Soridandau Madanmohan Rao vs Commissioner of Income Tax

At the instance of the assessee, the Tribunal referred the following questions for the opinion of the High Court : 1. Whether, in the circumstances and on the facts of the case, the order dated 28-3-1973 of the income tax Officer allowing the assessee''s claim of partial partition dated 5-8-1971 is in accordance with the provisions of section 171 of the income tax Act, 1961.

Whether, in the circumstances and on the facts of the case, the Addl. Commissioner of income tax is justified in holding that there could not be a partition in a Hindu joint family consisting of only the karta, his wife and minor daughter ?

Whether, in the circumstances and on the facts of the case, the Addl. Commissioner of income tax is justified in cancelling the order u/s 143(3) of the income tax Officer consequent on allowing the claim of partial partition u/s 171 of the income tax Act, 1961?

The assessee, Dandau Madanmohan Rao is the second son of Late Dandau Pentaiah. The assessee was allotted some joint family properties towards his share in the family partition which took place from time to time between himself, his brothers and his father. The assessee''s wife is one Padmavathi. As the assessee had no children, he adopted one Narsamma, the daughter of one of his brothers, by a registered deed of adoption dated 4-8-1971. The joint family, thereafter, consisted of the assessee, his wife Padmavathi and his adopted daughter, Narsamma. The assessee was being assessed in the status of a HUF up to and inclusive of the assessment year 1971-72, the accounting period ending with 19th October of each previous year. The year of the assessment in question is 1972-73, the accounting period being the year ending with 19-10-1971. An oral partition of the family properties as between the assessee, his wife and adopted daughter was made on 5-8-1971 and a record of lists of properties partitioned or kept joint was prepared on 16-8-1971. The ''A'', ''B'' and ''C'' schedule properties were respectively allotted to the assessee, his wife and adopted daughter. The ''D'' schedule properties were, however, kept joint. There was no physical partition made of premises No. 5-2-1974/2, Rashtrapathi Road, Secunderabad, in which the assessee and his wife were each allotted a half share. Likewise, the adopted daughter was allotted the one-sixth share belonging to the HUF of the assessee, the remaining five-sixth share, however, belonging to the divided members of the bigger HUF. For the assessment year 1972-73, the assessee claimed that a partial partition took place among the members of HUF on 5-8-1971. The ITO by his order dated 28-3-1973 accepted the claim made u/s 171(3) of the income tax Act, 1961 (''the Act''). He accordingly finalised the assessment for that year by his assessment order dated 28-3-1973. The Addl. Commissioner, in exercise of his powers u/s 263 of the Act, issued a notice dated 14-2-1974 calling upon the assessee to show cause as to why the order dated 28-3-1973 should not be cancelled with a direction to the ITO to re-do the assessment in accordance with law. The assessee showed cause after considering which the Addl. Commissioner set aside the two orders passed by the ITO as being prejudicial to the interests of the revenue and directed the ITO to re-do the assessment in accordance with law. The Addl. Commissioner held that neither Padmavathi nor Narsamma could be considered as coparceners entitled to claim a share in the family properties. The assessee then preferred two appeals before the Tribunal, one against the order cancelling the acceptance by the ITO of the claim made u/s 171(3) and the other against the direction of the Addl. Commissioner to re-do the assessment in accordance with law. The Tribunal dismissed both the appeals. The assessee, in his reference application made to the Tribunal u/s 256(1) of the Act, required the Tribunal to refer the first two questions set out above for the opinion of the High Court. In making the reference, however, the Tribunal also framed the third of the questions referred to above or the opinion of the High Court. 2. The provisions of section 171(2) prior to the Finance (No. 2) Act, 1980, became material. In terms of the material provisions of that section :

(2) Where, at the time of making an assessment u/s 143 or section 144, it is claimed by or on behalf of any member of a Hindu family assessed as undivided that a partition, whether total or partial, has taken place among the members of such family, the income tax Officer shall make an inquiry there into after giving notice of the inquiry to all the members of the family.

(3) On the completion of the inquiry, the income tax Officer shall record a finding as to whether there has been a total or partial partition of the joint family property, and, if there has been such a partition, the date on which it has taken place.

