of partition and disruption of HUF in the proceedings for the assessment years 1967-68 to 1969-70. There was no dispute before the ITO that there had been no physical division of the properties by metes and bounds. Therefore, the ITO was justified in holding that the status of a HUF had not been disrupted and the income derived from the properties for the purposes of assessment continued to be impressed with the HUF character. The High Court committed an error in quashing the order of the ITO. In the result, the order of the High Court was set aside. Decision of Kerala High Court reversed. – [ITO v. Smt. N.K. Sarada Thampatty (1991) 187 ITR 696 (SC)]

Section 171 recognises that income which ceases to be HUF’s income cannot be assessed in HUF’s hands 

The income which does not belong to the HUF cannot be taxed in the assessment of the HUF if in fact the income has ceased to be the income of the HUF and this has been verified by the ITO – [M.V. Valliappan v. ITO (1988) 170 ITR 238 (Mad.)]

 

HUF must have earlier been assessed to tax - If a HUF was not subjected to tax, the provisions of section 171(1) will have no application

S carried on business of plying buses. After his death, his second wife D claimed that the business was the individual business of S and that under a will executed by S, she was entitled to carry on the business in her own right. On a contrary claim set up by the first wife of S and also his brothers, the Supreme Court held that the business was that of the joint family of which S was the karta and that D had no interest whatsoever in the business. However, in a civil suit filed in the Court of the subordinate judge for partition of HUP, there was a preliminary decree on 27.03.1950. For the assessment years 1962-63 to 1968-69 proceedings were initiated for assessment of the income from plying of the buses in the hands of the joint family and the assessments were completed accordingly. The assessee urged before the Tribunal that the joint family became extinct on the filing of a suit in 1947 or, in any event on 27.03.1950 when the subordinate judge passed a preliminary decree for partition and, thus, no assessment could be made against a joint family which was not in existence in the previous years relevant for the assessment years 1962-63 to 1968-69. The Tribunal accepted the above contention and quashed the assessments made on the joint family as not maintainable. On reference, the revenue contended that though there was a preliminary decree in March 1950, but for the purposes of tax law, the joint family must be deemed to be in existence as no joint family properties were partitioned in definite portions and no order was recorded under section 171(1).

Held : The expression ‘hitherto assessed’ occurring in section 171(1) puts beyond any controversy that only a HUF which has suffered tax assessment in the past can be deemed to continue to be a HUF till an order of partition under section 171(1) is recorded. If a HUF was not subjected to tax, the provisions of section 171(1) will have no application. The fiction that a joint family shall be deemed to continue, enunciated in section 171(1), is for the limited purpose of roping in cases of joint families which had hitherto been assessed. It is not possible to extend that fiction beyond the field legitimately intended by the statute. The fiction in section 171(1) must necessarily be confined to the purpose for which it was specified in that section, and for no other purpose. In the present case, a suit for partition of the HUF had been filed in 1947 and a preliminary decree had been passed in 1950. These steps had the necessary consequence of rendering the joint family non-existent in law and that position prevailed for income-tax purposes also as the matter was not saved by the provisions of section 171. In the circumstances, assessment could not be made on the HUF in respect of the income derived from the business in plying motor buses for the assessment years 1962-63 to 1968-69. [In favour of the assessee] – [Addl. CIT v. P. Durgamma (1987) 166 ITR 776 (AP)]

 

Death of a coparcener cannot bring about an automatic partition and on such a death, the other surviving members continue to remain joint

