S.R. Kalani (HUF) vs Commissioner of Income Tax

G.G. Sohani, Actg. C.J.

The order in this case will also govern the disposal of Miscellaneous Civil Case No. 137 of 1986 (S.R. Kalani and Co. v. CIT).

The material facts giving rise-to these references, briefly, are as follows :

One Shri Shivprasad Kalani died issueless in the year 1921 leaving behind his widow, Smt. Badamibai. Some time in the year 1927, Smt. Badamibai adopted Sitaram Kalani, who was about 10 years old at the time of adoption. On attaining majority, Sitaram Kalani became the karta of the assessee-Hindu undivided family. Till the year 1935, Shri S. R. Kalani was living with his adoptive mother at Neemuch but thereafter, he shifted to Indore and started Hindu undivided family business under the name and style of S. R. Kalani and Co. The first wife of the assessee died in the year 1952 leaving behind two daughters and a son. Shri S. R. Kalani married again in the year 1953 and thereafter the Hindu undivided family consisted of Shri S. R. Kalani as karta, his second wife, Manoramabai, his children and Smt. Badamibai, as members. In the assessment proceedings for the assessment year 1962-63, the assessee claimed that there was a partial partition between S, R. Kalani and his adoptive mother on August 17, 1961, and on the same day, the Hindu undivided family business had been converted into a partnership business, as a result of a partnership entered into between Shri S. R. Kalani and his adoptive mother, Smt. Badamibai. It was contended that as a result of the partial partition of the Hindu undivided family made on August 17, 1961, Smt. Badamibai received a sum of Rs. 1,00,000 as her share in the movable property of the Hindu undivided family and that amount was invested by her in the partnership business. The story of partition and partnership was not believed by the Income Tax Officer who made the assessment of the assessee in the status of a Hindu undivided family. The order of the Income Tax Officer was affirmed in appeal by the Appellate Assistant Commissioner. In the second appeal before the Tribunal, the assessee, realising that as Smt. Badamibai had become a widow before the year 1937, when the Hindu Women''s Right to Property Act came into force, she was not entitled to any share in partition, gave up the story of partition set up earlier and contended that the sum of Rs. 1,00,000 was given to Smt. Badamibai in lieu of her right to maintenance under a family arrangement entered into between the members of the Hindu undivided family. The Tribunal sent the case back to the Income Tax Officer to make a fresh assessment after affording an opportunity to the assessee to substantiate the claim with regard to the family arrangement. The Income Tax Officer, after consideration of the material on record, rejected the claim of the assessee that there was a family arrangement and the Hindu undivided family business was turned into a partnership business. The Income Tax Officer made the assessment of the assessee in the status of a Hindu undivided family. On appeal, the order passed by the Income Tax Officer was affirmed. The Appellate Assistant Commissioner held that the alleged family arrangement and partnership were not genuine transactions entered into between Smt. Badamibai and Shri. S. R. Kalani and that the Income Tax Officer was justified in rejecting the claim of the assessee in that behalf. The Tribunal also affirmed this finding in second appeal. The application submitted by the assessee to make a reference was rejected and the assessee, therefore, filed applications u/s 256(2) of the Act before this court which were allowed. In pursuance of the directions given by this court, the Income Tax Appellate Tribunal, Indore Bench, made two references, which were registered as Miscellaneous Civil Case No. 70 of 1986 and Miscellaneous Civil Case No. 137 of 1986. In Miscellaneous Civil Case No. 70 of 1986, the questions referred to this court are as follows :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the family arrangement was a fictitious and sham transaction and the business of the Hindu undivided family continued to belong to it as before, in the assessment years in question ; and whether there was no evidence in support of the finding of the Tribunal that the family arrangement dated August 17, 1961, was a sham and fictitious transaction ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in treating the entire income of the business of S. R. Kalani and Co. as the income of the Hindu undivided family for the assessment years in question ?"

