ITA NO.30 OF 2006 [1] IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA NO.30 OF 2006 Date of decision: 20.01.2009 M/s Tirlochan Singh .......Appellant versus Commissioner of Income Tax and another ......Respondents CORAM: HON'BLE MR. JUSTICE J.S.KHEHAR HON'BLE MR. JUSTICE NAWAB SINGH Present: Mr. Akshay Bhan, Advocate for the appellant. Ms. Savita Saxena, Advocate for the respondents. J.S.Khehar, J. A notice under Section 148 of the Income Tax Act 1961(herein after referred to as the “Act”) was issued to the appellant on 14.03.2002, the same came to be served on the appallent on 21.03.2002. The claim of the Assessing Officer was that the appellant was assessable as a Hindu Undivided Family. On the contrary, the claim of the appellant-assessee was that a partial partition had taken place on 30.04.1978 whereby immovable as well as movable assests of the Hindu Undivided Family were divided by metes and bounds between the co- parceners, and as such, there was no question of assessing the appellant as a Hindu Undivided Family. After 30.04.1978, i.e. after the partial partition had taken place amongst the members of the Hindu Undivided Family, the property in question was sold, and the proceeds ITA NO.30 OF 2006 [2] thereof were invested as Fixed Deposit Receipts in the name of the appellant-assessee i.e. in the capacity of the appellant as a as a Hindy Undivided Family. The Fixed Deposit Receipts eventually matured on 8.09.1996, whereafter, monetary shares were allegedly apportioned amongst the members of the appellant-assessee i.e. the members of the Hindu Undivided Family. The facts narrated herein are undisputed and are in fact acknowledged by the learned counsel for the rival parties. The question which arises for consideration at the hands of this Court, while disposing of the present appeal relates to the Assessment Year 1997-1998. The appellant-assessee as a Hindy Undivided Family maintains that no assessment can be made for the Assessment Year in question. It is the submission of the learned counsel for the appellant that the original property in the hands of the Hindu Undivided Family, after partial partition thereof on 30.04.1978 could not be assessed to tax under Section 171 of the Act. It is the alternative contention of the learned counsel for the appellant, that even if the partial partition referred to above is not taken into consideration, that would not effect assessment in the hands of the appellant as a Hindu Undivided Family. In this behalf it is pointed out that the appellant as a Hindu Undivided Family could have been subjected to tax only if it had earlier been assessed to tax as a Hindu Undivided Family. Accordingly, the submission of the learned counsel for the appellant, that since the appellant-assessee had never hitherto before(i.e., prior to the Assessment Year 1997-98) ITA NO.30 OF 2006 [3] ever been assessed as a Hindu Undivided Family, there was no question of the appellant-assessee being assessed as a Hindu Undivided Family. In response to a query posed by the Court, learned counsel for the appellant states that the propertry in the hands of the Hindu Undivided Family, besides the property which was subjected to partial partition, is not subject matter of consideration in this appeal. The veracity of the instant answer at the hands of the learned counsel for the appellant-assessee is not subject matter of contest at the hands of the learned counsel for the respondents. It is in the factual background noticed hereinabove that we must decide the claim raised by the appellant in this case in terms of the mandate of Section 171 of the Act. Section 171 of the Act is being extracted hereunder: Section 171(1) 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. (2) 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 such family, ITA NO.30 OF 2006 [4] the [Assessing] Officer shall make an inquiry thereinto after giving notice of the inquiry to all the members of the family. (3) On the completition of the inquiry, the [Assessing] Officer shall record a finding as to whether there has been a total or partial partititon of the joint family property, and, if there has been such a partition, the date on whic h it has taken place. (4) Where a finding of total or partial partitition has been recorded by the [Assessing] 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. (5) Where a finding of total or partial partition has been recorded by the[Assessing] Officer under this section, and the partition took place after the expiry of the previous year, the total income of the previous ITA NO.30 OF 2006 [5] year of the joint family shall be assessed as if no partition had taken place; and the provisions of clause (b) of sub-section(4) shall, so far as may be, apply to the case. (6) Notwithstanding anything contained in this section, if