A partition is an act effected inter vivos between the parties agreeing to the partition. A death of a coparcener cannot bring about an automatic partition and on such a death, the other surviving members continue to remain joint. However, under the provisions of section 6 of the Hindu Succession Act, there is a deemed partition for a limited purpose of determining the share of the deceased coparcener for the purpose of succession under the Act. The right of a female heir to the interest inherited by her in the family property gets fixed on the death of a male member under section 6 of the Act but she cannot be treated as having ceased to be a member of the family without her volition as otherwise it will lead to strange results which could not have been in the contemplation of Parliament when it enacted that provision and which might also not be in the interest of such female heirs. The female heir shall have the option to separate herself or to continue in the family as long as she wishes as its member though she has acquired an indefeasible interest in a specific share of the family property which would remain undiminished whatever may be the subsequent changes in the composition of the membership of the family. - [State of Maharashtra v. Narayan Rao Sham Rao Deshmukh (1987) 163 ITR 31(SC)]

Before levying penalty on assessee-HUF for concealment of income, ITO passed order accepting its claim for partition - In view of section 171(8), ITO could levy and collect penalty up to date of partition from assessee-HUF as if no partition had taken place and assessee-HUF was still in existence

On a combined reading of the provisions of sub-sections (1) and (4) of section 171, it is clear-that in a case where an order has been made recording the partition of joint family property, the total income of the joint family has to be computed up to the date of partition and the tax payable by the joint family has to be determined as such, as if no partition had taken place and as if the joint family was still in existence. Again, on going through the provisions of section 171(8), it becomes clear that this sub-section expressly enacts that the provisions of the section in relation to the levy and collection of any penalty, interest, fine or other sum in respect of any period up to the date of total or partial partition of a HUF apply as they apply in relation to the levy and collection of tax. In other words, with regard to the levy and collection of penalty relating to assessment up to the date of partition, one has to proceed on the basis as if no partition had taken place and also that the joint family was still in existence. Hence, the fact that in the instant case the order recording partition was passed prior to the order levying penalty would be of no consequence as the provisions of section 171(8) read with section 171(4)(a) give express authority for the levy and collection of penalty in respect of period up to the date of partition where the HUF had been disrupted.

It is well settled law that reference to the provisions of the Act in support of the stand taken could not be equated with the raising of a new question of law or of fact which had not been canvassed earlier and may not be permitted to be raised for the first time before the Tribunal.

In the instant case, it was apparent that the stand taken by the department throughout was that it was competent for the ITO to impose penalty in respect of the period up to the date of partition. The mere fact that reference was not made to the provision of the Act which empowered the ITO to levy penalty could not debar the revenue from referring to the relevant provisions of the Act for the first time at the stage of the application under section 256(1). In the application under section 256(1), the department did not take any new stand but only brought to the notice of the Tribunal the relevant provisions of the Act which justified its action. Accordingly, the department was justified in law in raising the question of applicability of section 171(8) in application filed under section 256(1). – [CIT v. Raghuram Prasad (1983) 143 ITR 212 : 12 Taxman 50 (All.)]

On partition of bigger HUF, two pieces of land were apportioned to smaller HUF, comprising of G and other five members, which agreed to sell the same to P - By a partition deed, smaller HUF decided to allot land to G (karta) on his agreeing to pay five-sixth share of its sale proceeds to other five members who were paid eventually - There was a valid partition in terms of section 171

The bigger-HUF, consisting of M, G and V, was partitioned on 06.04.1950 when two pieces of land were apportioned to a smaller HUF, consisting of G and his four sons and wife. By a registered partition dated 12.09.1966, the members of smaller HUF decided to allot the land to G who had agreed to pay five-sixth share of its sale proceeds to the other five members. For the assessment years 1967-68 and 1968-69, the ITO rejected G's application under section 171 for recording a finding of partial partition on the grounds (i) that five-sixth share of the sale proceeds was, in fact, not paid to the members as mentioned in the partition deed ; and (ii)that there was no partition as required by the Explanation to section 171. Accordingly, he assessed the capital gains arising out of the sale of land in the hands of smaller HUF. The AAC sustained the ITO's order. On second appeal, the Tribunal held (i) that there was a valid partition effected in respect of the impugned land ; and (ii) that the sale proceeds were, in lact, apportioned and paid to the respective members. On reference, the revenue contended, inter alia, that the impugned transaction was, in effect and substance, a sale by the smaller HUF to G.

