2002 (12) TMI 22 - HC - Income Tax

Capital gains arising out of the sale of the immovable property of the deceased - taxability - Tribunal was justified in holding that the sale of the immovable property was effected by the co-sharers individually and not by the Hindu undivided family Thus, Tribunal was justified in treating the entire capital gains arising out of the sale of the immovable property of the deceased, taxable in the hands of the individual co-sharers - Tribunal was right in holding that the notice u/s 148 was untenable since the HUF did not exist, and that the capital gains arising was not taxable in the HUF s hands

Issues Involved:
1. Interpretation of the Supreme Court decision in Gurupad Khandappa Magdum v. Hirabai Khandappa Magdum regarding notional partition and the existence of a Hindu undivided family (HUF).
2. Assessment of capital gains in the hands of individual co-sharers versus the HUF.
3. Validity of the notice under section 148 of the Income-tax Act, 1961, for reassessment.

Issue-Wise Detailed Analysis:

1. Interpretation of the Supreme Court Decision and Notional Partition:
The Tribunal had interpreted the Supreme Court decision in Gurupad Khandappa Magdum v. Hirabai Khandappa Magdum to mean that there was a notional partition on the death of the Karta, Shri Digambar Hari Ranade, and thus, the HUF did not survive. The Tribunal held that each legal heir acquired his/her share immediately upon the death of the Karta. However, the court clarified that the concept of notional partition under section 6 of the Hindu Succession Act, 1956, does not imply an automatic partition upon the death of a coparcener. The apex court in State of Maharashtra v. Narayan Rao Sham Rao Deshmukh stated that a female member who inherits an interest does not cease to be a family member without her volition to separate. Hence, the court held that the HUF continues with other members after the death of a coparcener. Therefore, the Tribunal's finding that the HUF ceased to exist on the death of Shri Digambar Ranade was incorrect. Question No.1 was answered in the negative, in favor of the Revenue.

2. Assessment of Capital Gains:
Despite the incorrect interpretation of notional partition, the facts showed that the HUF was never assessed to tax, and on the death of Digambar Ranade, the legal heirs mutually decided their shares and recorded their names in official records. The legal heirs sold their respective 1/4th shares as tenants in common, not as HUF property. The use of "HUF property" in the sale agreement was insufficient to establish the existence of the HUF. The court held that the sale was by individual co-sharers, and capital gains were rightly taxed in their hands individually. Thus, the Tribunal was justified in its decision, and Question No.2 was answered in favor of the assessee.

3. Validity of the Notice Under Section 148:
The court found that the legal heirs had disclosed all material facts in their individual returns, and there was no evidence of the HUF's existence at the time of the property sale. The original assessment accepted the individual taxation of capital gains. There was no failure to disclose material facts or income escaping assessment. Consequently, the notice under section 148 was unsustainable. Question No.3 was answered in the affirmative, in favor of the assessee.

Conclusion:
- Question No.1: Answered in the negative, in favor of the Revenue.
- Question No.2: Answered in favor of the assessee, justifying individual taxation of capital gains.
- Question No.3: Answered in the affirmative, in favor of the assessee, invalidating the notice under section 148.

The reference was disposed of with no order as to costs.

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