M. Chockalingam Chettiar vs Commissioner of Income Tax

Ramanujam, J.—This is a reference u/s 66(2) of the Indian Income Tax Act, 1922, and the following question has been referred :

Whether, on the facts and in the circumstances of the case, there was any material to hold that the partial partition was not true and whether the

inclusion of the income of the Iyer Merah Estate and the disallowance of the interest paid to the daughters of the assessee as karta are justified in

law ?

The assessee is a Hindu undivided family represented by its karta. Sri M. Chockalingam Chettiar. During the assessment proceedings for the

year 1957-58, the assessee claimed that there was a complete partition of the family assets on 13th April, 1956, and, therefore, sought recognition

of that partition by filing an application u/s 25A of the Act. It was the assessee''s case that under the said partition the rubber estate called Iyer

Merah Estate has been given to the karta''s two minor sons, Meyyappan and Muthappan, aged five and three years, respectively, in addition to the

transfer of cash of Rs. 1,31,001 to both of them. It was also claimed that in the same partition $60,000 was given to each of the three minor

daughters of the karta. In support of its case that there was a complete partition of the joint family properties on April 13, 1956, the assessee relied

on the relevant entries made in its account books, and also on an affidavit of the karta dated 7th January, 1958, attested by the Commissioner of

Oaths, Malaya. The Income Tax Officer made the requisite enquiry u/s 25A and found that except the entries in the account books of the assesses

and the affidavit above referred to, there was no other evidence to support the alleged partition. Taking into account the fact that the assets of Iyer

Merah Estate and the cash transferred to the minor sons had continued to be under the control and management of the karta, even subsequent to

the alleged partition, he took the view that the partition set up by the assessee cannot be true. In that view, he rejected the assessee''s claim for

recognition of the partition u/s 25A.

After rejecting the claim of partition put forward by the assessee, the Income Tax Officer considered the return of income filed by the assessee.

In that return, the assessee had not included the income from the said Iyer Merah Estate, but he had claimed allowance for interest on the amounts

said to have been transferred both to the two minor sons as also to the three minor daughters as part of the partition arrangement. As the Income

Tax Officer had rejected the assessee''s claim, of partition as a result of the enquiry u/s 25A, he not only included the income from the Iyer Merah

Estate amounting to $40,002 in the income of the family, but also disallowed the assessee''s claim for interest of Rs. 11,830-1-6, in respect of the

amount standing in the names of the two minor sons and of $16,383 in respect of the amount standing in the names of the three minor daughters.

The assessee, thereafter, filed two appeals, one against the order of assessment and the other against the order refusing to recognise the partition

u/s 25A. But later, the assessee withdrew its appeal against the order u/s 25A though it contended in the appeal against the assessment order that

the alleged partition dated April 13, 1956, was true and genuine, and that, in any event, the properties and cash transferred to the minor sons and

daughters of the karta should be excluded from the assets of the joint family. In support of this new case of partial partition the assessee again

relied upon the entries in the account books of the family in which the particulars of the partition had been stated and also on the fact that separate

accounts had been opened in the names of the minor children. It also relied upon the declaration made by the karta before the Commissioner of

Oaths, Malaya, to the effect that he and his minor sons had become divided on and from April 13, 1956, and also a statement made by Srimathi

Sigappi Achi, the mother of the minor children, to the effect that she has been acting as the guardian of the minor children subsequent to the

partition. The Appellate Assistant Commissioner, however, without going into the question of the truth of total or partial partition pleaded by the

assessee, but relying on the decision in M.S.M.M. Meyyappa Chettiar Vs. Commissioner of Income Tax, eld that the Income Tax Officer was not

justified either in including the income from the Iyer Merah Estate in the total income of the family or in rejecting the assessee''s claim for interest on

the amounts transferred to the minor children.

Aggrieved against this order of the Appellate Assistant Commissioner, the revenue went before the Tribunal, contending that the Appellate

Assistant Commissioner was not justified in excluding the income from Iyer Merah Estate and allowing deduction for the interest paid on the

amounts transferred to the minor children and that, in fact, there was no relevant and acceptable material to prove that the partition alleged was

true and genuine. The Appellate Tribunal considered the materials on record and came to the conclusion that the alleged partition set up by the

assessee was not true and genuine and that the same is only sham and nominal. The Tribunal, however, did not separately and specifically consider

the question with regard to the allowance by the assessee towards the interest paid on the amount transferred to the minor daughters. The Tribunal

presumably felt that the transfer of funds to the minor daughters took place by way of family partition as set up by the assessee and that a finding

against that truth of the partition having been given, the allowance towards interest paid on the funds transferred to the minor daughters cannot be

upheld.

Before us, the learned counsel for the assessee contends that the reasoning given by the Tribunal to disbelieve the case of partial partition cannot

at all be sustained and that there are absolutely no materials to lead to the inference that the partial partition cannot be true. It is urged by the

learned counsel that there is no dispute that the entries made in the assessee''s account books give the details of the allotment made to the minor

sons at the partial partition and that there is no further material required to corroborate the factum of partial partition. According to the learned

counsel, no regular deed of partial partition is necessary in this case, as the assets allotted in favour of the minor sons only related to business, and

the transfer of such business assets need not be by a registered instrument. The learned counsel seeks support for this submission from the decision

in South Indian Lucifer Match Works Vs. Commissioner of Income Tax, Madras, t is true that the court in that case, relying on an earlier decision

in Jakka Devayya and Sons, Tenali Vs. Commissioner of Income Tax, Madras, , held that a partition in the case of a business in definite portions

may be brought about by specification of the shares in the accounts and by making the necessary entries therein to show that thereafter the

business would be held in severalty in specified or definite portions of the shares. Reference was also made in that case to Bhimraj Bansidhar Vs.

