Union of India & Ors Vs. M.V. Valliappan
& Ors [1999] INSC 173 (29 April 1999)
K.T.Thomas,
M.B.Shah Shah, J.
These
appeals by special leave are filed against the judgments and orders passed by
the High Court of Madras dated 13.1.1988 in Writ Petition Nos.992 and 993 of
1981, 162 & 6036 of 1983, 904-905, 994, 995, 5430, 6162 and 9283 of 1984,
by the High Court of Karnataka dated 9.11.1993 in Writ Petition Nos. 12312 to
12317 of 1987 and dated 25.11.1992 in W.P. No.23708 of 1992, and by the High
Court of Gujarat dated 29.6.1993 in Income Tax Application Nos.164
and 165 of 1993. By a common judgment and order passed in various writ
petitions filed before the Madras High Court 170 ITR 238), the High Court
struck down the provisions of Section 171(9) of the Income Tax Act, 1961 as violative
of Article 14 of the Constitution of India and that it suffers from the vice of
legislative competence. In the High Court, number of writ petitions were filed
involving questions relating to the validity, scope and interpretation of the
provisions of Section 171 (9). For our purpose, it would suffice to mention
facts of Writ Petition No.994 of 1984 for deciding the question involved in
these appeals. In the said petition, it was the case of the petitioner that he
was a Karta of a Hindu undivided family consisting of himself, his wife, his
minor son and minor daughter. It was his contention that the Hindu undivided
family was a partner in a partnership firm in which its funds were invested. On 13th April, 1979, a partial partition of certain
assets belonging to the Hindu undivided family was effected with effect from
that date by executing a deed of partition. An application under Section 171(2)
of the Income Tax Act, 1961 for recognition of the said partial partition came
to be filed before the Income Tax Officer. The Income Tax Officer passed an
order dated 28th
December, 1979
recognizing the partial partition. Thereafter for the assessment year 1980-81,
a return was submitted on behalf of the Hindu undivided family on April 12, 1980 which did not include the income
from the property which was the subject matter of partial partition. The income
derived from the assets that were the subject matter of partial partition were
declared by the respective individuals in their respective returns.
In
accordance with the said return, assessment was finalised. Similarly, wealth
tax return for the assessment year 1980-81 was also filed and accepted by the
Income Tax Officer. Thereafter, a notice dated March 4, 1983 under Section 148 of the Act was received by the petitioner
stating that income of the petitioner had escaped assessment and the Income Tax
Officer proposed to reopen the completed assessment for the year 1980-81. The assessee
objected to the re- opening of the assessment on the ground that order under
Section 171 of the Act recognising the partition not having been cancelled or
revoked, continued to be effective and, thereafter, no income from the
partitioned properties could be assessed in the hands of the Hindu undivided
family. These objections were rejected by the I.T.O. by order dated 30th November, 1983. Fresh assessment order for H.U.F.
was made by including the income relating to the assets which were partially
partitioned and allotted to the individual members of the Hindu undivided
family. That re-assessment order was challenged by filing writ petition.
Facts
in the other writ petitions were also similar to the facts as stated above. The
High Court after considering the various contentions and decisions relied upon
by the parties arrived at and summarised its conclusion as under: - (1) Section
171(9) of the Income-tax Act, 1951, cannot be sustained on the ground that it
is a measure to counteract the tendency to tax avoidance and it suffers from
the vice of legislative incompetence.
(2)
Section 171(9) of the Income-Tax Act, 1961, is also void on the ground of
violation of Article 14 of the Constitution of India.
(3)
Section 171(9) of the Income-Tax Act, 1961, entrenches upon the charging
provisions in Section 4 of the Income-Tax Act, 1961, and purports to bring to
charge the income which does not belong to the Hindu undivided family to be
assessed in the hands of the Hindu undivided family.
The
provision thus enlarges the scope of sections 4 and 5 of the Act and is,
therefore, invalid.
(4)
Section 171(9) of the Income-Tax Act, 1961 has the effect of fastening a penal
liability on the Hindu undivided family when in fact, in the case of a partial
partition, the liability for concealment of income is that of the member of the
Hindu undivided family who earned the income in his own right and not of the
Hindu undivided family.