the[Assessing] Officer finds after completion of the assessment of a Hindu undivided family that the family has already effected a partition, whether total or partial, the[Assessing] Officer shall proceed to recover the tax from every person who was a member of the family before the partition, and every such person shall be jointly and severally liable for the tax on the income so assessed. (7) For the purposes of this section, the several liability of any member or group of members thereunder shall be computed according to the portion of the joint family property allotted to him or it at the partition, whether total or partial. (8) The provisions of this section shall, so far as may be, apply in relation to the levy and collection of any penalty, interest, fine or other sum in respect of any period up to date of the partition, whether total or partial, of a Hindu undivided family as they apply in relation to the levy and collection of tax in respect of any such period. [(9) Notwithstanding anything contained in the ITA NO.30 OF 2006 [6] foregoing provisions of the 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 ITA NO.30 OF 2006 [7] property alloted to him or it at such partial partition, and the provisions of this Act shall apply accordingly.] Explanation-In this section,- (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 a partial as regards the persons constituting the Hindu undivided family, or the properties belonging to the Hindu undivided family, or both. Relying on clause(1) of Section 171 of the Act, it is contended on behalf of the appellant-assessee that the assessment permissible under Section 171 of the Act envisaged certain pre-requisites. Firstly, the aforesaid assessment must be in respect of property of a Hindu Family. Secondly, the assessment must be in respect of such a Hindu Undivided Family which has hitherto been assessed as a Hindu Undivided Family. Although, the facts in this case depict that at some point in time ITA NO.30 OF 2006 [8] the appellant-assessee was a Hindu Undivided Family but there is no dispute whatsoever, that the appellant-assessee has not been assessed as a Hindu Undivided Family prior to the Assessment Year 1997-98. In view of the fact, that the conditions pre- requisite for the application of Section 171 of the Act are not fulfilled by the appellant-assessee. In the present case, it is the submission of the learned counsel for the appellant that it was not open to the Assessing Officer to assess the appellant- assessee as a Hindu Undivided Family, and as such the assessment rendered by the Income Tax Officer vide order dated 6.03.2003 is liable to be set aside. We have carefully examined the ingredients of Section 171(1) of the Act. We have no hesitation in accepting the plea advanced by the learned counsel for the appellant so as to conclude, that Section 171 of the Act caters to a situation where a Hindu Undivided Family has been partitioned. We are also satisfied that Section 171 of the Act deals with assessment after the division of the Hindu Undivided Family. In our considered view before Section 171 of the Act can be invoked, so as to assess the property of the Hindu Undivided Family even after partition, as a Hindu Undivided Family, it should have been assesed as a Hindy Undivided Family before such partition. A similar conclusion was also expressed by the Gujarat High Court, as well as, by the Andhra Pradesh High Court. In this behalf reference may be made to the decision rendered by the Gujarat High Court in Commissioner of Income-Tax vs. Kantilal Ambalal ITA NO.30 OF 2006 [9] (HUF),(1991)192 ITR 376 wherein the Court observed as under:- "The argument of the Revenue proceeds on the assumption that section 171 of the Act applies to the facts of the present case. Section 171 of the Act has no application to a case of a Hindu family which has never been assessed before as a joint family i.e., as a unit of assessment. In other words, this section has application to a Hindu family which has been assessed before as a joint family and if the Hindu undivided family has never been assessed to tax, this section has no application. The Hindu undivided family of Kantilal Ambalal, admittedly, was never assessed to income-tax in the past. Therefore, section 171 of the Act has no application at all to the facts of the instant case. A similar view has been taken by the Andhra Pradesh High Court in Addl. CIT v. P.Durgamma[1987] 166 ITR 776." It would be pertinent to mention that after the passing of the assessment order dated 6.03.2003 the appellant preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax(Appeals) vide his order dated 27.06.2003 accepted the appeal by holding that the appellant could not have been assessed as a Hindu Undivided Family, under Section 171 of the Act. The aforesaid finding rendered