Held : The term “sale” mean transfer of property for a price. Partition is, on principle and authority, not a transfer of the property but is merely a change in the mode of enjoyment. Partition of joint Hindu family consists in ascertaining and defining the shares of its coparceners in the joint property. Its actual division by metes and bounds is not immediately necessary and such a division may take place subsequently. Partition may be effected, inter alia, by agreement or conduct which evidences an intention to sever the joint family status. The real test of an instrument of partition is whether there was any property co-owned by the parties which is divided by that deed in severality. The courts are only concerned with the construction of its terms and not with legality of the claim set up by one or the other.

In the instant case, the parties to the instrument dated 12.09.1966 were co-owners of the impugned land which was agreed to be divided in severality. Their shares were ascertainable. In anticipation of the realisation of the sale proceeds, G executed promissory notes of the respective amounts falling to the shares of other family members who were subsequently paid accordingly. 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, there was a valid partition and the ITO was bound to recognise and record it. Accordingly, capital gains arising out of the sale transactions in question were not taxable in the hands of the assessee. [In favour of the assessee] – [CIT v. Govindlal Mathurbhai Oza (1982) 138 ITR 711 : (1981) 22 CTR 165 : 6 Taxman 253 (Guj.)]

 

When HUF is reduced to a single individual, section 171(1) will not apply

Section 171(1) will not apply where a HUF has disappeared because of being reduced to a single individual – [Seethamma v. CIT (1982) 136 ITR 238 (Mad.)]

 

Partition in the case of HUF can be effected orally and entries in the books is the evidence of partition

In CIT v. Shiolingappa Shankarappa Mendse and Bros. had occasion to deal with a case where there was a partition of HUF and subsequent formation of a partnership firm by the erstwhile members of the HUF. Transaction of partition was evidenced by book entries. Partnership was held valid. The fact of partition specifically stated in the partnership deed, but the partnership deed refers to the document of partition and the relevant entries in the books of the HUF were produced before the Commissioner. Having regard to the principles of Hindu law, it is clear that the Tribunal was justified in taking the view that the joint family of the three brothers had disrupted and they had formed a partnership firm which was entitled to registration under the Act. [In favour of assessee] - [CIT v. Shio Lingappa Shankarappa and Brothers (1982) 135 ITR 375 (Bom.)]

A transaction can be recorded as a partition under section 171 only if, where the property admits of a physical division and not the notional partition, such division has actually taken place

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, mere physical division of the income without a physical division of the property producing income cannot be treated as a partition. Even where the property does not admit of a physical division, then 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 the 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 Act even though under the Hindu law there has been a partition total or partial. The consequence will be that the undivided family will be continued to be assessed as such by reason of section 171(1).

It cannot be gainsaid that the fiction in section 171(1) does not operate in the case of partial partitions as regards property where the composition of the family has remained unchanged.

It is common knowledge that in every partition under the Hindu law unless the parties agree to enjoy the properties as tenants-in-common, the need for division of the family properties by metes and bounds arises and in that process physical division of several items of property which admit of such physical division does take place. It is not necessary to divide each item into the number of shares to be allotted at a partition. If a large number of items of property are there, they are usually apportioned on an equitable basis having regard to all relevant factors and if necessary by asking the parties to make payments of money to equalise the shares. Such apportionment is also a kind of physical division of the properties contemplated in the Explanation to section 171. Any other view will be one divorced from the realities of life. The instant case was not a case where it was impossible to make such a division. Nor was it shown that the members were not capable of making payment of any amount for equalisation of shares. In fact, there was no material in the instant case showing that the assessee ever seriously attempted to make a physical division of the property as required by law. All that was attempted was to rely upon the arbitrator's award which were insufficient to uphold the claim of the assessee. Accordingly the impugned properties were capable of physical division.

