Andhra Pradesh H.C : These two references arising under the IT Act, 1961, and the WT Act, 1957, raise certain common issues for consideration concerning the same assessee. It is convenient to dispose of these two references together.

Counsel Appeared

K.V. Subrahmanya Narsu, for the Assessee : M. Suryanarayana Murthy, for the Revenue

Y.V. ANJANEYULU, J.:

These two references arising under the IT Act, 1961, and the WT Act, 1957, raise certain common issues for consideration concerning the same assessee. It is convenient to dispose of these two references together.

2. R.C. No. 342 of 1982 is a reference made by the Tribunal, under s. 256(1) of the IT Act, 1961, concernng the income-tax asst. yr. 1977-78. R.C. No. 343 of 1982 is a reference made by the Tribunal under s. 27(1) of the WT Act, 1957, concerning the wealth-tax asst. yrs. 1976-77 and 1977-78. In R.C. No. 342 of 1982, the question referred for consideraion of this Court is : ” Whether, on the facts and in the circumstances of the case, having regard to the provisions of s. 64 of the IT Act, 1961, the interest income of Rs. 22,006 can be said to belong to the smaller HUF consisting of the assessee and his wife and whether it is excludible from the total income of the assessee (individual) for the asst. yr. 1977-78 ? ” In R.C. No. 343 of 1982, the question referred for consideration of this Court is :

” Whether, on the facts and in the circumstances of the case, having regard to the provisions of s. 4, sub-s. (1A), cl. (c), of the WT Act, 1957, Rs. 1,88,862 which the assessee had got on partition with his son under the deed dated March 20, 1976, can be said to belong to the smaller HUF consisting of himself and his wife? ” Seth Tulsidas Bolumal, Vijayawada, was the Karta of a joint Hindu family consisting of himself, his wife and a major son. He made a declaration on June 25, 1970, impressing some of his individual properties with the character of joint family properties. After conversion of the individual properties into joint family properties, the properties as well as the income arising therefrom were assessed in the hands of the Hindu joint family. On March 10, 1976, there was a declaration of partition of the properties of the joint family. On the date of partition, the value of the properties which were thrown by the assessee into the joint family stock amounted to Rs. 3,77,723. These properties were divided in equal shares between the assessee and his major son in the course of partition so that the assessee’s major son was allotted properties of the value of Rs. 1,88,861 while the assessee was allotted properties of the value of Rs. 1,88,862.

In connection with the income-tax assessment for the year 1977-78, the assessee claimed that the properties which fell to his share in the partition belonged to a smaller joint family consisting of himself and his wife. The assessee urged that interest of Rs. 22,006 was paid by him to the joint family in respect of the aforementioned properties and claimed the interest as deduction from his individual income.

In connection with the wealth-tax assessments for the years 1976-77 and 1977-78, the assessee likewise claimed that the properties of the value of Rs. 1,88,862 which were allotted on partition do not belong to him individually but to a joint family consisting of himself and his wife. He accordingly claimed that properties to the above extent must be excluded from his individual wealth- tax assessments for the two years in question.

The above claims of the assessee were rejected by the Revenue. It was held that the properties were individual properties initially of the assessee and they were impressed with the character of joint family properties by the unilateral act of the assessee and, consequently, the provisions of s. 64(2) of the IT Act came into operation in respect the converted property. In that view, the Revenue held that the income arising out of the converted property which fell to the share of the assessee on partition should be deemed to be the income of the assessee in his individual capacity. The claim for deduction of interest in connection with the income-tax assessment for the year 1977-78 was rejected. A similar finding was recorded in connection with the wealth-tax assessments or the asst. yrs. 1976-77 and 1977-78. The Revenue claimed that in respect of the converted property, the provisions of s. 4(1A) of the WT Act are applicable and, consequently, the properties shall be deemed to be the properties of the assessee individually. Accordingly, the assessee’s claim for exclusion of the converted property from his individual wealth-tax assessments was rejected.

The assessee appealed against the assessments for income-tax as well as wealth-tax. The appeal in connection with the income- tax assessment forthe year 1977-78 was filed before the CIT (Appeals), while the appeals in connection with the wealth-tax assessments for the asst. yrs. 197677 and 1977-78 were filed before the AAC of Income-tax. The income-tax appeal was disposed of by the CIT (Appeals), on January 31, 1979, whereas the wealth-tax appeals were disposed of by the AAC on January 27, 1979. Curiously, the two appellate authorities came to contrary conclusions. The CIT (Appeals) held in connection with the income-tax assessment for the asst. yr. 1977-78 that the ITO was correct in refusing to allow deduction of interest of Rs. 22,006. The CIT upheld the ITO’s view that the provisions of s. 64(2) of the IT Act are applicable and the income arising from the converted property which was allotted to the assessee on partition has to be deemed to be his individual income. The assessee’s appeal was accordingly dismissed by the CIT (Appeals).