Commr. of Income Tax, , which laid down that the only method by which a business can be divided as a going concern is by dividing the book

balances in the names of persons to whom the shares of the business have been allotted and that a partition of the business can, therefore, be

brought about by mere specification of the shares in the accounts and making entries therein to show that the business is, thereafter, held in

severalty or in specified shares. The learned counsel for the assessee says that though the subject-matter of allotment in this case is a rubber estate,

it has always been treated by the Income Tax authorities as a business and, therefore, the principle enunciated in the above decisions will apply to

this case. The learned counsel for the revenue, however, disputes the fact that the estate in question was always treated as business and that the

income therefrom was treated as a business income. It is not necessary for us to go into that controversy as to whether the income from the estate

in question was a business income or not. Even assuming that the principle laid down in the above decisions is held to be applicable to the facts of

this case, still the further question to be considered is whether the entries made in the accounts were real and were actually acted upon. As pointed

out by the Tribunal, and it is not disputed by the assessee, there are no other documents to evidence the alleged partial partition except the entries

in the account books. The entries in the account books only show the transfer of certain amounts in the name of the karta''s minor daughters and

the transfer of the said rubber estate and certain other amounts in the name of the karta''s minor sons. While considering the truth and probability of

the partial partition set up by the assessee, the Tribunal had expressed that the assessee has not been able to explain the need for bringing about

the partial partition, especially when no one interested in the minor children had demanded such a partition, and there were no misunderstandings

between the karta and his wife leading to her nomination as the guardian of the minor children. This reasoning of the Tribunal is attacked by the

assessee''s learned counsel on the ground that, even if there is no motive shown for effecting a partition, the validity of the partition cannot be

questioned and that it is always open to the karta of a Hindu undivided family to effect a division of the properties even without reference to his

sons, the other coparceners, and without there being any misunderstanding between them. The learned counsel may be right in his submission that

the validity of the partition cannot be questioned merely because the motive for such a partition has not been established or there was no need or

justification for the same or there were no misunderstandings between the karta and the other members of the family. If a partition has, in fact,

taken place, its validity cannot be challenged on the ground that there was no motive or need for such a partition. But, when the question actually

arises as to whether there was in fact a partial partition, the existence of a need or motive to make a partial partition when the family is admittedly

joint, cannot be said to be an irrelevant circumstance. As a matter of fact, in this case, the assessee originally came forward with a specific case

that there was a complete partition on April 13, 1956. The sworn affidavit of the karta attested by the Commissioner of Oaths, Malaya, which has

been filed in these proceedings clearly showed that the assessee''s case was that there has been a complete partition of all the assets of the joint

family between coparceners. The karta, in fact, filed an application u/s 25A for recognition of that complete partition. On enquiry, the Income Tax

Officer specifically found against the truth and genuineness of that partition. It is not as if the Income Tax Officer rejected the application u/s 25A

on the ground that there was only a partial partition and not a complete partition, and, as such, an application for recognition of the partition cannot

be maintained. He held against the truth of the partition as such. It is only when the assessee failed to get recognition of the alleged complete

partition, he has come forward with a case that the same transaction should be treated as a partial partition. A transaction which is found to be not

true cannot be true in part. The assessee has not set up the plea before the Appellate Assistant Commissioner and before the Tribunal that the

transaction that took place on April 13, 1956, is a partial partition. As pointed out already, the assessee has withdrawn the appeal filed by it

against the order refusing to recognise the partition u/s 25A on the ground that it is not true. That finding given in the said proceedings will hold

good even for part of the transaction. Taking all these circumstances into consideration, the Tribunal held that the plea of partition, either complete

or partial, cannot be true and, therefore, cannot be accepted. Even though one of the reasons given by the Tribunal that there is no motive or need

for bringing about the alleged partition may not be acceptable to us, still the finding rendered by the Tribunal that the alleged partial partition is not

true and genuine but it is only a sham and nominal transaction, cannot be said to be without any material.

As regards the amounts transferred to the three minor daughters of the karta of the assessee it cannot, however, be said that it formed part of

the arrangement of partial partition. Even if the transfer of funds in favour of the daughters had been effected on April 13, 1956, along with the

other entries which, according to the assessee, was in the course of the partial partition, it could be treated as an independent transaction by which

the karta gifted certain amounts to the daughters. Even if the partial partition as alleged by the assessee is not accepted as true, the factum of

transfer of certain funds to the daughters cannot be doubted. The circumstances pointed out by the Tribunal to disbelieve the case of partial

partition are not sufficient to disprove the entries relating to the transfer of funds in favour of the daughters. As already stated, the Tribunal has not

considered the question as to the truth or otherwise of the transfer of funds to the daughters by the karta, as it felt that it is also covered by its

decision as to the sham and nominal character of the partial partition. In this case, the Appellate Assistant Commissioner treated the transfer of

funds by the karta to the minor daughters as a separate item for consideration and held that the allowance claimed by the assessee towards interest

paid on those amounts is to be upheld. We are of the view that the Tribunal also should have dealt with this item separately. If, on a due

consideration of the materials on record, the Tribunal were to uphold the transfer of funds by the karta to the daughters as a gift, the assessee will

be entitled to deduction in respect of the interest paid on those amounts. But, that is a matter to be considered by the Tribunal.

The question set out above is composite and covers both the questions relating to partial partition as also the disallowance of interest paid to the

daughters of the assessee. The first part of the question relating to the partial partition is answered in the affirmative and against the assessee. But

the second part of the question relating to the disallowance of the interest paid to the daughters of the assessee is answered technically in favour of

the revenue, the result being that the Tribunal has to consider the question of disallowance afresh, independent of the question of the partial

partition. There will be no order as to costs.