Section 171 applies to all partitions total and partial, and that unless a finding is recorded under section 171 that a partial partition has taken place, the income from the properties should be included in the total income of the family by virtue of sub-section (1) of section 171. In the instant case, no order under saction 171 had been passed and, accordingly, the income from said properties was assessable in the assessee’s hands. - [Kalloomal Tapeshwari Prasad (HUF) v. CIT (1982) 133 ITR 690 : 26 CTR 415:  8 Taxman 5 (SC)]

Business initially carried on as HUF business was partitioned and was subsequently converted into partnership business – ‘T’, karta of HUF, claimed that his share in partnership business should be assessed separately as his individual income - Since partnership deed, signed by ‘T’ and others itself contained recital that business was joint family business, there was no room for applying principle that members of joint Hindu family had not acquired business as members of joint family but in separate capacity as individual partners under contract - Therefore, share of ‘T’ in partnership business could not be regarded as his separate property

Section 171 of the Income-tax Act, 1961 [Corresponding to section 25A of the Indian Income-tax Act, 1922] - Hindu undivided family - Assessment after partition - Assessment year 1960-61 - The business initially carried on as the HUF business was partitioned and was subsequently converted into partnership business. Thereafter the said partnership firm was dissolved and a new firm came into existence. ‘T’, karta of the appellant-HUF, claimed in the relevant assessment year that his share in the partnership business should be assessed separately as his individual income. The Income-tax Officer rejected this claim. The AAC and also the Tribunal and then the High Court affirmed the order of the ITO.   On appeal to the Supreme Court :

Held : In the instant case, the finding of fact was that the property was not acquired as partnership property under a contract, but the partnership business was originally, prior to partition, Hindu undivided family business. Hence, there was no room for applying the principle that members of a joint Hindu family had not acquired the business as members of a joint family but in a separate capacity as individual partners under a contract.

There was no difficulty in determining the character of any nucleus of dividend property. The business prior to the partition of the Hindu undivided family was assessed as joint family business for a number of years without any protest by ‘T’. The partition deed signed by ‘T’ and others itself contained a recital that the business was a joint family business. The finding of fact reached by the Tribunal that the business was, until partition, a joint family business could not be said to be unreasonable or perverse. If that be so, the share of ‘T’ in the partnership which came into being on the partition of the Hindu undivided family could not be regarded as his separate property. It became the property of the joint Hindu family of ‘T’ and his sons. This was the finding of fact, quite reasonably arrived at by the Tribunal, which the High Court had accepted. Consequently, the appeal was dismissed. – [Tolaram Bijoy Kumar v. CIT (1978) 112 ITR 750 (SC)]

Assessing Officer bound to take decision on application for partition and must mandatorily hold inquiry and record a finding - Assessing Officer cannot continue to make assessment on HUF without disposal of the application made for partition. If such assessment is done, it shall not be valid and it has to be set aside so that assessment can be made in conformity with the order under section 171 which the Assessing Officer is bound to pass in accordance with law

Section 25A of the Indian Income-tax Act, 1922 (Corresponding to section 171 of the income-tax Act, 1961) - Assessment order passed by ITO in case of a HUF without holding an inquiry into validity of claim of partition made within a reasonable time by a member of HUF - Such assessment liable to be cancelled. Tribunal dealing with such question in appeal can not merely cancel ITO’s order without a further direction to assessing authority either to modify assessment suitably or to pass a fresh order of assessment in accordance with law

From a fair reading of section 25A, it appears that the ITO is bound to hold an inquiry into the claim of partition if it is made by or on behalf of any member of the HUF which is being assessed hitherto as such and record a finding thereon. When a claim is made in time and the assessment is made on the HUF without holding an inquiry as contemplated by section 25A(1), the assessment is liable to be set aside in appeal as it is in clear violation of the procedure prescribed for the purpose. Admittedly, in the instant case the claim for partition was not only made but was made well before the impugned assessments. The Tribunal was, therefore, right in holding that the impugned assessments were liable to be set aside as there was no compliance with section 25A(1).