The AAC held, while disposing of the wealth-tax appeals, that after partition of the converted properties, s. 4(1A)(c) of the WT Act is applicable and in accordance with the provisions contained therein, only the converted property which fell to the share of spouse or minor child can be deemed to be the property of the individual, who converted the property into joint family property initially. In the present case, since no property was allotted to the spouse of the assessee in the course of partition, the AAC held that there is no warrant for the application of s. 4(1A) of the WT Act. In that view, the AAC held that the converted properties allotted to the assessee on partition cannot be deemed to be the properties of the assessee in his individual capacity. The AAC accordingly directed the exclusion of the properties from the wealth-tax assessments of the assessee in his individual capacity.

9. The assessee was aggrieved by the decision of the CIT (Appeals), in connection with the income-tax assessment for the year 1977-78 and the Revenue felt aggrieved by the decision of the AAC for the wealth-tax assessments for the years 1976-77 and 1977-78. Both sides filed appeals before the Tribunal. The Tribunal agreed with the CIT (Appeals) and reversed the order of the AAC of WT. The Tribunal held that the provisions of s. 64(2) of the IT Act and also the provisions contained in s. 4(1A) of the WT Act are clearly applicable in the facts and circumstances of the case. The Tribunal accordingly held that the income received from the properties allotted on partition to the assessee has to be deemed to be the income of the assessee individually; likewise, the converted property allotted to the assessee on partition has to be deemed to be the property of the assessee in his individual capacity.

10. Aggrieved by the aforesaid decision of the Tribunal, the assessee sought references under s. 256(1) of the IT Act and s. 27(1) of the WT Act. The Tribunal referred the matters accordingly to this Court and the questions of law specified in para. 2, (p. 3) are referred for the consideration of this Court.

11. On the facts stated above, there is no dispute that after the assessee had impressed his individual properties with the character of joint family properties, the fictional provision contained in s. 64(2) of the IT Act and s. 4(1A) of the WT Act came into operation. There was also no dispute against the income-tax assessment and the wealth-tax assessments made till the date of partition of the converted asset on March 10, 1976. The income arising from the converted property as well as the property itself was assessed in the hands of the assessee individually on account of the deeming provisions contained in s. 64(2) of the IT Act and s. 4(1A) of the WT Act. The position, however, undergoes a change on the partition of the converted asset, as indicated in s. 64(2)(c) of the IT Act and s. 4(1A)(c) of the WT Act. These provisions authorise that after the partition of the converted asset, only the income arising to the spouse or minor child of the individual, who initially converted his individual property into joint family property, has to be deemed to be the income of the individual. Similarly for wealth- tax, the extent of converted property which fell to the share of the individual’s spouse and minor child has to be deemed to be the property of the individual. The statutory provisions are categorical to this effect. In the present case, on partition of the converted asset, no share was allotted to the spouse of the assessee. There was, of course, no minor child in the family. Consequently, the provisions contained in s. 64(2)(c) of the IT Act and s. 4(1A)(c) of the WT Act cannot be applied in order to assess in the hands of the assessee as individual income arising from the converted property allotted to him on partition ; likewise, the extent of the converted property allotted to him on partition cannot also be deemed to be the property of the individual. On the facts stated above, neither of the provisions, namely, s. 64(2)(c) of the IT Act and s. 4(1A)(c) of the Wealthtax Act, come into operation in the present case after partition of the converted asset.

12. The claim that the assessee and his wife constitute a smaller Hindu joint family after the partition of the joint family assets is legally sustainable in view of the decision of this Court in Premchand vs. CIT (1984) 41 CTR (AP) 162 : (1984) 148 ITR 440 (AP). The same view was adopted by several other High Courts. We may refer to the latest decision of the Madhya Pradesh High Court in Kishanlal Moolchand vs. CIT (1986) 57 CTR (MP) 285 : (1987) 166 ITR 449 (MP). The decision of the Supreme Court in Surjit Lal Chhabda vs. CIT 1976 CTR (SC) 140 : (1975) 101 ITR 776 (SC) is a direct authority supporting the proposition that after the partition, the assessee and his wife constitute a Hindu joint family. The basic question for consideration, however, is whether the income from the converted asset and the converted asset itself can be assessed in the hands of the assessee individually after the partition.