(5)
The effect of section 171(9) of the Income-Tax Act, 1961 is that it virtually
negatives the right of partition under the personal law only in certain cases of
partition after December 31, 1978, and there is no valid basis of justification
for treating Hindu undivided families separately in a hostile manner with
reference to the date December 31, 1978, the choice of the date being clearly
arbitrary.
(6)
The operation of Section 171(9) of the Income-Tax Act, 1961, is restricted only
to cases where a claim in respect of a partial partition which is effected
after December 31, 1978, is made for the first time in the
assessment year 1980-81.
(7)
The provisions of Section 171(9) of the Income Tax Act, 1961, will not fasten
any liability in respect of a partial partition which has already been recognised
in the assessment year 1979-80 and a finding recorded in respect of such a
claim for the assessment year 1979-80 will not be affected by the invalidating
provision in clause (a) of sub-Section (9) of Section 171 of the Act.
In
Civil Appeal Nos.12590/95 & 5743-48 of 1995, a similar view has been taken
by the Karnataka High Court following the decision rendered by the Madras High
Court.
The
Karnataka High Court has held Section 171(9) of the Income Tax Act, 1961 as
unconstitutional and also declared Section 20A of the Wealth Tax Act, 1957
which is substantially similar to Section 171(9) of the Income Tax Act as void
being violative of Article 14 of the Constitution. The Gujarat High Court has
rejected the Income Tax Applications filed before it for raising and referring
the following question:- whether on the facts and in the circumstances of the
case and in law, the Tribunal was right in coming to the conclusion that share
income from the firm to the two smaller HUFs cannot be clubbed in the hands of
the bigger HUFs.
In the
said cases also, I.T.O. refused to recognise partial partition in view of the
provisions of Section 171(9) of the Act and added the share income of two
smaller HUFs in the hands of the assessee bigger HUF. Since the question
involved in all these cases is of constitutional validity of Section 171(9) of
the Income Tax Act, 1961, all these matters were directed to be placed together
before the Constitution Bench. Hence, these appeals are disposed of this common
judgment and order. Learned counsel appearing on behalf of the
appellant-Revenue submitted that the findings given by the High Court are, on
the face of it, erroneous. He contended that there is no reason for holding
that Section 171(9) suffers from the vice of legislative incompetence or that
the prescribed cut off date as 31st December, 1978 is violative of Article 14 of the Constitution of India. The cut off
date is prescribed after taking into consideration the assessment year and is
given effect from the assessment year 1980-81. It is his further submission
that those who have partially partitioned HUF properties prior to cut off date
and those who have done it subsequently are both distinct and different
classes. As against this, learned Counsel for the respondents submitted that
the reasons recorded by the High Court for holding sub-section (9) to be
invalid do not call for any interference. Before appreciating the contentions
raised by the learned Counsel for the parties, it will be necessary to refer to
the relevant part of Section 171of the Act which is as under:
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 Hindu family assessed as undivided
that a partition, where total or partial, has taken place among the members of
such family, the (Assessing) Officer shall make an inquiry thereinto after
giving notice of the inquiry to all the members of the family.
(3) On
the completion of the inquiry, the (Assessing) Officer shall record a finding
as to whether there has been a total or partial partition of the joint family
property, and, if there has been such a partition, the date on which it has
taken place.
(4) to
(8) XX XX XX (9) Notwithstanding anything contained in the foregoing provisions
of this section, where a partial partition has taken place after the 31st day
of December, 1978, among the other 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 property allotted to him
or it at such partial partition, And the provisions of this Act shall apply
accordingly.
Explanation
- -------- From the aforesaid section, it is clear that for the purposes of
income tax, the concept of partial partition of HUF was recognised, but is done
away with by the amendment which specifically provides that where a partial
partition has taken place after 31st December, 1978 no claim of such partial
partition having taken place shall be inquired into under sub-Section (2) and
no finding shall be recorded under sub-Section (3) that such partial partition
has taken place.
If any
such finding is recorded under sub-Section (3) whether before or after 18th June, 1980 being the date of introduction of
Finance Bill (No. 2) 1980, the same shall be null and void. The effect of the
aforesaid sub-Section is that for the purposes of income- tax partial
partitions taking place on or after 1-1-79 are not to be recognised.
If a
partial partition has taken place after the cut off date no inquiry as
contemplated under sub-Section (2) by the Income-Tax Officer shall be held.