It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh unless forbidden from doing so by the statute. The statute does not say that such a direction cannot be issued by the appellate authority in a case of this nature. In interpreting section 25A(1), one cannot also be oblivious to cases where there is a possibility of claims of partition being made almost at the end of the period within which assessments can be completed making it impossible for the ITO to hold an inquiry as required by section 25A(1) by following the procedure prescribed therefore.

In the instant case, however, since it was not established that the claim was a belated one, the proper order to be passed was to set aside the assessments and to direct the ITO to make fresh assessments in accordance with the procedure prescribed by law. We do not, however, agree with the orders made by the High Court by which it upheld the assessments and directed the ITO to make appropriate modifications. Such an order is clearly unwarranted in the circumstances of this case. The order of the High Court is, therefore, set aside. The question referred by the Tribunal to the High Court does not appear to be comprehensive enough to decide the matter satisfactorily. The question may have to be read as including a further question regarding the nature of the orders to be passed by the Tribunal, if the orders of assessments are held to be contrary to law. In the light of the above, we hold that the orders of assessments are liable to be set aside but the Tribunal should direct the ITO to make fresh assessments in accordance with law. – [Kapurchand Shrimal v. CIT (1981) 131 ITR 451 (SC)]

Partition must be by metes and bounds if female member is allotted a share 

One ‘S’, his wife, ‘K’, and their sons ‘G’ (major) and ‘B’ (minor) constituted a joint Hindu family owing, inter alia, a business. By a release deed dated 10.11.1956, ‘G’ relinquished his interest in family business. ‘S’ died on 01.09.1961. He had executed a will on 22.02.1960 bequeathing his one-third interest in family including business, to his wife and two sons equally. ‘G’ released his interest in business which he got under will in favour of other two legatees by document dated 11.09.1961. It was also recited there in that there was partial partition between ‘K’ and her son ‘B’ of business and thereafter they became partners in said business. Assessee-Hindu undivided family contended that there was a partial partition of joint family business and, therefore, income from business should not be assessed in hands of HUF. A Hindu female has no right under Hindu law to demand a partition by metes and bounds. Therefore, it was not open to ‘K’ in her capacity as guardian of her minor son ‘B’ to effect a partition between herself and B’. Therefore, by release deed dated 11.09.1961, no valid partition between mother and minor son was effected. Therefore, after 11.09.1961, Hindu undivided family consisting of 'K' and 'B' continued to have two-thirds interest in joint family business and by virtue of release effected by ‘G’ in their favour on 11.09.1961, each of them individually was entitled to one-sixth share in remaining income of business. [In favour of revenue] (Related Assessment years : 1963-64 and 1964-65) - [CIT v. Shantikumar Jagabhai (1976) 105 ITR 795 (Guj.)]

In course of assessment proceedings against a HUF, an application under section 25A of 1922 Act was made claming partition - ITO having recorded statements of various members of HUF including appellant rejected claim, under section 25A of 1922 Act - Thereupon, a suit for partition was filed and City Civil Court passed a decree for partition - On appeal before AAC, reliance was placed on said decree - AAC, however, dismissed appeal - A second appeal to Tribunal was also dismissed - Thereafter, assessments were made against HUF up to assessment year 1965-66 - A large sum of tax and penalty became due - Income-tax authorities, thus, took steps for realisation of dues against appellant's family and got attached various properties - Appellant filed writ petition challenging order of assessments as well as attachment orders - High Court dismissed writ petition in limine - Income-tax authorities had to take their own view and they were not bound by partition decree passed by City Civil Court - Therefore, when income-tax authorities rejected HUF’s claim for partition, appellant was bound by assessments made in respect of income of his family which continued to be joint in eye of law - Consequently, share of appellant’s properties received by him from HUF or income thereof was liable for income-tax dues in question