by the Commissioner of Income Tax(Appeals) dated 27.06.2003, was assailed by the Revenue before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal agreed that the Revenue vide order dated 10.06.2005. In other words, the Income Tax Appellate Tribunal arrived at the conclusion that the property in question was liable to be assessed in the hands of the appellant as a Hindu Undivided Family under Section 171(9) of the Act. It is pertinent to mention that sun-section(9) of Section 171 of the Act is in the nature of an exception to sub- ITA NO.30 OF 2006 [10] Section(1) of Section 171 of the Act(relied) upon by the appellant. The order passed by the Income Tax Appellant Tribunal dated 10.06.2005 has also been challenged at the hands of the appellant by asserting that the same is inapplicable in this case. During the course of hearing of the instant appeal, learned counsel for the respondent has solely relied on sub- section(9) of Section 171 of the Act to defeat the claim of the appellant. It is the vehement contention of the counsel for the respondent that partition of the Hindu Undivided Family in the present case must be deemed to have taken place on 8.09.1996, and that, the same cannot be deemed to have taken place prior thereto, because after the sale of the property of Hindu Undivided Family the sale proceeds came to be deposited in as Fixed Deposit Receipts in the name of the Hindu Undivided Family. It is submitted that on maturity of the Fixed Deposit Receipts on 8.09.1996, the proceeds thereof were divided amongst the members of the Hindu Unidivided Family. It is therefore, the submission of the learned counsel for the respondents that it is not open to the appellant to claim partial partition of the property in question on 30.04.1978. Learned counsel for the respondent further submitted, that the partition of the Hindu Undivided Family in respect of the assessment which is a subject matter of consideration in the instant appeal, can be deemed to have taken place after 8.09.1996 i.e., after the maturity of the Fixed Deposit Receipts, and the distribution ITA NO.30 OF 2006 [11] thereof in the hands of the co-parceners. Under the mandate of sub-section(9) of Section 171 of the Act(extracted above) a partial partition which has taken place after 31.12.1978 is not recognised, and as such, the partial partition alleged to have taken place on 8.09.1996 cannot be recognised for purpose of taxing the appellant-assessee. We have considered the submission advanced by the learned counsel for the respondent based on sub-section(9) of Section 171 of the Act. There can be no doubt that sub-section (9) of Section 171 of the Act, is an exception to sub-Section(1) of Section 171 of the Act, as such, if the Revenue can establish the applicability of sub-section(9) of Section 171 of the Act, that would completely negate the submission advanced by the learned counsel for the appellant. We shall therefore, in the first instance, determine the applicability of sub-section(9) of Section 171 of the Act, to the facts and ciucumstances of the present case. We are satisfied that for the applicability of sub-section(9) of the Section 171 of the Act, two pre-requisites are essential. Firstly, the partial partition should have taken place after 31.12.19978. And secondly, such partial partition must have taken place in a Hindu Undivided Family which hitherto before was assessed as a Hindu Undivided Family. It is not a matter of dispute, that the appellant-assessee had not been assessed as a Hindu Undivided Family ever before the Assessment Year in question, namely 1997-98. We are, therefore, of the firm view, that the second essential ingredient for the applicability of sub-section(9) of ITA NO.30 OF 2006 [12] Section 171 of the Act cannnot be treated to have been fulfilled in the facts and circumstances of the present case. As such we are of the view that sub-section(9) of Section 171 of the Act would be clearly inapplicable to the facts of the present case. In view of the above, we are of the view that the following substantial question of law framed at the time of admission of the instant appeal deserves to be answered in favour of the appellant-assessee and against the Revenue: "Whether in the facts and circumstances of the present case, the action of the authorities below in invoking the provision of Section 171, when the appellant was never assessed before the issuance of notice under Section 148 of the Act on 14.3.2002 for assessment year 1997-98, is illegally sustainable in the eyes of law?" Answered accordingly. Resultantly, the instant appeal is allowed and the order passed by the Income Tax Appellate Tribunal 10.6.2005 assessing the appellant-assessee under Section 171 of the Income Tax Act is hereby set aside. [J.S.KHEHAR] JUDGE [NAWAB SINGH] JUDGE 20.01.2009 SKaushik