Even if the inquiry is completed and finding is given, it would be treated as
null and void. In this view of the matter, contention raised in some of the
petitions by the learned Counsel for the respondents that partial partition
took place on 13th April, 1979 and that in the assessment year it was recognised
and benefit was given to the assessee, has no significance in view of crystal
clear language used in the sub-section that partial partition taking place
after the cut off date is not to be inquired into and if inquired the findings
would be null and void. Such a family is to be assessed under the Act as if no
partial partition has taken place. The next question is whether the amendment
to the aforesaid section can be said to be in any way beyond the legislative
competence. In our view, it is difficult to comprehend that the said amendment
can be termed as beyond legislative competence. The Parliament has the authority
to delete or amend any provision of the Income Tax Act and it cannot be said
that it is beyond legislative competence. The legislative competence is to be
decided on the basis of the Constitution that empowers the Legislature to levy
taxes on income. The relevant item 82 of List I of the Seventh Schedule to the
Constitution empowers the Parliament to enact the legislation for imposition of
taxes on income other than agricultural income. Further, the concept of partial
partition of HUF was not recognised under the Income Tax Act, 1922 and was recognised
only under the Income Tax Act, 1961. All that is done by the amendment is to
restore the status quo ante that prevailed prior to 1961 Act. It is for the
legislature to decide whether the recognition of partial partition introduced
in the Income-Tax Act should continue or not. If it considers that it has led
to abuses or inconvenience, it is entitled to amend or delete. As per the
object and reasons of the Amending Act, it was introduced because multiple Hindu
undivided families were created by effecting partial partitions as regards
persons constituting the joint family or as regards the properties belonging to
the joint family or both, which resulted in tax reduction or evasion and with a
view to curbing this creation of multiple Hindu undivided families by making
partial partitions, it was proposed to de-recognise partial partitions of HUF
effected after 31st December, 1978 for the tax purposes. By having multiple
partial partitions qua the properties or the members, it is possible to
manipulate the affairs of the HUF for reduction of tax liability and to prevent
such manipulation, sub-section (9) is added. Hence, it would be difficult to
hold that addition of sub-Section 171(9) is beyond the legislative competence.
Further in the case of Balaji vs. Income Tax Officer, Special Investigation
Circle, Akola and Others (1961) 63 ITR 393, similar contention was considered
by this Court and it was held that it is settled law that entries in the Lists
are not powers but are only fields of legislation and Entry 82 can sustain law
made to prevent the evasion of tax. The Court dealt with the validity of
Section 16 (3) (a) (i) & (ii) of the Income Tax Act, 1922 which provided
that for computing the total income of any individual for the purpose of
assessment, the shares in the profits of the firm received by the wife and/or
minor children shall be included in the total income of the individual if he is
the partner of the said firm. The Court held that sub-section 3(a)(i) and (ii)
was enacted for preventing evasion of tax and was well within the competence of
Federal Legislature. On the question of legislative competence, the Court
referred to C.I.T. (1960) 40 ITR 605 and held as under:- So entry 54
(Government of India Act, 1935) should be read not only as authorising the
imposition of a tax but also as authorising an enactment which prevents the tax
imposed being evaded.
If it
were not to be so read then the admitted power to tax a person on his own
income might often be made infructuous by ingenious contrivances.
The
decision holds that the said entry can sustain a law made to prevent the
evasion of tax.
The
Court also dealt with the question of constitutional validity on the ground of
violation of the doctrine of equality and negatived the contention that the
legislature ought to have classified genuine and non genuine cases of
partnership by holding that demarcating a group any further, by sub
classification as genuine and non-genuine partnerships, might defeat the purpose
of the Act. The Court observed as under: - This mode of taxation may be a
little hard on a husband or a father in the case of genuine partnership with
wife or minor children, but that is offset, to a large extent, by the beneficient
results that flow therefrom to the public, namely, the prevention of evasion of
income-tax, and also by the fact that, by and large, the additional payment of
tax made on the income of the wife or the minor children will ultimately be
borne by them in the final accounting between them.
Next
ground is with regard to violation of Article 14.
