Madhya Pradesh High Court
Kesharimal Bapulal (Huf) vs Commissioner Of Income-Tax on 12 April, 2001
Equivalent citations: [2001]252ITR764(MP)
Author: J.G. Chitre
Bench: J.G. Chitre, Shambhoo Singh
JUDGMENT J.G. Chitre, J.
1. We have been called on to answer three questions formulated for recording our opinion on reference. Those three questions can be enumerated as below :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the order of the Commissioner of Income-tax under Section 263 which was passed without giving opportunity to all the members of the family (co-parceners) who were adversely affected by virtue of the provisions of Section 171(9) of the Income-tax Act, 1961, on the ground that the notice to the karta was sufficient compliance with the provisions of Section 263 ?
(2) Whether, on the facts and in the circumstances of the case, the Commissioner had jurisdiction under Section 263 of the Act to set aside the order passed by the Income-tax Officer under Section 171 of the Act recognising family settlement, when there was no loss of revenue as a result of assessment for the year in question ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Commissioner of Income-tax was justified in setting aside the order of the Income-tax Officer and further interpreting the same to be setting aside for limited purpose only when the Commissioner of Income-tax had cancelled the order of the Income-tax Officer which became non est in law ?"
2. Some facts need to be stated for the purpose of acquainting with the case for catching the gist point of the controversy. The petitioners (hereinafter referred to as "the assessee" for convenience) were being assessed as "Hindu undivided family". They stated that there were some family disputes between the members and on account of that the "karta" of the family was disturbed and on account of that disturbance in the family, a "family arrangement" was effected on October 21, 1979 (on Diwali as the accounting year was commencing from the first day of Diwali-Padwa and was ending by the end of the last day of Diwali). The returns were filed for the assessment year 1980-81 (relevant period commencing from November 1, 1978 to October 20, 1979). The assessees averred that they had paid the tax in respect of the concerned assessment year treating themselves to be a "Hindu undivided family" and, therefore, there was no loss of revenue to the Income-tax Department. The Income-tax Officer accepted their contentions and passed the assessment order on October 25, 1982. In that order he accepted the contention of the assessees in respect of "family arrangement" and a consequential deed which was executed by the members of the assessee-Hindu undivided family.
3. In view of provisions of Section 263 of the Income-tax Act, the Commissioner of Income-tax did not accept the said deed conveying "family arrangement" and held that it was "partial partition". By his order dated October 5, 1984, he set aside the order which was passed by the Income-tax Officer totally and directed him to make the assessment afresh by treating them as a Hindu undivided family and treating that deed as a document of partial partition.
4. The assessees appealed to the Income-tax Appellate Tribunal assailing the said order passed by the Commissioner of Income-tax. The Income-tax Appellate Tribunal confirmed the order passed by the Commissioner of Income-tax. Being aggrieved by the said order passed by the Income-tax Appellate Tribunal, the petitioners submitted a petition before this court making a prayer that the Income-tax Appellate Tribunal be directed to make a reference probably on the questions mentioned above. The said petition was allowed and this court sought the reference from the Income-tax Appellate Tribunal on the questions mentioned above.
5. Shri Choudhary, counsel appearing for the petitioners, submitted that in view of the provisions of Section 263 of the Income-tax Act, the Commissioner of Income-tax had no jurisdiction to reopen the assessment done by the Income-tax Officer by his order dated October 25, 1982, because obviously the said deed was executed after October 20, 1979. He submitted that the petitioners had paid the tax treating themselves to be Hindu undivided family and therefore, there was no loss of revenue as contemplated by the provisions of Section 263 of the Income-tax Act. He further pointed out that being so, the Income-tax Officer was not in error at all. Shri Choudhary submitted that for the purpose of invoking the jurisdiction and power in view of Section 263 of the Income-tax Act two ingredients should exist (i) that the order passed by the Assessing Officer should be erroneous and (ii) it should be prejudicial to the interests of the Revenue. He submitted that if these two ingredients are present then only the Commissioner would be entitled to call for and examine the record of any proceeding under the Income-tax Act and can either confirm the order passed by the Assessing Officer or set it aside. Shri Choudhary submitted that in the present case the petitioner had paid the tax as Hindu undivided family in respect of the concerned year and, therefore, there was no prejudice either caused or likely to be caused to the interests of the Revenue and, secondly, being it so, the Income-tax Officer was not in error at all.