(4) Where a finding of total or partial partition has been recorded by the income tax Officer under this section, and the partition took place during the previous year,-

(a) the total income of the joint family in respect of the period up to the date of partition shall be assessed as if no partition had taken place; and

(b) each member or group of members shall, in addition to any tax for which he or it may be separately liable and notwithstanding anything contained in clause (2) of section 10, be jointly and severally liable for the tax on the income so assessed.

The partial partition was orally made on 5-8-1971, during the accounting period 1971-72, the year of the assessment being 1972-73. It was on such a claim made by the assessee that the ITO recorded a finding that the partition in fact took place on 5-8-1971, after giving notice of the enquiry to all the members of the family and after making the enquiry in terms of section 171(2). Consequent on the acceptance of such claim made by the assessee, the assessee, his wife and daughter became jointly and severally liable to pay the income tax on the total income of the joint family in respect of the period till 5-8-1971 and thereafter, severally in respect of the income arising to each of them from the properties allotted to their respective shares. Consequent on the acceptance of such claim for partial partition, the ITO finalised the assessment of the assessee for the year 1972-73 u/s 143(3) of the Act. The Addl. Commissioner as also the Tribunal took the view that the assessee was the only member of the family entitled to the status of a coparcener and that neither his wife nor the adopted daughter could be coparceners, entitled to claim partition and that, therefore, the oral partition dated 5-8-1971 is ab initio void and illegal. Mr. Dasaradharama Reddy has fairly stated that there cannot be any valid partition as such between the assessee, his wife and adopted daughter. He has, however, tried to persuade us to uphold the validity of the partition on the basis of a family settlement. In support of this submission, he placed reliance on Commissioner of Income Tax Vs. Narain Dass Wadhwa, The facts in that case were that Narain Dass Wadhaw, constituted a HUF along with his son, Krishna Lal Wadhwa, his wife Sita Devi and two unmarried daughters, Veena and Chandrika. On the death of Narain Dass Wadhwa on 19-1-1964, the HUF constituted by Krishna Lal, his mother and two sisters, was a partner in the firm known as Paxit Containers''. On 15-5-1969, there was a partial partition in respect of the amount of Rs. 60,000 which stood invested by the assessee-HUF in the said firm. Necessary entries were made in the books of Paxit Containers showing the division of the aforesaid amount of Rs. 60,000. Consequent upon this partial partition, Sita Devi, Veena and Chandrika withdrew the amounts from Paxit Containers and invested the same somewhere else. Krishna Lal thereafter joined the firm, Paxit Containers, as representative of the smaller HUF, consisting of himself, his wife and a minor child. On 10-7-1970, the assessee-HUF filed an application u/s 171, requesting the ITO to record a finding as to the partial partition of the joint family property as on 15-5-1969. That claim was supported by an affidavit filed by each member of the assessee-HUF. The claim was, in fact, presented that there was nothing in law to compel the karta of the family to remain joint with his mother and sisters and as such, the partial partition in question, which in fact, was tantamount to a family arrangement, was valid in the eye of law. The ITO refused to accept the claim of partial partition on the ground that there must be at least two coparceners for the purpose of effecting a partition of the joint family property, but there was only Krishna Lai, one male coparcener. The ITO thereafter reproceeded to add the interest on the total amount of Rs. 60,000 in computing the income of the assessee-HUF. On appeal, the AAC accepted the claim of the assessee and the order of the AAC was confirmed by the Tribunal. The facts disclosed beyond doubt that Sita Devi, Veena and Chandrika became the legal representatives along with Krishna Lal, son of Narain Dass Wadhwa who died in 1964 subsequent to the Hindu Succession Act, 1956. Each of them had, therefore, a right to claim a share in the assets belonging to Narain Dass Wadhwa. The learned Judges of the Punjab and Haryana High Court accepted the partial partition both as of fact and on the alternative basis that it represents a family arrangement arrived at fairly between the members belonging to the family of Narain Dass Wadhwa. Mr. Dasaradharama Reddy cannot, therefore, rely upon this decision, in view of the facts which arose for decision in that case.