13. Where an asset of a pre-existing joint family is allotted on partition to the Karta, that asset belongs to a smaller joint family consisting of the Karta and his wife. The income from such asset as well as the asset itself are liable to be assessed in the hands of the smaller joint family consisting of the Karta and his wife. It makes no difference that the Karta is the sole surviving coparcener and the wife is entitled only to maintenance without a right to claim partition. This is because of the fact that the asset allotted to the Karta on partition has an antecedent history of ancestry and was never the individual property of the Karta. This legal position is fairly settled-vide decisions of the Supreme Court in Gowli Buddanna’s case (1966) 60 ITR 293 (SC) and Narendranath’s case (1969) 74 ITR 190 (SC). In both these cases, the Supreme Court held that the HUF as an assessable entity need not consist of at least two male members.

14. The Supreme Court carved out an exception to this principle in the case of Surjit Lal Chhabda (supra). In that case, ” Kathoke Lodge ” which was the undivided property of the Karta of the joint family was thrown into the family hotchpot by a declaration made by the Karta on January 26, 1956. The family of the Karta consisted of himself, his wife and an unmarried daughter. The Supreme Court held that after the Karta impressed Kathoke Lodge with the character of joint family property, the lodge became the property of the joint family consisting of the Karta, his wife and his unmarried daughter. The Supreme Court held that no exception can be taken to the above claim and the absence of antecedent history of jointness between the Karta and his ancestors is no impediment to the Karta, his wife and the unmarried daughter forming a joint family. The question for consideration, however, was whether the income from Kathoke Lodge after it was thrown into the family hotchpot was liable to be taxed in the hands of the Karta as an individual or was it liable to be taxed as income of the joint family consisting of the Karta, his wife and unmarried daughter. The Supreme Court held that the income from the lodge even after conversion into a joint family asset was liable to be taxed in the individual hands of the Karta. The reason for arriving at this conclusion is stated by the Supreme Court at page 795. It is useful to extract the following passage : ” Kathoke Lodge was not an asset of a pre-existing joint family of which the appellant was a member. It became an item of joint family property for the first time when the appellant threw what was his separate property into the family hotchpot. The appellant has no son. His wife and unmarried daughter were entitled to be maintained by him from out of the income of Kathoke Lodge while it was his separate property.

Their rights in that property are not enlarged for the reason that the property was thrown into the family hotchpot. Not being coparceners of the appellant, they have neither a right by birth in the property nor the right to demand its partition nor indeed the right to restrain the appellant from alienating the property for any purpose whatsoever. Their prior right to be maintained out of the income of Kathoke Lodge remains what it was even after the property was thrown into the family hotchpot : the right of maintenance, neither more nor less. Thus, Kathoke Lodge may be usefully described as the property of the family after it was thrown into the common stock, but it does not follow that in the eye of Hindu law it belongs to the family, as it would have, if the property were to devolve on the appellant as sole surviving coparcener. “

15. Now, the aforesaid observations clearly provide an answer to the question arising for consideration in this case. The property which was thrown into the common hotchpot of the family by the assessee was not an asset of a pre-existing joint family of which the assessee was a member. So long as there is a son in the joint family who is entitled to claim a share on partition, the converted property retained the character of joint family property. If there is no son who can claim a share on partition, as it happened in the case of Kathoke Lodge, the property, though it may technically belong to the HUF, would in reality belong to the sole surviving coparcener. In the present case, when the property was thrown into the family hotchpot by the assessee, there was a son and the property was rightly regarded as joint family property as the son was entitled to claim a share on partition. But once partition is effected and the claims of the son were discharged by allotting properties, the only family left is that of the Karta and his wife without a son. Thus, after the partition of the converted asset, although technically it may be correct to say that the extent of the converted property which fell to the share of the assessee belonged to the joint family consisting of himself and his wife, still, in the absence of a son, it must be regarded as belonging to the assessee who is the sole surviving coparcener in the joint family consisting of himself and his wife. Based on this distinction, the Supreme Court held that the income from Kathoke Lodge was liable to be taxed in the hands of the individual rather than the joint family. That distinction clearly governs the present case also and the extent of the converted asset which fell to the share of the assessee on partition is liable to be assessed in the hands of the assessee as an individual since he is the sole surviving coparcener.

16. We have thus come to the conclusion that the income arising from the converted property that fell to the share of the assessee as well as the property itself are liable to be assessed in the hands of the assessee as an individual not by the application of the provisions of s. 64(2) of the IT Act and s. 4(1A)(c) of the WT Act but by operation of the general principles of Hindu law we have set out above. We find that the questions referred in both the cases limit the consideration only to s. 64 of the IT Act and s. 4(1A) of the WT Act. In view of the correct legal position, we reframe the question to bring about the real controversy in the following form: ” Whether, on the facts and in the circumstances of the case, the income arising to the assessee from the extent of the property allotted to him on partition out of the converted asset and also the extent of the converted asset are liable to be assessed in the hands of the assessee as an individual?”

