Allahabad High Court
Ambika Prasad Sonar vs Commissioner Of Income-Tax on 6 April, 1987
Equivalent citations: [1987]168ITR444(ALL), [1987]33TAXMAN231(ALL)
JUDGMENT R.K. Gulati, J.
1. This reference has been made by the Income-tax Appellate Tribunal in compliance with the directions given by this court under Section 256(2) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act"), at the instance of Ambika Prasad Sonar who has been assessed in the status of a Hindu undivided family.
2. The assessment years in dispute are 1973-74 to 1977-78. Returns for all these years were filed by Ambika Prasad (hereinafter referred to as an "assessee"), claiming therein the status of an individual. The assessments were, however, framed in the status of a Hindu undivided family.
3. On the facts, as found by the Income-tax Appellate Tribunal and those as summarised in the statement of the case submitted to this court, it is not in dispute that up to the assessment year 1965-66, the assessments were all along made in the status of a Hindu undivided family of which Ambika Prasad and his two brothers, Panna Lal and Prem Chand, were its members and coparceners.
4. During the course of assessment proceedings for the assessment year 1973-74, the Income-tax Officer called upon the assessee to explain why assessments should not be framed in the status of a Hindu undivided family, as in the past, and why the income earned by his two brothers in their names should also be not included in the total income of the family.
5. The assessee took up the stand that his brothers had separated since long. They were doing their separate businesses in their own names. In the statements recorded on oath by the Income-tax Officer, both Panna Lal and Prem Chand had stated that there was a partition in the family on May 19, 1965. A copy of family partition deed in support of such a claim was also filed before the Income-tax Officer. However, both the brothers could not give the names of the witnesses who were the signatories to the partition deed. The Income-tax Officer recorded a finding that the partition deed was a got-up document that had been prepared after he had instituted an enquiry by giving show-cause notice to the assessee. While rejecting the assessee's claim for partition, he framed the assessment in the status of a Hindu undivided family. In computing the total income, he clubbed the income earned by the two brothers in their names to the income returned by Ambika Prasad. Similar assessments were made for other years in the status of a Hindu undivided family after giving notice to the assessee in respect of each of the other four years in dispute.
6. All these assessments were confirmed in appeal by the Appellate Assistant Commissioner. He held, admittedly, that assessments in the past were made in the status of a Hindu undivided family. No claim under Section 171 of the Income-tax Act was ever lodged with the Income-tax Officer in pursuance of the alleged partition, nor had any order been made recognising the partition in the family. He thus did not find anything wrong with the assessments as framed by the Income-tax Officer.
7. Being aggrieved, the assessee went up in appeal before the Income-tax Appellate Tribunal. All the appeals were decided by a consolidated order. The assessee did not dispute before the Tribunal any of the findings recorded by the Appellate Assistant Commissioner. What was contended before the Tribunal was that in the returns filed, subsequent to the date of partition, the composition of the family shown therein was different from what was previously assessed to tax, inasmuch as the family now consisted of Ambika Prasad and his own family members which was a smaller-Hindu undivided family. It was further contended that the family in which the partition had taken place was not assessed to tax thereafter. Thus, it was not a family "hitherto assessed" within the expression as used in Section 171(1) of the Act. According to the assessee, it was not necessary for him to make any claim as required under Sub-section (2) of Section 171 of the Act. Relying upon the partition deed, he claimed that incomes earned by Panna Lal and Prem Chand were not liable to be included in the total income returned by him.
8. Alternatively, it was argued that the income earned by the two brothers was earned from "sonari" on account of their personal skill and labour without the help of, or detriment to, the family funds, being income from profession. Thus, there was no justification for clubbing their individual income with the income of the family.
9. The Income-tax Appellate Tribunal did not accept any of these contentions and upheld the assessments in due course and the assessee applied for references and succeeded in obtaining references under Section 256(2) of the Act. Consequently, the following consolidated question of law for all the years in dispute has been referred for the opinion of this court:
"Whether on the consideration that prevailed with the Income-tax Appellate Tribunal, it was justified under the law in holding that the income earned by Sri Prem Chand and Panna Lal were liable to be clubbed with the income of the assessee-Hindu undivided family ?"
