Commissioner of Income Tax vs Madan Lal Parikh

On an application u/s 256(1) of the income tax Act, 1961 (''the Act''), the Tribunal has referred the following questions for our opinion: 1. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that share income from the firm Motilal Madanlal & Sons, Kota was assessable as the income of the Hindu undivided family consisting of the assessee and his wife?

Whether, on the facts and in the circumstances of the case and in law, the Tribunal was right in not upholding that the assessee''s status was that of an individual with reference to the share income from the firm Motilal Madanlal & Sons, Kota and he was liable to be assessed as such?

The basic issue raised in these questions is as to whether the status of the assessee should be taken as HUF or individual. The assessee has claimed that after partial partition, the share which he refused on partial partition has been deducted with the firm and again he represents the HUF in the firm so whatever the share income from the firm comes to him, is the income of the HUF and not in his individual capacity. Therefore, the share income from the firm should be assessed in the hands of Madan Lal Parikh, HUF.

The Tribunal has elaborately considered the facts that in what manner the partial partition has taken place and how much share came to the assessee and when that share has been deposited with the firm, how that should be treated as HUF. The relevant observations of the Tribunal reads as under:

We have heard the representatives of the parties at length in these appeals. On the basis of the decided cases on the subject, it is rather difficult to accept the revenue''s contention. A solitary decision supporting the revenue clearly is the decision of the Orissa High Court in Satyanarayana Murthy''s case which has been expressly dissented from by the Andhra Pradesh High Court in Prem Chand Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, . However, we would like to say about some misapprehensions that have developed and emerged. We had an occasion to go through all the commentaries on the Hindu Law and we regret very much to observe that there is no such thing as HUF''s property. In fact, the subject index of Mulla''s Hindu Law, which deals with nearly every matter discussed in the book does not refer to any such thing as HUF or Hindu undivided family much less property belonging to such a family. In Hindu law either there is a joint family which consists of some coparcenary property. It has its own existence. It does not belong to any individual whether he is the Karta, father or any other member. Besides this, a member can hold his separate property which would belong to him individually. The joint status of a Hindu family continues and family continues to hold coparcenary or joint family property till there is a partition. But then probably the law did not recognize any such thing as partial partition. A simple intention to separate coupled by any gesture such as a notice or any other manifest act is sufficient to disrupt the Hindu family and thereafter there is no such thing as a joint Hindu family. It is then a divided family. Each coparcener who gets a share and any other member (say, a female) is entitled to a share, get it as his separate property. The mere fact person who gets a share. The only limitation in Hindu Law was that if a coparcener was getting share for his own branch which might consist of his own sons, grandsons, etc., and there was no partition between him and his sons, the property acquired by him would become joint family property of his own family consisting of himself, his wife and children. Once there is a partition, between a father and his sons, possibly there could be no coparcenary property left in the hands of the father. In case of the sons it would again be their individual property unless any son has got his own son qua whom it would be coparcenary property of a family consisting of himself and his children. These principles of Hindu law are so clear that there can be possibly no doubt about the position of the law as explained by us above. However, Courts deciding income tax cases and income tax authorities have developed totally different and strange conceptions. According to them, there can be a partial partition of a family. One asset can be partitioned. The remaining assets continue to be owned by the family. Again one person takes his share in one asset so that he separates from the family qua that asset but continues to be the member of the family otherwise, so that the remaining part of that asset which is not partitioned among the other members starts belonging to another HUF consisting of the remaining members. Thus, they have invented the idea of multiple HUFs which probably was never contemplated by the Hindu law. The sole purpose of introducing these concepts is to divide the income/wealth into as many units as possible and, thus, to decrease the incidence of tax. The evil has come to stay and that it has been recognised by the Legislature is apparent from the use of the words ''partial partition'' in section 171 of the income tax Act. Of course the Legislature has now rightly understood that introduction of these conceptions has resulted in a whole-scale evasion of law and, therefore, they have abolished the conception of partial partition after 31-12-1978.

It was unheard in Hindu law that a person who is a sole-surviving co-parcenar, would have any limitation on his power of disposal of his property, even though it originally came to him by way of partition from a larger family. Although this question was not directly involved, after accepting that their Lordships of the Supreme Court in Surjit Lal Chhabda Vs. The Commissioner of Income Tax, Bombay, held that the property which the assessee had put in the common stock may change its legal position on the birth of a son but until that event happens, the property in the eye of Hindu law is really his. He can deal with it as full owner, unrestrained by considerations of legal necessity or benefit of the estate. He may sell it, mortgage it or make a gift of it. Even a son born or adopted after the alienation shall have to take the family hotchpot as he finds it. Consequently, they further held that notwithstanding the throwing of this property into family hotchpot, the income was chargeable to income tax as his individual income. On the other hand, we will point out that the Andhra Pradesh High Court in Prem Chand Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, has gone to the extent of holding that even after the wife has been allotted a share in a partition of the HUF among her husband and children, the property obtained by her husband would continue to be HUF property because the material bond between the husband and wife continued and was not snapped in spite of the share given to her. It is correct that in this particular case, the only question involved was as to whether the wife could be considered to be the family of the HUF which was set up by the husband in relation to the share obtained by him on partition between himself and his children for the purpose of attracting a higher rate of tax under sub-para 2 of para A of Schedule I to the Finance Act, 1974, but this has been repeatedly used by the assessees for the purpose of treating the share given to the husband on a partition between him, his sons and wife as HUF property. We have not been able to understand as to which HUF this property belongs and why it cannot be considered to be the separate/individual property of the husband. But as the decided cases stand, it has been so held accordingly. From that angle, the assessee''s case probably stands on a rather stronger footing inasmuch as here his wife did not get a share in the partition between her husband and son.

One thing that should have been looked into was capacity in which the assessee had invested the capital in the firm and had become a partner, i.e., whether it purported to be in his individual capacity or karta of the HUF. For that a perusal of the partnership deed was necessary. Unfortunately none of the parties was in a position to produce the same. Since the department is in appeal, primarily it was the duty of the department to produce it if it relied upon the fact that the partnership was entered into by the assessee as an individual and not as a karta of the HUF. This is also not the case set out by the ITO in his order. In fact, he has proceeded on the assumption that after partition, the assessee could not treat this capital as HUF property. The decided cases mentioned above probably go against this contention of the department. In these circumstances, we have not option but to dismiss these appeals which we do accordingly.

Considering the facts discussed by the Tribunal, which are not disputed by the learned counsel for the revenue, we find no infirmity in the order of the Tribunal, treating the income from the firm as income of Madan Lal Parikh HUF.

In the result, we answer both the questions in the affirmative, i.e., in favour of the assessee and against the revenue. The reference, so made, is hereby disposed of accordingly.