The record of lists of oral partition prepared on 16-8-1971 proceeds on the basis that the assessee, his wife and daughter chose to have an oral partial partition of their undivided family properties. Padmavathi, the wife of the assessee, would have had a claim for maintenance, if she could make out the grounds entitling her to claim separate maintenance from her husband. Narsamma, the adopted daughter of the assessee would have had a right to claim maintenance and a provision made for her marriage expenses on the existence of grounds enabling her to make such a claim. No reference is made to the existence of such claims in the oral partition deed. The document itself does not give any indication that the oral partition was brought about to record a bona fide family arrangement. Such a claim based on bona fide family arrangement was not put forward either before the Addl. Commissioner or before the Tribunal, and not even, in the statement of the case filed by the assessee u/s 256(1). No such question of law as to whether the partial partition could be upheld as a family settlement had been referred to the High Court. The said question does not, therefore, arise out of the order of the Tribunal.

A further submission made by Mr. Dasaradharama Reddy, arising out of Question No. 2 remains to be considered. The Addl. Commissioner revised the order of the ITO made u/s 171(3),in purported exercise of his revisional powers u/s 263 of the Act. The Addl. Commissioner could exercise such power, if he considers that any order passed by the ITO is erroneous insofar as it is prejudicial to the interests of the revenue, but in such cases, it is incumbent on him to give the assessee an opportunity of being heard. The submission of Mr. Dasaradharama Reddy is that the Addl. Commissioner revised the order only after giving notice to Madanmohan Rao, the assessee, but he did not give any such notice to either Padamavathi or Narsamma and for such defect in the procedure followed by the Addl. Commissioner, the order passed by him in revision cannot be sustained. He placed reliance on T. G. SULAKHE Vs. COMMISSIONER OF Income Tax, HYDERABAD AND ANDHRA., ). The facts in that case are : a joint Hindu family consisted of T.G. Sulakhe, K.G. Sulakhe and B.G. Sulakhe. All the three brothers were being assessed under that status for 1950-51 for which period the accounting year ended on 21-9-1949. In the course of the assessment proceedings for 1950-51, the members of the family claimed that there was a division in status between them, and the joint family properties were divided among the three members of the family on 22-10-1949. The ITO accepted the division in status and the partition and passed an order u/s 25A of the 1922 Act, to the effect that there was a separation in the family on 22-10-1949. It was also claimed before the ITO that after such partition, the three brothers carried on the businesses in partnership of the same date as the partition deed. The ITO on an application being made by the assessee-firm and having regard to the recognition by him of the division in status and partition in the family on 22-10-1949, by his order dated 31-3-1952, recognised the partnership with effect from that date and registered the firm u/s 26A of the 1922 Act. The assessment for the year 1951-52 was completed. For the year 1952-53, registration of the firm was renewed by the order of the ITO, dated 12-6-1953 but the assessment was not completed. The Commissioner issued a notice u/s 33B of the 1922 Act, on T.G. Sulakhe for the cancellation of the orders made by the ITO (1) u/s 33B, dated 22-3-1952, (2) u/s 25A, dated 31-3-1952, and 12-6-1953 in respect of 1951-52 and 1952-53 assessments, and (3) the order of the assessment made on the firm for the year 1951-52. The question then arose whether the revisional order passed by the Commissioner after giving notice to only one of the members of the joint family was valid. Jaganmohan Reddy, J. (as he then was) speaking for the Bench observed :