10. Counsel appearing for the assessee urged that in the instant case, Section 171(1) did not apply inasmuch as this section applied to a "Hindu family hitherto assessed as undivided". According to him, admittedly, the undivided family has not been assessed to tax after the assessment year 1965-66 till the assessment year 1973-74. Therefore, it is not a family "hitherto assessed as a Hindu undivided family" within the meaning of that expression as contemplated by Section 171(1) of the Act. Another argument of counsel was that once the family is dissolved or disrupted as a result of partition between its members, the income which arises thereafter is the income of its members only and it cannot be clubbed with the income of the Hindu undivided family.
11. We have carefully considered the aforesaid submissions and are of the opinion that they are without any substance. Sub-section (1) of Section 171 of the Act says that a Hindu family hitherto assessed as undivided shall be deemed for the purposes of this Act to continue to be a Hindu undivided family, except where and in so far as a finding of partition has been given under this section in respect of the Hindu undivided family. It creates a legal fiction and deems a Hindu family to continue to be a Hindu undivided family except to the extent where a finding of partition has been given in respect of the Hindu undivided family. The provisions of Sub-section (2) of Section 171 provide that where, at. the time of making an assessment under Section 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 that family, the Income-tax Officer was to make an enquiry into that fact after giving notice to all the members of the family.
12. In our opinion, in order that Sub-section (1) may apply, all that is necessary is that there is a family which prior to the relevant claim for partition has been assessed to tax as Hindu undivided family. The fact that the family has been so taxed prior to the relevant assessment year is sufficient to bring that family within the expression" hitherto assessed as undivided family". It is not a further condition of Sub-section (1) of Section 171 that the family must continuously be so assessed without any break in respect of its income or must have been so assessed till the immediately preceding year in which the claim for partition is made under Section 171(2) of the Act. Such a requirement is not warranted from the language of the aforesaid provisions.
13. Now, Sub-section(3) of Section 171 says that on the completion of the enquiry, the Income-tax Officer shall record a finding as to whether there has been a total or partial partition of the family property and if there has been such a partition, the date on which it has taken place. When an order has been made recording the partition, the assessment of the total income received on behalf of the joint family as such will, up to the date of partition, be made in accordance with the provisions of Sub-section (4)(a) and Sub-section (5) of Section 171 of the Act. These provisions provide for an assessment in the hands of the family ignoring the partition in the family and the determination of the tax payable by the joint family as such ignoring the partition, as if no partition had taken place and the family were still in existence. Sub-section (4)(b) of Section 171 in such a situation provides a machinery for the recovery of taxes from each of the member's or group of members which liability is joint and several for the whole amount of tax determined on the joint family.
14. From the aforesaid discussion, it follows that unless the partition is recognised by the Income-tax Officer by passing an order under Section 171(3) of the Act, the family continues to be joint under Section 171(1) for the purposes of this Act and is liable to tax on its total income irrespective of partition in the family.
15. The provisions of Section 171 had been the subject-matter of scrutiny before the Supreme Court in Kalloomal Tapeswari Prasad (HUF) v. CIT [1982] 133 ITR 690, where at page 704, the Supreme Court observed :
"Now we come to Sub-section (1) of Section 171 of the Act which contains a 'deeming' provision. It says that a Hindu family hitherto assessed as undivided shall be deemed for the purposes of the Act to continue to be an HUF, except, where and in so far as a finding of partition has been recorded in respect of it under Section 171......... Where there is no claim made that a partition--total or partial--has taken place or where it is made and disallowed an HUF which is hitherto being assessed as such will have to be assessed as such notwithstanding the fact that a partition had in fact taken place as per Hindu Law. A finding to the effect that partition had taken place has to be recorded under Section 171 by the Income-tax Officer... The consequence will be that the undivided family will continue to be assessed as such by reason of Sub-section (1) of Section 171."
