Madhya Pradesh H.C : Whether, on facts and in the circumstances of the case, the Tribunal was right in upholding the order of the CIT under s. 263 which was passed without giving opportunity to all the members of the family (coparceners) who were adversely affected by virtue of provisions of s. 171(9) of the IT Act on the ground that the notice to the Karta was sufficient compliance with the provisions of s. 263 ?

Counsel Appeared

P.M. Choudhary with Anil Jain, for the Petitioner : R.L. Jain, for the Revenue

JUDGMENT

J.G. CHITRE, J. :

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 facts and in the circumstances of the case, the Tribunal was right in upholding the order of the CIT under s. 263 which was passed without giving opportunity to all the members of the family (coparceners) who were adversely affected by virtue of provisions of s. 171(9) of the IT Act on the ground that the notice to the Karta was sufficient compliance with the provisions of s. 263 ? Whether, on the facts and in the circumstances of the case, the CIT had jurisdiction under s. 263 of the Act to set aside the order passed by the ITO under s. 171 of the Act recognising family settlement, when there was no loss of revenue as a result of assessment for the year in question ? Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the CIT was justified in setting aside order of the ITO and further interpreting the same to be setting aside for limited purpose only when the CIT had cancelled the order of the ITO 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 “HUF”. 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 21st Oct., 1979 (on Diwali as the accounting year was commencing from the 1st day of Diwali-Padwa and was ending by the end of the last day of Diwali). The returns were filed for asst. yrs. 1980-81 (relevant period commencing from 1st Nov., 1978 to 20th Oct., 1979). The assessees averred that they had paid the tax in respect of the concerned assessment year treating themselves to be ‘HUF’ and, therefore, there was no loss of revenue to the IT Department. The ITO accepted their contentions and passed the assessment order on 25th Oct., 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 assessee ‘HUF’.

3. In view of provisions of s. 263 of IT Act, CIT did not accept the said deed conveying “family arrangement” and held that it was “partial partition”. By his order dt. 5th Oct., 1984, he set aside the order which was passed by ITO totally and directed him to make the assessment afresh by treating them as ‘HUF’ and treating that deed as a document of partial partition.

4. The assessees appealed to Tribunal assailing the said order passed by the CIT Tribunal confirmed the order passed by the CIT. Being aggrieved by the said order passed by the Tribunal, the petitioners submitted a petition before this Court making a prayer that Tribunal be directed to make reference probably on the questions mentioned above. The said petition was allowed and this Court sought the reference from Tribunal on the questions mentioned above.

5. Shri Choudhary, counsel appearing for the petitioners submitted that in view of provisions of s. 263 of IT Act, CIT had no jurisdiction to reopen the assessment done by the ITO by his order dt. 25th Oct., 1982, because obviously the said deed was executed after 20th Oct., 1979. He submitted that the petitioners had paid the tax treating themselves to be ‘HUF’ and therefore, there was no loss of revenue as contemplated by provisions of s.

263 of the IT Act. He further pointed out that being so, the ITO was not in error at all. Shri Choudhary submitted that for the purpose of invoking the jurisdiction and power in view of s. 263 of the IT Act two ingredients are existing (i) that the order passed by the AO should be erroneous, and (ii) it should be prejudicial to the interest of Revenue. He submitted that if these two ingredients are present then only the CIT would be entitled to call for and examine the record of any proceeding under the IT Act and can either confirm the order passed by the AO or set it aside. Shri Chouhan submitted that in the present case the petitioner had paid the tax as ‘HUF’ in respect of the concerned year and, therefore, there was no prejudice either caused or likely to be caused to the interest of Revenue and secondly, being it so, the ITO was not in error at all.

6. Sec. 263(1) of the IT Act provides that the CIT may call for and examine the record of any proceeding under this Act and if he considers that any order passed therein by the AO is erroneous insofar 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 a fresh assessment. 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.

7. Sec. 171(9) of the IT Act provides that “Notwithstanding anything contained in the foregoing provisions of this section, were a partial partition has taken place after the 31st Dec., 1978, among the members of an HUF hitherto assessed as undivided : (a) no claim that such partial partition has taken place shall be inquired into under sub-s. (2) and no finding shall be recorded under sub-s. (3) that such partial partition had taken place and any finding recorded under sub-s. (3) to that effect whether before or after the 18th 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. 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 HUF or the properties belonging to the HUF, or both.