Section 171 of the Income-tax Act, 1961 (Corresponding to Section 25A of the Indian Income-tax Act, 1922) - The impugned orders did not suffer from any infirmity of law or any such defect which made them void. Notice of the enquiry had been given to all the members as admitted by the appellant himself. He had been examined in the proceedings. Sub-section (3) of section 25A of 1922 Act provides that where an order accepting partition had not been passed in respect of a Hindu family assessed as undivided such family shall be deemed for the purposes of the Act to continue to be a Hindu undivided family. A partition preliminary decree came much later. The income-tax authorities had their own view to take. They were not bound by the decree. No reference was taken under the Income-tax Act challenging the order of the Tribunal dismissing the appeal. It was further seen from records that notices were being issued in the name of family which was carrying on business in the assumed name of ‘B’. They were neither issued to nor served on ‘B’ - the dead person. In response to the notices returns were being filed by the managing member of the. family. At no stage before the income-tax authorities a contention was raised that the notice was served on a dead person. In such circumstances, the appellant was bound by the assessment made in respect of the income of his family which continued in the eye of law to be joint. The share of the appellant's properties received by him from the joint family or the income thereof was liable for the income-tax dues in question. In the result, instant appeal failed and was to be dismissed. [In favour of the revenue] (Related Assessment year : 1955-56) – [Narendrakumar J. Modi v. CIT (1976) 105 ITR 109 (SC)]

Whether the provisions of the 1922, Act would apply or the provisions of the 1961 Act would apply

Section 171 of the 1961 Act corresponds to section 25A of the 1922 Act and provides for assessment of a Hindu undivided family after partition. But it has made various changes in the law. The principal change is that the new section applies not only to cases of total partition, but also to cases of partial partition.

Sub-section (6) of section 171 of 1961 Act applies only to situation where assessment of HUF is completed under section 143 or section 144 of 1961 Act, and not to situation where assessment of HUF is completed under corresponding provisions of 1922 Act - Therefore, where assessments of HUF for assessment years in question were completed in accordance with provisions 1922 Act which included section 25A, ITO was not entitled to avail of provision enacted in sub-section (6), read with sub-section (7), of section 171 of 1961 Act for purposes of recovering tax or any part thereof personally from any members of joint family – (Related Assessment years : 1950-51 to 1956-57) - [Govinddas v. ITO (1976) 103 ITR 123 (SC)]

Specific claim is necessary before ITO initiates inquiry - Mere knowledge on the part of the ITO is neither material nor relevant. It is evident that the ITO is called upon to make an inquiry and record an order only when and if a claim to that effect is made by or on behalf of any member of such family

Section 160 read with section 171 of the Income-tax Act, 1961 (Corresponding to section 41(1) read with section 25A(3) of the Indian Income-tax Act, 1922) - The assessee was a HUF. One of the members of the HUF instituted a suit for partition and a preliminary decree came to be passed in 1931 partitioning the family property into five branches and on passing of final decree in 1939 family properties and assets were divided into five lots.

Mere knowledge on the part of the ITO is neither material nor relevant. Section 25A(1) of the 1922 Act provided that where at the time of making an assessment under section 23, it was claimed by or on behalf of any member of a Hindu family hitherto assessed as undivided that a partition had taken place among the members of such family, the ITO should make such inquiry there into as he might think fit, and, if he was satisfied that the joint family property had been partitioned among the various members or groups of members in definite portions, he should record an order to that effect. It is evident that the ITO is called upon to make an enquiry and record an order only when and if a claim to that effect is made by or on behalf of any member of such family. Where no such claim has been made there was no question of an order being passed simply because the ITO had knowledge of the pendency of the partition suit. In the absence of an order under section 25A(1), the Hindu family is by force of sub-section (3) to be statutorily deemed to continue to be a Hindu undivided family. [In favour of assessee] (Related Assessment years : 1941-42 to 1950-51) - [Pratap Chandra v. ITO (1975) 100 ITR 551 (All.)]