16. In Pratap Chandra v. ITO [1975] 100 ITR 551, this court while dealing with a case arising under Section 25A of the Indian Income-tax Act, 1922, a provision corresponding to Section 171 of the Income-tax Act, 1961, observed (vide headnote):
"For the purposes of the Income-tax Act, a Hindu undivided family will be deemed to continue as such notwithstanding that in proceedings in the civil court it may have in fact been disrupted. Such disruption cannot be recognised in any proceedings under the Income-tax Act so long as an order to that effect has not been passed under Section 25A(1) of the Act."
17. These decisions make it clear that a partition in the family or a claim in respect thereof is of no consequence for the purposes of this Act unless the partition as claimed has been accepted by the Income-tax Officer and an order is made to that effect under the provisions of Section 171 of the Act recognising the said partition.
18. We have seen earlier that during the assessment proceedings for the assessment year 1973-74, a claim, that there had been a partition in the family, was put forward by the assessee. On investigation, this claim was not found to be a genuine one. The assessee did not challenge these findings in appeal but instead contested the assessment order on other grounds, as set out earlier.
19. The stand taken by the assessee in these proceedings has not been accepted. Accordingly, the first argument of learned counsel for the assessee is rejected.
20. The assessee's counsel invited our attention to paragraph 7 of the order of the Income-tax Appellate Tribunal where the alternative contention of the assessee has been recorded in the following manner:
"Alternatively, he submitted that since the income of 'sonari' is a professional income and not an income from business, the income earned by S/Shri Panna Lal and Prem Chand by dint of their labour and without the help of the Hindu undivided family funds, could not be included in the total income of the assessee,"
21. We were also referred to the Tribunal's findings contained in paragraph 10 which are to the following effect:
"The alternative argument put forth on behalf of the assessee is also devoid of any merit. It is pertinent to note that even in the earlier years, the income earned by all the coparceners was treated as the income of the Hindu undivided family and not their individual income even though they had earned the income by dint of their labour."
22. Learned counsel submitted that the Tribunal has proceeded wrongly in this matter. He argued that each year's assessment is separate from the other and that an order in respect of an earlier year may be relevant but the Income-tax Appellate Tribunal should not automatically follow it in respect of a subsequent year. It should apply its mind independently in respect of every year and act objectively, which it has failed to do in the present case. He argued that the Appellate Tribunal did not maintain the distinction in respect of income assessed in the past and the income earned from "sonari" by Panna Lal and Prem Chand in these years. According to him, the income enjoyed by the family in earlier years was from sarrafa business while the position in these years was different. It is only after the partition that separated members started earning from "sonari" which was in the nature of a profession carried on by them. In these circumstances, it was necessary for the Income-tax Appellate Tribunal to have investigated into the matter to find out the correct facts. He went on to say, assuming for argument's sake, that income earned by personal skill and labour by the two brothers was allowed to be taxed in the hands of the Hindu undivided family in the past and the assessee was not debarred from raising such a plea in the subsequent years. There was no res judicata in the assessment proceedings. Further, unless the, disputed income was earned with the aid of family funds or to its detriment, there was no justification for clubbing the income in the hands of the family. Learned counsel then argued that the premise on which the Tribunal has sustained the assessments is clearly vitiated and cannot be sustained.
23. Sri Bharatji Agarwal, learned senior standing counsel for the Revenue, contended in reply that there were no new facts before the Income-tax Appellate Tribunal. The findings of the Income-tax Appellate Tribunal are that the income earned by Panna Lal and Prem Chand were assessed as belonging to the Hindu undivided family. The principles of res judicata applied in such circumstances and the Tribunal was entitled to follow and rightly followed the orders made in the past. He referred to the assessment orders for these years and drew our attention to those parts of the orders, where the income is finally computed with the remarks "income from business in the name of Panna Lal". Likewise, in respect of Prem Chand, income was clubbed with the remarks" income from the business in the name of Prem Chand". From these remarks, he emphasised that the business income, earned by Pannalal and Prem Chand after the alleged partition, which at one time belonged to the family before its allotment to them, has only been brought to tax in the hands of the Hindu undivided family. In these circumstances, he suggested, no exception should be taken to the Tribunal's order when it confirmed the clubbing of the income with the other income of the family.