17. We answer the question, as reframed above, in the affirmative, that is to say, in favour of the Revenue and against the assessee. In the circumstances, there shall be no order as to costs. R. C. Nos. 342 & 343 of 1982 :

Per JEEVAN REDDY, J.:

I agree with the answers proposed by my learned brother, Anjaneyulu J. But, in view of the importance of the questions referred, I wish to say a few words. All the facts are stated in the opinion of my learned brother and it is not necessary to repeat them. The two questions referred are identical, one arising under the IT Act and the other under the WT Act. The relevant provisions in both the enactments are identical. It would be sufficient if I deal with the question arising under the IT Act.

2. The assessee, Seth Tulsidas Bolumal, was the ” Karta ” of a Hindu joint family consisting of himself, his wife and a major son. Besides the properties held by the joint family, he also held some separate properties. By a declaration dated June 25, 1970, he threw his separate properties into the family hotchpot impressing them with the character of joint family properties. Since the said conversion took place after December 31, 1969, the income derived from the converted properties should be deemed to have arisen to the assessee in his individual capacity, and not to the family, by virtue of cl. (b) of sub-s. (2) of s. 64. Be that as it may, a partition took place between

Seth Tulsidas Bolumal and his only major son on March 19, 1976. The value of the converted property on that date was Rs. 3,77,723. It was divided equally, with the result that the son got properties of the value of Rs. 1,88,861, while the assessee got properties of the value of Rs. 1,88,862.

For the asst. yr. 1977-78, the assessee claimed that the income arising from the converted properties falling to his share should be treated as the income of the smaller joint family consisting of himself and his wife and cannot be treated as his individual income. This has been negatived by the Tribunal ultimately. The question is whether the Tribunal was correct in its view ? The matter has to be examined in the context of s. 64 of the IT Act, in particular sub-s. (2), which reads as follows: ” (2) Where, in the case of an individual being a member of an HUF, any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration (the property so converted or transferred being hereinafter referred to as the converted property), then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computation of the total income of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1971,— (a) the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly; (b) the income derived from the converted property or any part thereof shall be deemed to arise to the individual and not to the family; (c) where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the income derived from such converted property as is received by the spouse or minor child on partition shall be deemed to arise to the spouse or minor child from assets transferred indirectly by the individual to the spouse or minor child and the provisions of sub-s. (1) shall, so far as may be, apply accordingly:

3. Provided that the income referred to in cl. (b) or cl. (c) shall, on being included in the total income of the individual, be excluded from the total income of the family or, as the case may be, the spouse or minor child of the individual. Explanation 1.—For the purposes of sub-s. (2), ‘Property’ includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method, such other property. Explanation 2.—For the purposes of this section, ‘income’ includes loss.”

4. If, for a moment, we exclude s. 64 from our consideration, the position would be that on partition between Seth Tulsidas Bolumal and his major son, the income from the properties which fell to the share of the assessee (father) would be taxable in the hands of the smaller joint family consisting of the assessee and his wife. The income would be treated as the income of the said smaller joint family. This is the decision of this Court in Premchand vs. CIT (supra). Other High Courts too have taken the same view. The question is whether the provisions in s. 64 make a difference to the above proposition ? It should be remembered that by virtue of cl. (b) of sub-s. (2) of s. 64, even after conversion, the income derived from the converted property is liable to be deemed to arise to the individual who transferred the converted property to the family, and shall not be deemed to be the income of the joint family. It would be rather queer if, on partition, suddenly the income arising from the converted property falling to the share of the father, ceases to be his individual income and becomes the income of the smaller Hindu joint family consisting of the assessee and his wife. Secondly, to test the proposition, we may take a case where on the date of partition there is a minor son of the assessee. By virtue of cl. (c) of sub-s. (2) of s. 64, the income arising from the share of converted property allotted to such minor son would be included in the individual income of the assessee-father. It would again be rather queer if we hold that while the income arising from the share of converted property allotted to the minor child will be included in the individual income of the father, the income arising from the share of converted property allotted to the father himself will not be treated as his individual income but will be treated as the income of the smaller Hindu joint family consisting of the father and his wife. In our opinion, it would be consistent and proper to hold in this case that even after partition, the income arising from the share of converted properties allotted to the assessee-father should be treated as his individual income and be taxed as such, and not as the income of the smaller Hindu joint family consisting of himself and his wife. It is in this connection that the principle of the decision of the Supreme Court in Surjit Lal Chhabda vs. CIT (supra) becomes relevant. This aspect has been dealt with by my learned brother.

5. Accordingly, I agree that both the questions referred should be answered in the affirmative, i.e., in favour of the Revenue and against the assessee.

[Citation : 170 ITR 1]