There can be an unequal partition

It is at the sweet will of the co-parceners and members as to whether to allot on partition in accordance with the share specified under the Hindu Succession Act or to allot lower or more to anyone or more persons. The partition in the family could not be considered to be a disposition conveyance, assignment, settlement, delivery, payment or other alienation of property. A member of a Hindu undivided family has no definite share in the family property before division and he cannot be said to diminish directly or indirectly the value of his property or to increase the value of the property of any other coparcener by agreeing to take a share lesser than what he would have got if he would have gone to a court to enforce his claim. - [CGT v. N. S. Getti Chettiar (1971) 82 ITR 599 (SC)]

 

Law is well settled that a partition of the joint family properties can be effected by an oral agreement, irrespective of the value of the property - A memorandum recording factum of partition, evidencing previous oral partition does not create any new jural relationship amongst parties and, hence, it is not hit by section 17(1) of Indian Registration Act, 1908 – Therefore, such a memorandum of partition was admissible in law even without registration under 1908 Act

The assessee-HUF effected an oral partition on 01.04.1957, and the regular memorandum evidencing oral partition was drawn up on 01.05.1957. The memorandum indicated that both movable and immovable properties were divided. The share capital in two firms was also partitioned. It filed an application under section 25A of the 1922 Act and an order was sought to the effect that the joint family property had been partitioned among the various members in definite portions as required under section 25A, sub-section (1). The Income-tax Officer rejected this claim holding that the memorandum was compulsorily registerable and that the properties which initially belonged to the karta should have been transferred by another registered document to the other members. The order of the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner. On second appeal, the Tribunal affirmed the order of the Appellate Assistant Commissioner. On reference:

In the instant case, the disruption of the joint family with partition by metes and bounds in respect of properties covered by the memorandum dated 01.05.1957, took place on 01.04.1957. Since, then, the joint ownership was converted into individual ownership and the memorandum was merely evidence of that fact. The memorandum by itself did not create any new jural relationship amongst the parties. It merely recorded the factum of partition which had already taken place. It is not hit by section 17(1) of the Indian Registration Act. Therefore, the memorandum of partition dated 01.05.1957, evidencing previous oral partition on 01.04.1957, was admissible in law and did not require registration under the Indian Registration Act. - [In favour of the assessee] (Related Assessment year : 1959-60) – [Popatlal Devram v. CIT (1970) 77 ITR 1013 (Orissa)]

Provision applies to both schools of Hindu law

Section 171 applies to families governed by the Dayabhaga School of Hindu Law as well as to the Mitakshara School of Hindu Law. The interpretation that the expression ‘group of members’ is intended to refer to a group consisting of a head of a branch and his sons who remain undivided, cannot be accepted since such an interpretation will be meaningless in relation to a Hindu family governed by the Dayabhaga School – [Joint Family of Udayan Chinubhai v. CIT (1967) 63 ITR 416 (SC)]

Once order under section 25(1) of Income Tax Act, 1922 has been passed in respect of HUF, that family cannot be assessed in the status of a Hindu undivided family; unless the order is set aside by a competent authority

The question before the Hon’ble Supreme Court of India in this case was whether a decision in a particular assessment year operates as res judicata in respect of the matter decided in any subsequent proceedings for a different Assessment Year. The court stated as follows: “It is true that an assessment year under the Income-tax Act is a self-contained assessment period and a decision in the assessment year does not ordinarily operate as res judicata in respect of the matter decided in any subsequent year, for the assessing officer is not a Court and he is not precluded from arriving at a conclusion inconsistent with his conclusion in another year. It is open to the Income-tax Officer, therefore, to depart from his decision in subsequent years, since the assessment is final and conclusive between the parties only in relation to the assessment for the particular year for which it is made. A decision reached in one year would be a cogent factor in the determination of a similar question in a following year, but ordinarily there is no bar against the investigation by the Income-tax Officer of the same facts on which a decision in respect of an earlier year was arrived at. But this rule, in our judgment, does not apply in dealing with an order under S. 25-A (1).” Income from property of a Hindu undivided family, 'hitherto' assessed as undivided, may be assessed separately if an order under section 25A (1) had been passed. When such an order is made, the family ceases to be assessed as a Hindu undivided family. Thereafter, that family cannot be assessed in the status of a Hindu undivided family unless the order is set aside by a competent authority. Under clause (3) of section 25A if no order has been made notwithstanding the severance of the joint family status, the family continues to be liable to be assessed in the status of a Hindu undivided family, but once an order has been passed, the recognition of severance is granted by the income-tax department, and clause (3) of section 25A will have no application. – [Joint Family of Udayan Chinubhai, etc. v. CIT, Gujatrat (1967) 63 ITR 416 : [TS-4-SC-1966] (SC)]