The
amendment is brought with effect from 1st April, 1980 and is to apply in relation to
assessment years 1980-81 and thereafter. It is true that two distinct classes
are created one of families having partial partition which has taken place
prior to the cut off date and other of partial partition taking place after the
cut off date. Benefit which is conferred upon those assessees who have
partially partitioned their property prior to the cut off date is not withdrawn
and others who partitioned their property after the cut off date would not get
the same, but that would hardly be a ground for holding it as violative of
Article
14. It
is settled law that differentiation is not always discriminatory. If there is a
rational nexus on the basis of which differentiation has been made with the
object sought to be achieved by particular provision, then such differentiation
is not discriminatory and does not violate the principles of Article 14 of the
Constitution. This principle is too well- settled now to be reiterated by
reference to cases. Further, whether the same result or better result could
have been achieved and better basis of differentiation could have been evolved
is within the domain of Legislature and must be left to its wisdom. In the
present case, there is intelligible basis for differentiation and the
classification is having rational nexus of achieving the object of preventing
the creation of further multiple Hindu undivided families for reduction of tax
liabilities. Further, for the validity of the Section, it is not necessary for
the legislature to withdraw the benefit which is already conferred. Secondly,
cut off date of 31st December, 1978 cannot be said to be arbitrary. The Amending
Bill was introduced in June, 1980 and is given effect to from the assessment
year 1980-81. It is settled law that the choice of a date as a basis for
classification cannot always be dubbed as arbitrary even if no particular
reason is forthcoming for the choice unless it is shown to be capricious or
whimsical in the circumstances; while fixing a line, a point is necessary and
there is no mathematical or logical way of fixing it; Precisely, the decision
of the Legislature or its delegate must be accepted unless it is very wide off
the reasonable mark. [Re: and
Others, etc. (1996) 10 S.C.C. 536]. The learned Counsel for the Respondent was
not in a position to point out any ground for holding that the said date is
capricious or whimsical in the circumstances of the case. In this view of the
matter, the finding given by the High Court that there is no valid basis of
justification for treating Hindu undivided family separately in a hostile
manner with reference to the date, i.e., 31st December, 1978, is on the face of it erroneous.
The next reason given by the High Court is that it entrenches upon the charging
provisions in Section 4 & 5 of the Income Tax Act and purports to charge
the income which does not belong to HUF to be assessed in the hands of HUF. Hence,
it enlarges the scope of Section 4 & 5 of the Act. In our view, this reason
is also devoid of any substance because charging Sections 4 & 5 are to be
read with the definition of the word person given in the Act, that is, the tax
is to be charged in respect of the total income of the previous year of every
person. Word person is given the meaning in Section 2 (31) which, inter-alia,
includes a Hindu undivided family. It is open to the Legislature to give
different meaning to the word person for the purpose of the Act which may or
may not include HUF or such other legal entities. In such a situation, it is
open to the HUF to take the benefit of the Act as available or to partition the
HUF as a whole. It is to be stated that even prior to the amendment, all partial
partitions were not recognised under the Act. Partial partition which was only
in accordance with the Explanation was recognised. Further, prior to Income Tax
Act, 1961, there was no question of recognising partial partition and the
relevant provision under the Income Tax Act, 1922 was Section 25A. After
considering the various decisions, this Court in the case of Kanpur (1982) 133
I.T.R. 690 held that the substance of C.I.T. (1967) 63 ITR 416 (SC) was that
under Section 25-A of the 1922 Act a Hindu undivided family which had been
assessed to tax could be treated as undivided and subjected to tax under the
Act in that status unless and until an order was made under Section 25-A (I);
if in the course of the assessment proceedings it is claimed by any of the
members of the Hindu undivided family that there has been total partition of
the family property resulting in physical division thereof as it was capable
of, the assessing authority should hold an inquiry and decide whether there had
been such a partition or not; If he held that such a partition had taken place,
he should proceed to make an assessment of the total income of the family as if
no partition had taken place and then proceed to apportion the liability as
stated in Section 25-A amongst the individual members of the family. If no
claim was made or if the claim where it was made was disallowed after inquiry,
the Hindu undivided family would continue to be liable to the assessed as such.
This was the legal position under the 1922 Act.