6. Section 263(1) of the Income-tax Act provides that the Commissioner may call for and examine the record of any proceeding under this Act and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing afresh assessment.
7. This relates to question No. 1 formulated for reference as well as question No. 2 and, therefore, while answering these questions both these questions will have to be considered together.
8. Section 171(9) of the Income-tax Act provides that :
"Notwithstanding anything contained in the foregoing provisions of this section, where a partial partition has taken place after the 31st day of December, 1978, among the members of a Hindu undivided family hitherto assessed as undivided,--
(a) no claim that such partial partition has taken place shall be inquired into under Sub-section (2) and no finding shall be recorded under Sub-section (3) that such partial partition had taken place and any finding recorded under Sub-section (3) to that effect whether before or after the 18th day of June, 1980, being the date of introduction of the Finance (No. 2) Bill, 1980, shall be null and void ;
(b) such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken place ;
(c) each member or group of members of such family immediately before such partial partition and the family shall be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under this Act by the family in respect of any period, whether before or after such partial partition ;
(d) the several liability of any member or group of members aforesaid shall be computed according to the portion of the joint family property allotted to him or it at such partial partition."
9. It has been further provided that the provisions of this Act shall apply accordingly. An Explanation has been afforded to this one by providing :
"(a) 'partition' means--
(i) where the property admits of a physical division, a physical division of the property, but a physical division of the income without a physical division of the property producing the income shall not be deemed to be a partition ; or
(ii) where the property does not admit of a physical division, then such division as the property admits of, but a mere severance of status shall not be deemed to be a partition ;
(b) 'partial partition' means a partition which is partial as regards the persons constituting the Hindu undivided family, or the properties belonging to the Hindu undivided family, or both."
10. In the present matter, the Commissioner of Income-tax concluded that the said deed cannot be treated to be conveying a family arrangement. He was right in coming to that conclusion in view of the provisions of Section 171(9) of the Income-tax Act which were to come into force by December 31, 1978. He was empowered to come to a conclusion that the said document was not effecting a family arrangement as contended by the petitioners-assessees and it was to be treated as joint Hindu family by ignoring the said document indicating the family arrangement as the assessees wanted to convey. But it was necessary for him to note that the assessees had paid the tax in view of the assessment order for the concerned year because the said deed came in force and in existence from October 21, 1979. Being that, he should have come to a conclusion as a natural corollary to this, that the assessees continued their existence as Hindu undivided family inspite of execution of the said document. He could have come to a conclusion that the status of the assessees was to be treated as Hindu undivided family from December 31, 1978, onwards. He could have given a direction to the Income-tax Officer for treating them as Hindu undivided family even after December 31, 1978, and for the assessment year commencing from October 21, 1979. He could have also directed the Income-tax Officer to treat them as Hindu undivided family even for the year which was in question. But it was necessary for him to note that they had paid the tax for that year treating themselves as Hindu undivided family. Therefore, he should have come to a conclusion that inspite of that deed executed, there was no prejudice to the interests of the Revenue. But instead of doing that, the Commissioner of Income-tax set aside the entire assessment order. Being it so, the said order will have to be treated as improper and incorrect.