The necessary requisites for an order being made under sub-section (I) of section 25A is, firstly, that the family which is seeking to obtain an order that a partition has taken place among the members of its family, should have been hitherto assessed as undivided; secondly, that at the time of making the assessment u/s 23, a claim must have been put forward by or on behalf of any member of the family, and thirdly, that on such claim being put forward, the ITO is required to make an inquiry into the matter and, before doing so, is bound to serve a notice of enquiry on all the members of the family. An order, therefore, made under this section would be binding on all the members of the joint family, because once a declaration that a partition has been effected is made, no member of the family can be said to be a member of the Hindu undivided family. The severance of the joint family and a partition between the members, of the assets of the joint family has the effect of vesting each member with an absolute right in the property allotted to him or which has fallen to his share. This is the legal effect of a partition by metes and bounds and declaration under section25A by the income tax Officer would constitute the members of the disrupted joint family into assessable entities. In the circumstances, is the Commissioner authorised u/s 33B to revise and cancel an order affecting the status and assessable entity of each of the members of the joint family without giving a notice to every member who is affected by that order ? In other words, what is the true scope and extent of the words ''after giving the assessee an opportunity of being heard'' occurring in section 33B ? Section 33B has been added along with section 33A by the income tax and Business Profits Tax (Amendment) Act, 1948, conferring a general revisional power on the Commissioner to revise any order passed by the income tax Officer, if he considers it to be erroneous insofar as it is prejudicial to the interests of the revenue, and to cancel an assessment or order directing a fresh assessment to be made or make any other order which is to the detriment of the assessee. Before the Commissioner can exercise jurisdiction under this section, it is one of the conditions precedent that the assessee must be given an opportunity to be heard. The word ''assessee'' is a comprehensive one and has been defined u/s 2(2) to mean a person by whom income tax or any other sum of money is payable under this Act, and includes every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the loss sustained by him or of the amount of refund due to him. The assessee who is to be given an opportunity of being heard u/s 33B is that person in relation to whom an order has been passed in any proceedings, an examination of which has revealed that it is prejudicial to the interests of revenue...it is an elementary principle of jurisprudence accepted in this country that an order made without hearing the party affected is contrary to the principles of natural justice and is bad. If section 25A makes it obligatory that each member of the joint family is to be given a notice before a declaration that there is a partition in the family, an order reversing that order should equally be made after due notice to all the members...If the issue of notices to all the three members giving them an opportunity of being heard is a condition precedent to the cancellation of the order u/s 25A, then the Commissioner, not having fulfilled the requirement of that provision, has no jurisdiction to exercise the powers specified in section 33B..... For these reasons, we think that the order of the Commissioner of income tax is bad insofar as it relates to cancellation of the order u/s 25A as it is passed without notice to all the members adversely affected.

This judgment, in our view, is plainly distinguishable. There, the three brothers were coparceners, each entitled to a share in the family properties in his own right as such coparceners. It became, therefore, necessary for the Commissioner to have issued notice to all the three of them and not to only one of them. In the case on hand, however, the assessee Madanmohan Rao is the only person entitled to the family properties. The income according to him of all the family properties is exigible to tax. The partition claimed is held to be invalid. The Addl. Commissioner is, therefore, correct in disposing of the revision, after giving notice only to Madanmohan Rao, the assessee in question. There is no need for him, in the circumstances, to have issued a notice to Padmavathi and Narsamma as well as no income can be said to have accrued to them on the family properties allotted to them under an invalid partition.

The order of the Addl. Commissioner itself makes it clear that the notice dated 14-2-1974 was issued by him only to the assessee Madanmohan Rao and not to either his wife or adopted daughter. That fact is also apparent from the order of the Tribunal and from the statement of case prepared by the Tribunal in making the reference. This point was not, however, specifically raised before the Addl. Commissioner or before the Tribunal. The learned standing counsel contended before us in the alternative that for that reason we should not allow such a plea to be raised for the first time in this Court and more so, when the question of law in that forum has not been referred to this Court for its opinion. In Commissioner of Income Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd., Venkatramana Aiyar, J. speaking for the majority, summarised the legal position in the following manner :

(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.

(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order.

(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.

(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.

Stating the position compendiously, it is only a question that has been raised before or decided by the Tribunal that could be held to arise out of its order." (p. 611)

The question of law now sought to be canvassed by Mr. Dasaradharama Reddy falls under the fourth category. It is not, therefore, permissible for us to allow the assessee to question the legality of the order passed by the Addl. Commissioner. We cannot give effect to the minority opinion expressed by Shah, J. following the view expressed by Chagla, CJ., in MADANLAL DHARNIDHARKA Vs. COMMISSIONER OF Income Tax, BOMBAY CITY., . The majority opinion did not approve the legal position stated by Chagla, CJ., in Madanlal Dharnidarkd''s case (supra). We, accordingly, hold that the validity or otherwise of the order of the Addl. Commissioner passed without giving a notice to either Padmavathi or Narsamma is not a question of law which arises out of the order of the Tribunal. It is now well settled that the High Court may decline to answer such questions that do not arise out of the order of the Tribunal vide Commissioner of Income Tax, West Bengal, Calcutta Vs. Smt. Anusuya Devi, We accordingly decline to answer the reference. There shall be no order as to costs in this reference.