The question referred to this court in Miscellaneous Civil Case No. 137 of 1986 by the Tribunal is as follows :

"Whether, on the facts and and in the circumstances of the case, the Tribunal was right in law in holding that the business carried on in the name of S.R. Kalani & Co. continued to be the business of the Hindu undivided family and no genuine firm came into existence and whether there is no evidence on record to support the finding of the Tribunal that the partnership deed dated August 17, 1961, was sham and fictitious ?"

That is how the aforesaid question''s of law have been referred to this court for its opinion.

Shri Chaphekar, learned counsel for the assessee, contended that the findings of the Tribunal that no family arrangement and partnership, as claimed by the assessee, had come into existence, were based on suspicion and that in arriving at these findings, the Tribunal had taken into consideration irrelevant material and had omitted to consider relevant material. It was also contended that merely because the effect of a transaction was to reduce the tax incidence, that transaction could not be viewed with suspicion. In reply, learned counsel for the Revenue contended that the findings given by the Tribunal were justified on the basis of material on record and that in any event, even if another view on the same evidence was possible, the findings of fact recorded by the Tribunal should not be held to be unjustified.

The main question for consideration is whether in arriving at its findings that the family arrangement and partnership claimed by the assessee were sham and fictitious, the Tribunal has acted on surmises and suspicion, and whether the Tribunal had taken into consideration irrelevant material and omitted to take into consideration any relevant material on record. In this connection, we may usefully refer to the following observations of the Supreme Court in Homi Jehangir Gheesta Vs. The Commissioner of Income Tax, Bombay, :

"We must read the order of the Tribunal as a whole to determine whether every material fact, for and against the assessee, has been considered fairly and with due care ; whether the evidence pro and con has been considered in reaching the final conclusion ; and whether the conclusion reached by the Tribunal has been coloured by irrelevant considerations or matters of prejudice. Learned counsel for the appellant has taken us through the entire order of the Tribunal as also the relevant materials on which it is based. Having examined the order of the Tribunal and those materials, we are unable to agree with learned counsel for the appellant that the order of the Tribunal is vitiated by any of the defects adverted to in Dhirajlal Girdharilal Vs. Commissioner of Income Tax, Bombay, or Omar Salay Mohamed Sait Vs. Commissioner of Income Tax, Madras, . We must make it clear that we do not think that those decisions require that the order of the Tribunal must be examined sentence by sentence, through a microscope as it were, so as to discover a minor lapse here or an incautious opinion there to be used as a peg on which to hang an issue of law. In view of the arguments advanced before us, it is perhaps necessary to add that in considering probabilities properly arising from the facts alleged or proved, the Tribunal does not indulge in conjectures, surmises or suspicions."

It is, therefore, necessary to examine the order of the Tribunal in the light of the aforesaid observations.

Now, in the instant case, the Hindu undivided family business is alleged to have been converted into a partnership business as a result of a partnership agreement entered into between S.R. Kalani and his adoptive mother, Smt. Badamibai, aged about 65 years. To prove that Smt. Badami-bai had contributed a sum of Rs. 1 lakh towards the capital of the firm, the assessee contended that a deed of partition was executed on the day when the deed of partnership was executed and as recited in the deed of partition, the adoptive mother of S.R. Kalani received a sum of Rs. 1 lakh as her share in the movable property of the Hindu undivided family, Subsequently, when the proceedings were pending in appeal before the Tribunal, the assessee realised that Smt. Badamibai, having become a widow in the year 1921, before the Hindu Women''s Right to Property Act came into force, was not entitled to any share in partition. Then, the assessee put forward the story that the amount of Rs. 1,00,000 was paid to Smt. Badamibai in lieu of maintenance. The Tribunal found from the material on record that Smt. Badamibai was being duly maintained out of the family funds prior to the execution of the partition deed dated August 17, 1961 and that even thereafter, she was being maintained out of the family funds. The Tribunal has, in this behalf, observed as follows :

