N. Kaliappa Chettiar vs The Commissioner of Income Tax

S. Ramachandra Ayyar, C.J.—This reference relates to the assessment of one Kaliappa Chettiar, a businessman at Salem, in his capacity as

the Karta of a Hindu joint family for the assessment years 1952-53 to 1955-56. Kaliappa Chettiar has, a son Gopalan by his first wife and six

other sons by his second wife. Misunderstandings appear to have arisen between him and Gopalan early in the year 1951 and on the 31st May of

that year a partition arrangement was entered into under which Gopalan was given properties worth Rs. 35,000. The arrangement is evidenced by

a document which expressly effects a release of Gopalan from the family, leaving the rest, namely, the father and his other six sons united. On the

date of partition, presumably, with an intention of ascertaining the share of Gopalan, certain entries were made in the account books. The capital

account of the business, including the profits previously earned, was estimated at Rs. 2,42,297-14-4. To this was added the value of movable and

immovable properties of the family, which were valued at Rs. 69,500. The resulting capital was found to be Rs. 3,11,797. Gopalan was given for

his share four items of immovable properties, valued at Rs. 11,500. A sum of Rs. 23,500 was placed at his credit to be paid to him at the time of

the registration of the partition deed. With regard to the balance of capital, the account books contain debits against each one of the other six sons

in the sum of Rs. 24,860, after giving credit to the value of the properties brought into the capital account and transferred. There was a

corresponding credit in favour of each for a like sum. The result of these entries was that the capital account of the business was put at Rs. 84,797

: this was kept in the Assessees'' name. The business was run as before with this difference that Gopalan who had gone out of the family, had no

longer any interest therein. The Assessee, in the course of his management, credited each one of his six sons with interest every year on the amount

of Rs. 24,860 standing to their respective credit in the books of account; that was supported by a corresponding debit in the books of the

business.

In the course of the assessment proceedings for the year 1952-53, the Assessee filed an application u/s 25(A) of the income tax Act for

recognition of the fact that the entire family had become divided. According to the Assessee, although the partition deed, to which we have just

now made reference, was intended to divide Gopalan alone from the rest of the family, there was a subsequent exercise of power by him on the

very same lay to effect a division between himself and the six other sons as well inter se-Evidence in support of such a partition was the entries in

the account books, which showed a credit in favour of each of the six sons. The Assessee also claimed that after the date of such a partition, the

business became his sole concern and he claimed deduction for the interest credited in favour of his sons.

The income tax Officer rejected the Assessee�s claim u/s 25(A) of the Act as not bona fide. He further held that the only partition that was

entered into on 31st May 1951, was the one with Gopalan and that there was no further partition effected by the father between himself and the

other sons. He rejected the claim of the Assessee for deducting interest payable on the deposits standing in favour of his sons.

The Appellate Assistant Commissioner upheld the order of the income tax Officer and stated:

Admittedly, the Hindu undivided family had immovable properties. The Appellant had also business. All that the Appellant did was to value the

properties, bring the valuation into the business books by debiting the property account and crediting the capital account and dividing the capital

amongst the co-parceners. Even if the division were genuine, there was clearly no division of the immovable properties by metes and bounds.

Where a Hindu undivided family holds immovable properties, it is necessary that the properties should be divided by metes and bounds in order to

satisfy the requirements of Section 25-A (1). As this requirement is not satisfied, the income tax Officer was correct in not passing an order u/s 25-

A(1).

On the other question relating to the deduction of interest on the deposits he stated:

If a genuine partition was intended to be effected between the Karta and his minor sons also, the opportunity of a registered partition deed

between the Karta and the major sons by the first wife would have been utilised for effecting a complete partition. Further, even the minors are not

admitted as partners in the family business. Merely credits have been raised against their names. In these circumstances, I hold that the credits

raised in the minor sons names did not really represent genuine credits. It is only an attempt to create a debt in favour of the minors so as to claim

interest payment as a deduction...The interest is not therefore a genuine payment.

There was an appeal to the Tribunal but without success.

In compliance with an order of this Court u/s 66(2) of the income tax Act, the following questions have been referred for our opinion:

Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in rejecting the claim of the Petitioner Kaliappa, that

he was entitled to an order u/s 25-A recording the partition not only between himself and his son Gopalan, but also between himself and his six

other sons with effect from 31st March 1961?

Whether on the facts and in the circumstances of the case, the Petitioner Kaliappa was liable to be assessed in the status of a Hindu undivided

family with reference to the income from the business or the income from the property?

Whether on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the claim of Kaliappa to deduct payment of

interest charges amounting to Rs. 13,245?

Questions similar to question No. 3 have also been referred to us with respect to the payment of interest for the assessment years 1953-54, 1954-

55 And 1955-56.

Question No. 1.--This question presents little difficulty. The partition deed evidences that Gopalan alone had separated himself from the rest of

the family. If the document had stood alone, the position will be that after the separation of Gopalan, Kaliappa Chettiar and his sons by the second

wife continued as members of a joint Hindu family. A partition in a joint Hindu family might be partial, either with respect to the members or with

respect to the property. If there be a partial partition with regard to the members, in the sense that one or a few of them separate themselves from

the other members of the family, the latter would still constitute an undivided family for purposes of taxation. Section 25A cannot be called to the

aid of the joint family and its assessment has to be made with respect to the income from properties in its hands. Again Section 25A will not apply

to a case where there is only a partial partition, in the sense that some assets are divided, while the other assets are left for division at a future date.