24. We have carefully gone through the orders of the tax authorities. There is nothing on record to show that in the earlier years Panna Lal and Prem Chand were making any income from their personal labour or profession and yet it was subjected to tax in the hands of the Hindu undivided family. On the other hand, it seems to us that the Tribunal has decided the question on an abstract legal position without investigating the correct facts. It has proceeded accepting the facts as true as stated by the assessee before it and has confirmed the clubbing of income. The Tribunal was swayed in its decision by the principle of res judicata, having at the back of its mind that the income before the partition in the family earned by the joint efforts of all coparceners was treated as the income of the Hindu undivided family and not as their individual income.
25. In Piyare Lal Adishwar Lal v. CIT [1960] 40 ITR 17 (SC), one Sheel Chandra, who was the karta of his Hindu undivided family consisting of himself and his younger brother, furnished as security his family properties for being appointed the treasurer of a bank. He would not have been appointed treasurer of the bank but for the security given. It was contended on behalf of the Revenue that the salary earned by Sheel Chandra was the family income and was liable to be taxed as such. The , Supreme Court while repelling this contention held (at pages 26 and 27):
"There is nothing to show that Sheel Chandra had received any particular training at the expense of the family funds or his appointment was the result of any outlay or expenditure of, or detriment to, the family property. But it was argued on behalf of the respondent that because he had lodged joint family property by way of security, his earnings as treasurer became a part of the income of the Hindu undivided family for the reason that the acquisition was not without risk to the family estate ...... but the respondents were not able to refer to any decision in which it was held that the mere fact of giving joint family property in security for the good conduct of a member of the family employed in a post of trust was sufficient to make the emoluments of the post joint family property because of any detriment to family property or risk of loss. It has not been shown that in this case there was any detriment to the family property within the meaning of the term as used in decided cases."
26. In CIT v. Gurunath V. Dhakappa [1969] 72 ITR 192 (SC), the karta of a Hindu undivided family was admitted to a registered firm as partner representing his family. The karta was paid Rs. 500 per month as remuneration being appointed as manager of the firm. In the absence of any finding that the salary was paid to the manager because the assets of the family were utilised by the firm, the Supreme Court held that the remuneration received by the karta was not the income of the Hindu undivided family liable to assessment in its hands.
27. The general principles governing the determination of the character of an acquisition by a coparcener of a Hindu undivided family were exhaustively reviewed by the Supreme Court in Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33. Their Lordships reviewed several cases of the Supreme Court and of other courts and enumerated the following tests (at page 43):
"(1) Whether the income received by a coparcener of a Hindu undivided family as remuneration had any real connection with the investment of the joint family funds ;
(2) whether the income received was directly related to any utilisation of family assets;
(3) whether the family had suffered any detriment in the process of realisation of the income; and (4) whether the income was received with the aid and assistance of the family funds."
28. It was held in that very case (at pages 43 and 44):
"...... the broader principle that emerges is whether the remuneration received by the coparcener in substance though not in form was but one of the modes of return made to the family because of the investment of the family funds in the business or whether it was a compensation made for the services rendered by the individual coparcener. If it is the former, it is an income of the Hindu undivided family but if it is the latter then it is the income of the individual coparcener. If the income was essentially earned as a result of the funds invested, the fact that a coparcener has rendered some service would not change the character of the receipt. But if, on the other hand, it is essentially a remuneration for the services rendered by a coparcener, the circumstance that his services were availed of because of the reason that he was a member of the family which had invested funds in that business or that he had obtained the qualification shares from out of the family funds would not make the receipt the income of the Hindu undivided family."