Failure to make an order on the claim for partition made does not affect the jurisdiction of the ITO to make an assessment of the HUF which has hitherto been assessed as undivided

In the instant case no orders were recorded by the ITO at the time of making assessments in respect of the five years, and therefore, no personal liability of the members of the family arose under the proviso to sub-section (2). The ITO did not seek to reach in the hands ‘T’ and ‘V’ the property which was once the property of the HUF he seeks to reach the personal income of the two respondents. That the ITO could do only if by virtue of the proviso to sub-section (2) a personal liability has arisen against them. In the absence of an order under sub-section (1), however, such a liability did not arise against the members of the HUF even if the family is disrupted. The remedy of the income-tax authorities, in the circumstances of the case, was to proceed against the property, if any of the HUF. That admittedly they have not done. The appeals were dismissed accordingly. (Related Assessment years : 1941-42 to 1946-47) – [Addl. ITO v. A. Thimmayya (1965) 55 ITR 666 (SC)]

Partition is not a transfer

Each coparcener has an antecedent title to the joint Hindu family property. Though its extent is not determined until partition takes place. That being so, partition really means that whereas initially all the coparceners had subsisting title to the totality of the property of the family jointly, that joint title is transformed by partition into separate title of the individual coparceners in respect of several items of properties allotted to them respectively. As this is the true nature of a partition, the contention that partition of an undivided Hindu family property necessarily means transfer of the property to the individual coparceners cannot be accepted. - [Ajit Kumar Poplai and Another AIR 1965 (SC) 432]

Partition will not be invalid if minor is not represented by natural guardian 

So long as the adult members make a division which is fair and which is not unequal or prejudicial to the minor's interest, the division would be binding, and if the minor after attaining majority thinks that it was unfair or prejudicial, it would be open to him to attack the partition by appropriate proceedings. So long as the interests of the minor have not suffered, it is open even to a person other than the natural guardian to represent the minor in the partition. Thus, a partition is not invalid on ground that minor was not represented by his natural guardian. – [Jakka Devayya & Sons v. CIT (1952) 22 ITR 264 (Mad.)]

Claim for partition can be made at any time before assessment 

Section 171 of the Income-tax Act, 1961 [Corresponding to section 25A of the Indian Income-tax Act, 1922] – Section 25A of the Indian Income-tax Act, 1922 requires a physical division of property before an ITO can pass an order that joint Hindu family property has been partitioned among various members or group of members in definite portions. The expression ‘at the time of making an assessment’ stated in section 25A of the Indian Income-tax Act, 1922 means in the course of the process of assessment. Expression at time of making an assessment as stated in section 25A is not restricted to time of making final order determining assessment and, therefore, power of ITO to pass an order under section 25A(1) arises when at time of making an assessment under section 23 of the Indian Income-tax Act, 1922 a claim is made by member that a partition has taken place but not necessarily during accounting year. A partition after close of accounting year may be put forward and is bound to be enquired into by ITO. Hence, even when a claim for partition is made after the expiry of the accounting period but before the assessment, it should be entertained by the ITO. (Related Assessment year : 1943-44) – [Rajmal Paharchand v. CIT (1950) 18 ITR 1 (Punjab)]