The
Court further held as under: - Hindu law does not require that the property
must in every case be partitioned by metes and bounds or physically into
different portions to complete a partition. Disruption of status can be brought
about by any of the modes referred to above and it is open to the parties to
enjoy their share of property as tenants-in-common in any manner known to law
according to their desire. But the income tax law introduces certain conditions
of its own to give effect to the partition under Section 171 of the Act"
The Court also held: If a transaction does not satisfy the above additional
conditions, it cannot be treated as a partition under the Act even though under
Hindu law there has been a partition total or partial. The consequence will be
that the undivided family will be continued to be assessed as such by reason of
sub-Section (1) of Section 171.
From
the aforesaid decisions, it is clear that prior to Income tax Act, 1961, there
was no question of recognising partial partition. Even with regard to total
partition, it was required to satisfy all the conditions prescribed in Section
25A and an order was required to be passed for that purpose under Section 25A(1).
If the claim of partition was disallowed after inquiry, the HUF was liable to
be assessed as such. After the new Act, partial partition was not recognised
unless it satisfied the conditions laid down in the Explanation. Therefore, the
contention that sub-Section (9) entrenches upon charging provision in Sections
4 & 5 of the Act is without any basis.
The
aforesaid case of Kalloomal was relied upon in the case and the Court observed
that in considering the factum of partition for the purpose of amendment, it is
not permissible to ignore the special meaning assigned to partition under the Explanation
to Section 171 even if the partition is to be effected by a decree of the
Court. The Legislature has assigned special meaning to the word Partition under
the Explanation which is different from general principles of Hindu law and it
contains the deeming provision under which partition of the property of the HUF
could be accepted. In this view of the matter, it cannot be held that by
addition of sub-Section (9), scope of Sections 4 and 5 of the Act is enlarged
and, therefore, it is beyond legislative competence. The learned Counsel for
the respondent, inter alia, submitted that: -
(1) Such a drastic and sweeping
provision was arbitrary and excessive and was not at all necessary to prevent
the abuse of partial partition as a tax avoidance tool.
(2) Partial partition
can be for absolute, genuine and bona fide need and if it was not genuine or
for bona fide need as per Explanation, it was not recognised. Therefore, there
was no necessity of amending the Act.
(3) Once, there is a partial partition
and if it is not recognised, the income received from the partitioned assets
would be taxable in the hands of HUF at a significantly higher rate of tax than
the rate applicable to the separated member.
(4) Under the provisions of the
Act, HUF can be liable to pay the tax without having control over the assets
which are partitioned.
(5) Considering this hardship and inequities resulting
from Section 171(9), the Court has rightly held the provisions to be arbitrary
and violative of Article 14 of the Constitution.
In our
view, the aforesaid submissions are without any substance and similar
contentions are dealt with and rejected by this Court in the cases mentioned
above.
[Sardar
Baldev Singh 40 ITR 605 and Balaji 63 ITR 393 (supra)]. It is for the
Legislature to recognise or not to recognise partial partition of HUF property
for the purpose of levy and collection of tax; it is also for the legislature
to decide whether only non bona fide partial partition undertaken for reducing
the tax liability should not be recognised or not to recognise all partial
partitions of HUF properties. Further, consideration of hardship is totally
irrelevant for deciding the question of legislative competence. In the case of
taxation, it is settled law that hardship or equity has no role to play in
determining eligibility to tax and it is for the legislature to determine the
same. Lastly, once the partial partition is not recognized, tax is to be
calculated as if the assets are held by the HUF. Hence, the question whether
the HUF is required to recover tax from the person to whom the properties are
allotted, is not required to be considered by the Taxing authority as for the
purpose of income tax the properties belong to the HUF. If the HUF finds any
hardship, it is for the members of HUF to have the partition of the entire
estate and not to have partial partition.
Therefore,
there is no substance in the contentions raised by the learned Counsel for the
Respondent.
In
this view of the matter, aforesaid appeals are allowed. The judgments and
orders holding Section 171(9) of the Income Tax Act, 1961 and Section 20A of
the Wealth Tax Act, 1957 as unconstitutional are quashed and set aside.
The
writ petitions filed by the respondents as mentioned above before the Madras
High Court and Karnataka High Court challenging the validity of Section 171(9)
of the Income Tax Act and for consequential reliefs are dismissed. The orders
of the Gujarat High Court rejecting applications under Section 256(2) of the
Income Tax Act, 1961 are also set aside and in the said matters, the Income Tax
Appellate Tribunal, Ahmedabad shall refer the questions to the High Court for
determination. Ordered accordingly. No order as to costs.
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