It is possible for such a thing to take place in one of two ways. The members might become divided in regard to certain properties and quoad

other properties, they might continue to be members of an undivided family. In such a case, the original family would undoubtedly exist quoad the

undivided properties. Section 25A cannot obviously apply to that case. Again there may be a partition between all the members of the family with

respect to certain of the properties, while the other properties are left to be enjoyed in common as co-tenants. Even to such a case, the provisions

of section 25A will not apply, as it cannot be said that there has been a partition in definite, portions. For the application of that section, all assets

of the family must have been divided; this has been laid down by this Court in MEDAM GURUMURTHI SETTY Vs. COMMISSIONER OF

Income Tax MADRAS., . where Leach C.J., observed:

Partition means a completed partition. The fact that some assets are divided and others are left for division at a future date would not be a partition

within the meaning of the section (Section 25-A.).

The interpretation of the section has been the subject-matter of several decisions. In Sundar Singh Majitha v. Commissioner of income tax,

United and Central Provinces ILR (1943) All 69 (P.C.), the Privy Council laid down that the section would have no application to any case in

which a Hindu undivided family continued to remain in existence at the time of the assessment. The words partitioned among the various

members... in definite portions occurring in the section has, therefore, to be construed as meaning that there was a partition between the members

by metes and bounds. In Joint Receivers Chunampet Zamin v. Commissioner of income tax ILR (1961) Mad. 294, 300 one of us Srinivasan J.,

laid down the rule thus:

After all, immediately there is a declaration of the intention to separate on the part of any member of the joint family, fractional interest in the family

becomes ascertained. But that is not to say that he became entitled to any definite portion of the family estate. Nor does the fact that, pending an

actual division of the properties, the income is divided in the ratio of the shares amount to such a division in definite portions.

The case for the Assessee is that after entering into a partition arrangement with Gopalan, the father Kaliappa Chettiar, in the exercise of his

power as the father of a Hindu family, effected a partition between himself and his other sons, allotting to each one of his sons cash in lieu of their

interest in the business and also gave them a share in the movable and immovable properties. Under the partition arrangement with Gopalan, his

share was ascertained to be Rs. 32,000 ; and an extra sum of Rs. 3,000 was given to him as Jeshta Bhagam. This sum was made up of Rs.

11,500, the value of four items of immovable properties, and the balance of Rs. 23,500 agreed to be paid at the time of registration of the

document. The entries in the accounts show that the other sons were given each a sum of Rs. 32,000. Each one of them was given a seventh share

in the house and garden, which was valued at Rs. 7,140. The balance due to each, namely, Rs. 24,860 was credited in the business accounts in

their respective names. It will be seen from this that even if we were to assume that there was a real partition between the father and his sons by his

second wife, the house and garden, in which they were given a share, were not divided by metes and bounds and they were allotted only an

undivided one-seventh share therein. This circumstance, namely, that there was no actual division by metes and bounds in regard to the house and

garden, would by itself make Section 25A inapplicable. So much is conceded by the learned Counsel appearing for the Assessee. We, therefore,

answer the first question in the affirmative and against the Assessee.

Questions 2 and 3.--But the mere fact that the alleged partition between all the members of the family could not be recognised u/s 25A does not

dispose of the matter. In the assessment of the joint family, it has first to be seen what are the properties owned by the family, so that its income

might be brought to tax. In other words, if, notwithstanding a partial partition, the status of the family is not affected quoad the property which

remain undivided, the properties actually partitioned would, nevertheless, case to be joint family properties and the income therefrom cannot be

regarded as the income of the family. The case for the Assessee is that by virtue of the partition which he had effected between himself and his six

sons by the second wife on 31st May 1951, the entire business was allotted to him, while the sons were given a sum of Rs. 24,860 each, in

respect of which they were treated as creditors of the business. If this contention were to be accepted, the business should be regarded as the

separate property of Kaliappa Chettiar and he would further be entitled to claim deduction for interest lawfully paid by him to his sons.

In a division of the joint family properties, it is not necessary that each member should be given his share in every item of property. A valid

partition arrangement can take place by allotting different items of properties to the several sharers.

In M.S.M.M. Meyyappa Chettiar Vs. Commissioner of Income Tax, it was held that in the case of a business, the only kind of division possible

would be to make entries in the accounts and to indicate by other modes that there was a separation of the shares between the members of the

family owning the business. This view was reiterated in Jakka Devayya and Sons, Tenali Vs. Commissioner of Income Tax, Madras, where

Satyanarayana Rao J., observed:

A partition in the case of business in definite portions may be brought about by a specification of the shares in the accounts and making the

necessary entries therein to show that thereafter the business was held in severalty in specified or definite portions of shares. It is open to the

members of the Hindu joint family to enter into a partnership thereafter in respect of the family business which they have divided by specified shares

in the accounts among themselves. The property so held in partnership is taken out of the joint family and thereafter the income derived from the

partnership would not be income of the joint family. In other words, it ceased to be an asset owned by a Hindu undivided family. The rest of the

properties and the status of the family regarding them may continue to be joint.