"Smt. Badamibai was about 65 years of age on August 17, 1961, and if the amount of future maintenance payable to her was commuted, that would have come to a much smaller amount than a sum of Rs. 1 lakh having regard to her life expectancy in the year 1961. Now, as regards the plea of the assessee as to the cause that forced the assessee to enter into the transaction in question, i.e., that there used to be disputes between Badamibai and Smt. Manoramabai, the wife of the assessee, from the asses-see''s own evidence, this plea gets falsified. Smt. Badamibai was 65 years of age in the year 1961 when the dispute is alleged to have come to its highest. Ordinarily, it would be difficult for an old lady of that age to pick quarrels with her only daughter-in-law. Apart from that, the more important thing proved on the record is that Smt. Badamibai, in fact, did not live with her son''s family at Indore from 1952, when Shri S.R. Kalani had shifted to Indore. She continued to live at Neemuch right up to the year 1961 and immediately after the execution on August 17, 1961, of the two deeds of declaration or partition and the partnership deed, she shifted to her son''s residence at Indore."

The Tribunal found that the story that the amount of Rs. 1,00,000 was paid to Smt. Badamibai for her maintenance was not reliable. The Tribunal also noted that after the formation of the alleged partnership, Smt. Badamibai had not withdrawn any money from the partnership firm for her maintenance and that if she was facing any difficulty in meeting her expenses, which, according to the assessee, was the reason for entering into a family arrangement, she would have spent some amount at least, out of the sum given to her for her maintenance. The Tribunal also noted that the story of quarrels between Smt. Badamibai and her daughter-in-law, Smt. Manoramabai, which, according to the assessee, led to the execution of the partition deed, was not true because she made a gift of all her jewellery and ornaments valued at Rs. 55,000 to Smt. Manoramabai after the execution of the partition deed. The Tribunal also noted that on August 17, 1961, when the partnership was alleged to have come into existence, Smt. Badamibai was aged about 65 years and did not have any particular qualification to run a business. The Tribunal further noted that it was proved from the material on record that Smt. Badamibai did not spend any part of the share income derived by her on any one except the family members of her adopted son. In view of all this material on record, the Tribunal came to the conclusion that the capital of Rs. 1 lakh was not in fact paid by Smt. Badamibai and the transaction of partnership alleged to have been entered into between S.R. Kalani and his adoptive mother was not genuine.

It cannot be disputed that the Tribunal had the jurisdiction to enquire whether a genuine firm had been constituted notwithstanding the execution of the partnership deed by S.R. Kalani and Smt. Badamibai. In the circumstances of the case, it cannot be held that the Tribunal''s finding about the non-genuineness of the firm or the fictitious nature of the family arrangement is based upon no material or no evidence whatsoever or on surmises and suspicion. In our opinion, there was sufficient material on record, on the basis of which the Tribunal could record an adverse finding on the genuineness of the firm and the family arrangement. It was urged that while deciding the appeal of the assessee arising out of assessment proceedings for the assessment years 1971-72 to 1973-74, the Tribunal failed to take into consideration the subsequent conduct of Smt. Badamibai which was brought on record. As regards this aspect of the matter, the Tribunal has observed as follows :

"We have gone through the order of the Tribunal for the assessment years 1962-63 and 1967-68 to 1970-71 and have considered the rival submissions as made before us in these appeals. It was not disputed by Shri Chitle, that no fresh material was placed by the assessee on the record of the authorities below in any of the three assessment years in question besides the material that was placed before them in the case of the assessee for the assessment years 1962-63 and 1967-68 to 1970-71."

The Tribunal, therefore, hold that the matter was covered by the earlier decision with which it agreed. In those circumstances, it cannot be held that the Tribunal omitted to take into consideration any relevant material while deciding the appeal arising out of assessment proceedings for the assessment years 1971-72 to 1973-74.

For all these reasons, our answer to the two questions referred in Miscellaneous Civil Case No. 70 of 1986, is in the affrmative and against the assesses. Similarly, our answer to the question referred in Miscellaneous Civil Case No. 137 of 1986 is also in the affirmative and against the assessee. In the circumstances of the case, parties shall bear their own costs of those references.