1996 (2) TMI 114 - HC - Income Tax

Summary

Issues Involved:
1. Exclusion of the share of Shri Nanubhai and Smt. Maniben in computing capital gains.
2. Status and continuity of the Hindu undivided family (HUF) after the death of Nanubhai.
3. Effect of the Hindu Succession Act, 1956, on the devolution of property.
4. Legal implications of deemed partition under Section 6 of the Hindu Succession Act.
5. Taxability of capital gains in the hands of the HUF.

Detailed Analysis:

1. Exclusion of the Share of Shri Nanubhai and Smt. Maniben in Computing Capital Gains:
The central issue was whether the Tribunal was right in excluding the share of Shri Nanubhai and Smt. Maniben for computing capital gains on the sale of property. The Tribunal concluded that the share of Nanubhai and Smt. Maniben should be excluded based on the Supreme Court decision in Gurupad Khandappa Magdum v. Hirabai Khandappa Magdum [1981] 129 ITR 440. The Tribunal found that the Hindu undivided family continued even after the death of Nanubhai, and at most, the share of Nanubhai and his widow could be excluded from the joint property of the HUF.

2. Status and Continuity of the Hindu Undivided Family (HUF) after the Death of Nanubhai:
The Tribunal and the court assumed that the HUF continued to exist after Nanubhai's death, despite the operation of Section 6 of the Hindu Succession Act. The property was not subjected to actual physical partition, and the family continued in the status of the HUF. The court noted that the property bore a dual character, with part of it vesting in the heirs of Nanubhai as their separate property and the remainder as HUF property.

3. Effect of the Hindu Succession Act, 1956, on the Devolution of Property:
The court discussed the impact of the Hindu Succession Act, particularly Section 6, which stipulates that the interest of a deceased coparcener devolves by succession and not by survivorship when a male Hindu dies leaving behind a female heir specified in Class I of the Schedule. This results in a deemed partition immediately before the death of the coparcener, giving each heir an indefeasible right to their share. The court noted that the property inherited by heirs ceases to be HUF property and becomes their individual property.

4. Legal Implications of Deemed Partition under Section 6 of the Hindu Succession Act:
The court clarified that the legal fiction of deemed partition under Section 6 does not extend beyond determining the share of the deceased for inheritance purposes. It does not result in an actual physical partition or disrupt the HUF unless a partition is claimed and executed. The court emphasized that the share of a female heir remains part of the HUF property until she voluntarily claims partition and it is actually allotted to her.

5. Taxability of Capital Gains in the Hands of the HUF:
The court held that for computing capital gains, the share of the property that devolved by succession on Nanubhai's heirs must be excluded from the HUF's property. The capital gains attributable to the interest inherited by the heirs cannot be taxed as HUF property. However, the share of Smt. Maniben, who did not claim partition before her death, remains part of the HUF property and cannot be excluded. The court concluded that the capital gains arising from the sale of the property should be apportioned between the HUF and the individual heirs based on their respective shares.

Conclusion:
The court answered the reference by stating that for computing capital gains, the share attributable to the interest of the deceased Nanubhai, which devolved by succession on his heirs, must be excluded. However, no exclusion of any share on account of the death of Maniben can be made. The court emphasized that the property retains its dual character until actual partition takes place, and the capital gains should be apportioned accordingly.