In the present case, there is no question of the joint family business being converted into a partnership. The six sons of Kaliappa Chettiar by his

second wife were minors on the material date and it is not the case of the Assessee that the family business hitherto carried on, was run after the

date of the alleged partition, as a partnership, to the benefits of which the minors were admitted.

It is, however, contended on Assessees'' behalf that under the alleged partition the entire business became that of the father, while the sons

were thereafter entitled only to the sums of money credited in their favour. It can readily be admitted that the business, which was an asset of the

family, is not one capable of division by metes and bounds. In a proper partition the business itself, may be divided and if it is continued the

erstwhile members of the family can become partners in it, or it may be that the business is allotted to one among the sharers, thereat being given

either cash or other family property in lieu of their interest in the business. Whether there was a division of the kind stated above, is a matter for

evidence in each case. In Commissioner of Income tax v. Ramakrishnier (1963) 49 ITR 603 to which one of us (Srinivasan J.) was a party, it was

recognized that an item of property which was not capable of division by metes and bounds, such as the interest of the family in a firm, could be

divided only by making necessary entries in the books of account and that would be satisfactory evidence of the partition of such an asset. In that

case, a Hindu undivided family was a partner in another firm. The family''s interest in the firm was partitioned among its members by making the

necessary entries in the capital accounts of its members. It was held that those entries afforded cogent evidence of a partition in the family and the

mere circumstance that there were no entries in the firm''s accounts (the firm having been conducted by the family with strangers) would not militate

against the claim for partition. As pointed out by the Supreme Court in Charandas Haridas and Another Vs. The Commissioner of Income Tax,

Bombay North, Kutch, Saurashtra and Ahmedabad and Another, there is nothing in the income tax law which prevents members of a Hindu joint

family from dividing any asset belonging to the family. Law does not require that the property must, in every case, be divided by metes and bounds.

Any partition will be effective if separate enjoyment could otherwise be secured, according to the shares of the members.

But the question whether there has been a partition is always one of fact, which has to be proved like any other fact. In such cases, entries in

account books will certainly afford evidence of the transaction. But it is well-known that mere entries in the account books cannot be regarded as

conclusive in regard to any matter. There may be cases where entries are made with ulterior motives or with no intention to divide, or there may

equally be cases where the entries afford proof of the fact of separation. It can be accepted that in the case of division of an asset, like a business,

entries in the account books afford valuable evidence. But that cannot mean that once there is an entry, it should be accepted as conclusive of the

question regardless of the existence of other circumstances disproving a partition. This principle was recognized in Abdul Kareem v. Commissioner

of income tax ILR (1963) Mad. 858 where it was held that though an entry in a book of account, as such, might not conclusively establish a real

and effective transaction, it would be evidence to support the same and that it would be open to the Court to look into the surrounding

circumstances for ascertaining whether the entries in the books of account reflected the real state of affairs.

Now, in the present case, it is not clear from the evidence that the sons retained no interest in the business. The house and garden have been

included in the joint assets of the business. The sons by the second wife were each given a seventh share in such properties. Prima facie, therefore,

they would appear to have an interest in the business. Again, the value of the father''s share is Rs. 84,797 whereas the share of each of his other

sons is only Rs. 32,000. No acceptable reason has been given why there should be this difference. Mr. Swaminathan for the Assessee suggested

that the increased share given to the father might be due to the fact that he was responsible for C the liabilities of the firm. There is, however, no

evidence as to the existence of such liabilities. The entries in the account books themselves, under which credit was given to each of the sons in the

sum of Rs. 24,860 are not clear whether it was cash that was given to them or only an interest in the business proportionate to that amount. It is

true that in the accounts for the subsequent years, the sons are treated as creditors to the extent of that sum. At best, these credits can only be

regarded as equivocal. It may be a genuine case of allotment of cash to the sons or it might merely be a device to obtain deduction for the interest

attributable to that amount of deposit. As we stated, there is no real explanation in this case for an unequal and arbitrary distribution of the assets

between the father and the sons. It is significant that this partition between the father and the sons by his second wife, which is said to have been

arranged on the very day on which Gopalan got divided from his father, is not referred to in the document executed that day. On the contrary, that

document proceeds as if the father and the son by his second wife continued to be members of a single undivided family. No other document has

been executed by the father to evidence the alleged partition between himself and his other sons. Under these circumstances, we have no hesitation

in holding that there were sufficient materials for the department as well as the Tribunal to come to the conclusion that no real partition was

intended between the father and the six sons by his second wife.

On this conclusion, questions 2 and 3 as well as the questions relating to the payment of interest to the sons during the years 1953-54, 1954-

55 and 1955-56 have to be and are answered against the Assessee. The Assessee will pay the costs of the department.