29. From these cases, it follows that an essential feature of self-acquired property is that it should be acquired without the assistance or aid of the joint family property. If the income claimed by the individual was not earned on account of any detriment to the joint family assets, then it cannot be assessed as belonging to the Hindu undivided family. In other words, in order that such an income could be assessed as the income of Hindu undivided family, it must be found as a fact by the authorities concerned that there was a real and sufficient connection between the investment of the Hindu undivided family funds and the income claimed by the coparcener as his individual income. The aid must be real and substantial and not having any remote connection with the business of the family.
30. Unfortunately, the Income-tax Appellate Tribunal did not address itself to these principles in the instant case.
31. As stated earlier, the Tribunal was largely influenced in its decision that it took by the fact that such income in the earlier years was assessed in the hands of the family. That, by itself, is no ground for sustaining the clubbing of income earned by Panna Lal and Prem Chand in the hands of the family. It is settled that the rule of res judicata or estoppel by record, which applies to the decisions of the civil courts has no application to the decisions of the income-tax authorities, so as to debar determination of a question decided in the previous assessment years from being reopened in proceedings relating to the subsequent years.
32. In Joint Family of Udayan Chinubhai v. CIT [1967] 63 ITR 416, the Supreme Court held (at page 423):
"......It is true that an assessment year under the Income-tax Act is a self-contained assessment period and a decision in the assessment year does not ordinarily operate as res judicata in respect of the matter decided in any subsequent year, for the assessing officer is not a court and he is not precluded from arriving at a conclusion inconsistent with his conclusion in another year. It is open to the Income-tax Officer, therefore, to depart from his decision in subsequent years, since the assessment is final and conclusive between the parties only in relation to the assessment for the particular year for which it is made."
33. Applying these principles to the facts of the case, we must come to the conclusion that the Tribunal did not perform its duties at it was bound to do. In our opinion, it has not considered the position dispassionately. It has acted in a routine manner and not judiciously. The Appellate Tribunal permitted the assessee to raise a fresh ground which was not the subject of issue before the other two tax authorities. Whether it had the jurisdiction to allow such a plea to be raised for the first time before it is not the question with which we are concerned in this case. Having done so, the Tribunal, however, committed an error when it sustained the assessment order on the ground that "even in the earlier years, the income earned by all the coparceners was treated as the income of the Hindu undivided family and not as their individual income even though they had earned the income by dint of their labour." In recording such a finding, the Tribunal automatically and without the application of independent mind followed the assessment orders in respect of earlier years, if there were any. The earlier orders might have had some bearing, but that did not conclude the matter. We are unable to accept the contention of Sri Bharatji Agarwal that there was no change from the orders of the earlier years. Moreover, whether there is any practical change in the years in dispute or not as sought to be argued on behalf of the Revenue now was not considered in that aspect by any of the authorities including the Tribunal.
34. The two grounds which prevailed with the Income-tax Appellate Tribunal in sustaining the assessment order to the extent that the income earned by Panna Lal and Prem Chand was to be clubbed in the hands of the Hindu undivided family are not good and valid reasons.
In the present case, it was desirable that the Tribunal should have gone into the issue in detail and then determined the question whether the income earned by Panna Lal and Prem Chand were from "sonari" as claimed by the assessee and, if so, what nexus it had with the sarrafa business carried on by the family and the loss or detriment caused to the family assets thereby.
35. As essential findings necessary for answering this part of the question are not there, we have no option but to return that part of the question unanswered to the Tribunal with the direction that it will take up the appeals for fresh hearing and decide them in accordance with law in the light of the observations made above.
36. Before concluding, we consider it appropriate to reformulate the question referred to us and split it into two questions in the following manner:
"1. Whether, on the facts and circumstances of the case, the Tribunal was legally right in taking the view that the assessment was liable to be made in the status of a Hindu undivided family ?
2. Whether there was any material before the Tribunal to justify confirming the clubbing of the income of Panna Lal and Prem Chand from sonari business as income of the Hindu undivided family ?"
37. For the reasons stated above, we answer the first question in the affirmative and in favour of the Department. The second question is returned unanswered with the direction that the Income-tax Appellate Tribunal will rehear the appeals for the years in dispute as indicated above in this order and dispose of them afresh in accordance with law. There shall be no order as to costs.