In the present matter the CIT 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 provisions of s. 171(9) of IT Act which were to come in force by 31st Dec., 1978. He was empowered to come to a conclusion that the said document was not effecting a family arrangement as contended by the petitionersassessees 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 21st Oct., 1979. Being that, he should have come to a conclusion as a natural corollary to this, that assessees continued their existence as ‘HUF’ in spite of execution of the said document. He could have come to a conclusion that the status of the assessees was to be treated as “HUF” from 31st Dec., 1978, onwards. He could have given a direction to the ITO for treating them as ‘HUF’ even after 31st Dec., 1978, and for the assessment year commencing from 21st Oct., 1979. He could have also directed the ITO to treated them as ‘HUF’ 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 ‘HUF’. Therefore, he should have come to a conclusion that in spite of that deed executed, there was no prejudice to the interest of the Revenue. But instead of doing that, CIT set aside the entire assessment order. Being it so, the said order will have to be treated as improper and incorrect.

The CIT committed an error because when he treated the assessees as ‘HUF’ 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 vs. CIT (1982)

138 ITR 518 (MP) : TC 57R.314; where the Division Bench of this Court held that invoking the powers and the jurisdiction indicated by s. 263(1) of the IT Act two prerequisites must be present before the CIT (i) that the order of the ITO must be erroneous; (ii) that the error must be such that it is prejudicial in the interests of the Revenue. This Court further held that if the order is erroneous but it is not prejudicial to the interest of the Revenue, the CIT cannot exercise within its power under s. 263(1) of the IT Act. CIT should have noted that in the present case though the ITO was wrong in coming to the conclusion that the said deed conveyed a family arrangement, the assessees were liable to be assessed as ‘HUF’, no prejudice was caused to the interest of Revenue. Shri Choudhary further placed reliance on the judgment of Division Bench of Allahabad High Court in the matter of CIT vs. Shrawan Kumar Swarup & Sons. (1998) 147 CTR (All) 305 : (1998) 232 ITR 123 (All) : TC S57.4455, wherein the Division Bench of Allahabad High Court held that the assessee-HUF consisted of the Karta SKS, his wife, AKS, and two minor children. HKS and NS. The Karta of the HUF 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 1st Jan., 1971. The two groups consisted of SKS and his minor daughters, NS, on 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 ITO acting in view of provisions of s. 171 of the IT 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 Allahabad High Court in that matter held that after giving notice of inquiry to all members of the family the order in question could be reversed or cancelled by the CIT under s. 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.

In the present case while setting aside the order passed by the ITO, CIT did not issue the notices qua each member but issued the notice to Karta of the said family and treated that issuing a notice to him and service of that notice on him was compliance of the procedure which has been laid down by s. 263 of the IT Act, CIT fell in the error of contradiction because by overruling the theory of family arrangement he concluded that the assessee was ‘HUF’. It means that he passed an order which was prejudicial to the interest of each member of HUF. 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 HUF without affording them the opportunity of being heard. It was not proper and correct on his part to issue notice to Karta of the said ‘HUF’ only and treating him to represent the ‘HUF’ and treating him sufficient enough in legal sense for protecting the interest of each member of the ‘HUF’. 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 the virtue of the order which was passed by the ITO.

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 provisions of s. 263 of the IT Act.

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 CIT. Unless the order which was passed by ITO was erroneous and unless that was causing prejudice to the interest of Revenue, it was not open for the CIT to invoke the jurisdiction and power in view of s. 263 of the IT Act and to call the record of the proceeding in which the concerned order was passed by the ITO and to go on for examining its correctness, propriety and legality. The CIT could not invoke the jurisdiction and power as indicated by s. 263(1) of the IT 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 s. 263(1) of the IT Act if either of these two factors is absent. The presence of these two factors independently and jointly would only confer the power and jurisdiction on CIT to call for the record of the proceeding and to examine its propriety, correctness and legality. Thus, in view of the discussions above, this Court answers both the questions in negative and in favour of the petitioners the assessees as natural corollary of that, this Court answers question No. 2 by holding that the Tribunal was not justified in holding that CIT was justified in setting aside the order of ITO and further interpreting the same to be setting aside the order passed by the ITO for limited purpose to the extent of setting aside the entire order. It should have held that the CIT was right in holding that the petitioners- assessees were ‘HUF’ and were liable to be assessed and taxed as such from 21st Oct., 1979, onwards. The Tribunal should have held that the assessment and levy of tax for the year prior to 21st Oct., 1979, was not fit to be reopened, in the circumstances and facts of this case.

15. Thus, this petition stands allowed. However, with no order as to cost, keeping in view the peculiar facts and circumstances of this case. Thus, questions referred to are answered.

[Citation : 252 ITR 764]