Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the HUF of Shantilal C. Shah got partitioned w.e.f. 1st Dec., 1976, and that the income of the erstwhile family is to be assessed in the hands of the members of the family ?

Counsel Appeared

Krishnan, for the Assessee : P.K.R. Menon, for the Revenue

FATHIMA BEEVI, J.:

The Tribunal, Cochin Bench, has, under s. 256(1) of the IT Act, 1961, referred the following question for our opinion :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the HUF of Shantilal C. Shah got partitioned w.e.f. 1st Dec., 1976, and that the income of the erstwhile family is to be assessed in the hands of the members of the family ?”

2. The assessment year in question is 1978-79. The assessee, Shantilal C. Shah, had been assessed as an individual. The HUF of the assessee was a partner in the firm of M/s Anandji. The ITO included in the income of the assessee a sum of Rs. 3,830 as his share in the income of the HUF from the firm, rejecting the contention of the assessee that the income from the firm was assessable only in the hands of the HUF. The AAC held that in view of the Kerala Joint Hindu Family System (Abolition) Act, 1975, which came into force w.e.f. 1st Dec., 1976, there was a deemed partition of the HUF and, consequently, the share of the assessee in the income of the HUF from the firm is liable to be included in his individual assessment. On further appeal, the Tribunal, following its earlier decisions and the decision of this Court in the case of WTO vs. K. Madhavan Nambiar (1988) 169 ITR 810 (Ker), held that the HUF should be deemed to have been partitioned w.e.f. 1st Dec., 1976, and that the assessee’s share in the income of the HUF from the firm is includible in the income of the assessee.

The contention on behalf of the assessee is that because no partition has been recorded as required under s. 171 of the IT Act in respect of the HUF which had been hitherto assessed as HUF, the share income is properly assessable only in the name of the HUF and not in the hands of the members thereof. This contention is (made) without noticing the effect of the Kerala Joint Hindu Family System (Abolition) Act, 1975.

On and after 1st Dec., 1976, no Hindu joint family existed in the State. The Act is one enacted to abolish the joint family system among the Hindus in the State of Kerala. All members of an HUF governed by the Mitakshara law holding any coparcenary property on the day the Act came into force are thereafter deemed to hold it as tenants- in-common as if a partition had taken place among all the members of that HUF as respects such property and as if each one of them is holding his or her share separately as full owner thereof. There is a total annihilation of the system in the State. The properties held by the HUF thereafter have lost the character of joint family property and have become the individual property of the members. The individual right has also been determined, as joint tenancy has given way to tenancy-in-common. Therefore, after 1st Dec., 1976, the individual members of the family have a distinct share in the property and this change has been brought about by operation of law and not by act of parties. Where a joint family has ceased to exist by operation of law, the question of recording a partition as envisaged under s. 171 of the IT Act does not arise. That section applies only in cases where an HUF has been assessed as HUF and a claim of partition is made subsequently. For the purpose of bringing to tax the income earned by the joint family before its disruption on partition, a fiction has been introduced in the section that until the partition is recorded by the ITO after enquiries, the joint family shall be deemed to continue. The machinery thus provided under s. 171 is inapplicable in a case where no such partition has taken place, but the family has come to an end under law, the property had devolved on the members as provided under the statute and thereby the rights have been defined and settled. In such a case, if the income earned by the HUF before such extinction has escaped assessment, the only course open to the assessing authority is to make a reassessment on the family under s. 147 as provided under s. 283(1) of the Act. That section providing for notice in bringing to tax the income of the joint family after a partition has been recorded under s. 171 should apply in such a case. This view is in accord with the decision in Writ Appeal No. 159 of 1981. Notice in respect of the HUF has to be served on the person who was the last manager of the HUF or if such a person is dead, then on all adults who were members of the HUF immediately before the partition. The machinery is one which enables the authorities to assess the income earned by the HUF even after its disruption by partition. The same machinery has to be applied for bringing to tax the income of the HUF after its extinction by operation of law.

The ITO is, therefore, empowered to make a reassessment in respect of the income earned by the HUF upto 1st Dec., 1976, by issuing notice to the quondam Karta in the name of the joint family. The income accruing, therefore, can only be assessed in the hands of the members of the family in proportion to their share as the income of the individual members and not as that of the HUF. In this view, the proportionate share of the income that accrued to the partner as on 31st March, 1977, is properly assessable in the hands of the assessee in the individual status. The Tribunal was, therefore, right in holding that the share income of Shantilal C. Shah is properly assessable in the individual status.

The question is accordingly answered in the affirmative, in favour of the Revenue and against the assessee.

[Citation : 169 ITR 805]