1995 (1) TMI 38 - HC - Income Tax

Summary

Issues Involved
1. Validity of the reunion of a Hindu undivided family (HUF) under Hindu law.
2. Tax implications of the reunion under the Income-tax Act, 1961.
3. Legal requirements for a valid reunion of an HUF.
4. Effect of partial reunion and partial partition on the validity of the reunion.

Issue-wise Detailed Analysis

1. Validity of the Reunion of a Hindu Undivided Family (HUF) under Hindu Law
The primary issue is whether the reunion of Vaiyapuri Chettiar and his son, Rajkumar, constitutes a valid Hindu undivided family (HUF) under Hindu law. The Tribunal referred to the principles laid down by the Supreme Court in the case of Bhagwan Dayal v. Mst. Reoti Devi, which held that by an agreement, the parties can create a reunion with the property brought in as the joint family property. The Tribunal accepted that the reunion can be created with limited items of properties and that it is not necessary for all the properties belonging to the erstwhile HUF to be brought into the reunited joint family for the reunion to be valid.

2. Tax Implications of the Reunion under the Income-tax Act, 1961
The Department contended that the reunion should restore the position to a point before the partition by bringing back all the assets that had been divided. They argued that the reunion was intended to create a fresh HUF, which is untenable because a joint family is a creature of law and cannot be created by contract. Furthermore, they argued that the motive behind the reunion was tax reduction, which cannot be recognized in law. The Tribunal, however, held that the assessment should be made by accepting the reunion, following the decision rendered by the Karnataka High Court in Paramanand L. Bajaj v. CIT.

3. Legal Requirements for a Valid Reunion of an HUF
The conditions precedent for a valid reunion under Hindu law are:
1. There must have been a previous state of union.
2. There must have been a partition in fact.
3. The reunion must be effected by the parties or some of them who had made the partition.
4. There must be a junction of the estate and the reunion of property.

The Tribunal noted that the reunion is intended to bring about a fusion in the interest and estate among the divided members of an erstwhile HUF, restoring their status as a HUF once again. This creates a right on all the reuniting coparceners in the joint family properties that were the subject of partition among them.

4. Effect of Partial Reunion and Partial Partition on the Validity of the Reunion
The Tribunal held that a reunion can be valid even if it involves only some of the properties of the erstwhile HUF. The Supreme Court in Bhagwan Dayal v. Mst. Reoti Devi held that a reunion is a matter of contract and there should necessarily be a junction of the estate to validate the reunion. The Tribunal observed that even if there is a clause giving the option to bring in only some properties, the reunion cannot be invalidated. However, the clause giving the option to bring in whatever assets they like was declared illegal and unsustainable. The entire properties of the erstwhile joint family prior to the partition would be the properties of the reunited joint family.

Conclusion
The Tribunal upheld the validity of the reunion effected by the deed of reunion dated October 1, 1979, but deleted the clause giving the option to bring in only some properties. The entire properties of the erstwhile joint family prior to the partition would be considered the properties of the reunited joint family. Consequently, the Income-tax Officer may assess the income arising from the entire properties belonging to the erstwhile joint family prior to partition in the hands of the reunited HUF. The Tribunal's order was upheld, and the question was answered in the affirmative and against the Department.