11. The Commissioner of Income-tax committed an error because when he treated the assessees as Hindu undivided family he was to treat them as such. Shri Choudhary has placed reliance on the judgment in the matter of H. H. Maharaja Raja Pawer Dewas v. CIT [1982] 138 ITR 518 (MP), where the Division Bench of this court held that invoking the powers and the jurisdiction indicated by Section 263(1) of the Income-tax Act two prerequisites must be present before the Commissioner : (i) that the order of the Income-tax Officer must be erroneous ; (ii) that the error must be such that it is prejudicial to the interests of the Revenue. This court further held that if the order is erroneous but it is not prejudicial to the interests of the Revenue, the Commissioner cannot exercise his power under Section 263(1) of the Income-tax Act. The Commissioner of Income-tax should have noted that in the present case though the Income-tax Officer was wrong in coming to the conclusion that the said deed conveyed a family arrangement, the assessees were liable to be assessed as Hindu undivided family, no prejudice was caused to the interests of the Revenue. Shri Choudhary further placed reliance on the judgment of the Division Bench of the Allahabad High Court in the matter of CIT v. Shrawan Kumar Swamp and Sons [1998] 232 ITR 123, wherein the Division Bench of the Allahabad High Court held that the assessee-Hindu undivided family consisted of the karta SKS, his wife, AKS, and two minor children, HKS and NS. The karta of the Hindu undivided family by virtue of powers and rights vested in him, voluntarily and with the consent of the other members of the family effected a partial partition in respect of the share capital and rights in the profits of a firm in two groups on January 1, 1971. The two groups consisted of SKS and his minor daughters, NS, on the one hand and AKS and his minor son, HKS, on the other. The total share capital invested by the assessee family through its karta in the said firm amounting to Rs. 50,000 was divided into two equal shares between the two groups. It was necessary for the Income-tax Officer acting in view of the provisions of Section 171 of the Income-tax Act to issue notices to all the members for affording them the opportunity of being heard. It held that that was necessary in accordance with rules of natural justice. The Division Bench of the Allahabad High Court in that matter held that after giving notice of inquiry to all the members of the family the order in question could be reversed or cancelled by the Commissioner of Income-tax under Section 263(1). It was further held that without affording the opportunity of being heard to each member of the said family, cancellation of the order was against the rules of natural justice.
12. In the present case while setting aside the order passed by the Income-tax Officer, the Commissioner of Income-tax did not issue the notices qua each member but issued the notice to the karta of the said family and treated that issuing a notice to him and service of that notice on him was compliance with the procedure which has been laid down by Section 263 of the Income-tax Act. The Commissioner of Income-tax fell into the error of contradiction because by overruling the theory of family arrangement he concluded that the assessee was a Hindu undivided family. It means that he passed an order which was prejudicial to the interests of each member of the Hindu undivided family. When that was so, it was necessary for him to afford them the opportunity of being heard independently. He could not have passed an order to the prejudice of the members of the said Hindu undivided family without affording them the opportunity of being heard. It was not proper and correct on his part to issue notice to the karta of the said Hindu undivided family only and treating him to represent the Hindu undivided family and treating him sufficient enough in legal sense for protecting the interest of each member of the Hindu undivided family. It was necessary for him to note that by passing that order he was depriving each member of the benefit which they were to acquire by virtue of the order which was passed by the Income-tax Officer.
13. Apart from that, it was necessary for him to hold the inquiry and for that it was necessary for him to issue notices to each member and to hear each member while conducting the inquiry as contemplated by the provisions of Section 263 of the Income-tax Act.
14. The Tribunal did not consider this important aspect of the matter while passing the order which is being assailed, confirming the order which was passed by the Commissioner of Income-tax.
15. Unless the order which was passed by the Income-tax Officer was erroneous and unless that was causing prejudice to the interests of the Revenue, it was not open for the Commissioner of Income-tax to invoke the jurisdiction and power in view of Section 263 of the Income-tax Act and to call for the record of the proceeding in which the concerned order was passed by the Income-tax Officer and to go on to examine its correctness, propriety and legality. The Commissioner of Income-tax could not invoke the jurisdiction and power as indicated by Section 263(1) of the Income-tax Act unless these two factors are depicted by the matter. They are to be present independently and jointly. He cannot invoke the jurisdiction in view of Section 263(1) of the Income-tax Act if either of these two factors is absent. The presence of these two factors independently and jointly would only confer power and jurisdiction on the Commissioner of Income-tax to call for the record of the proceeding and to examine its propriety, correctness and legality.
16. Thus, in view of the discussions above, this court answers both the questions in the negative and in favour of the petitioners the assessees. As natural corollary to that, this court answers question No. 2 by holding that the Tribunal was not justified in holding that the Commissioner of Income-tax was justified in setting aside the order of the Income-tax Officer and further interpreting the same to be setting aside the order passed by the Income-tax Officer for limited purpose to the extent of setting aside the entire order. It should have held that the Commissioner of Income-tax was right in holding that the petitioners-assessees were Hindu undivided family and were liable to be assessed and taxed as such from October 21, 1979, onwards. The Tribunal should have held that the assessment and levy of tax for the year prior to October 21, 1979, was not fit to be reopened, in the circumstances and facts of this case.
17. Thus, this petition stands allowed. However, with no order as to costs, keeping in view the peculiar facts and circumstances of this case. Thus, the questions referred are answered.