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1988 (1) TMI 29 - HC - Income TaxPartial partitions - Validity scope and interpretation of the provisions of section 171(9) of the Income-tax Act 1961 - violation of article 14 of the Constitution of India - Legislative competence to enact Section 171(9) - tax evasion - partial partitions in Hindu undivided families (HUFs) - recognition of the partial partition - Non obstante clause - demand notice under section 156 HELD THAT - By using the non obstante clause notwithstanding anything contained in the foregoing provisions of this section in section 171(9) Parliament has excluded the provisions of sub-sections (2) and (3) and has given overriding effect to section 171(9) of the Act. Admittedly sub-section (9) comes into force with effect from April 1 1980 for the assessment year 1980-81. As already pointed out clause (a) of sub-section (9) therefore contemplates that originally before the assessment year 1980-81 the income from joint family property is assessed in the hands of the Hindu undivided family and a claim is made in the assessment year 1980-81 that a partial partition has taken place after December 31 1978. In a case where the Hindu undivided family is not assessed to any tax prior to the assessment year 1980-81 a partial partition between members of such family even if it takes place after December 31 1978 would be permissible and outside the mischief of section 171(9). In the case of such partition the income of a member of a Hindu undivided family which accrues to him as a result of a partial partition effected even after December 31 1978 if taxable will be taxed only in the hands of the said individual member and not in the hands of the Hindu undivided family. There is no rationale behind treating the two sets of the Hindu undivided families one which was an assessee prior to the assessment year 1980-81 and the other which is not an assessee and becomes an assessee after the assessment year 1980-81 differently in so far as the partial partition and the income of the separated member from the property which he acquires as a result of the partial partition are concerned. On this ground also we are of the view that section 171(9) suffers from invalidity on the ground of discrimination and arbitrariness and must therefore be declared as void. We accordingly hold that section 171(9) of the Income-tax Act 1961 suffers from legislative incompetence and is also void on the ground of violation of article 14 of the Constitution of India. For the purpose of clarity we summarise our conclusions as follows (1) Section 171(9) of the Income-tax Act 1961 cannot be sustained on the ground that it is a measure to counteract the tendency to tax avoidance and it suffers from 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 provision 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 or 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 the circumstances of the case we make no order as to costs in these writ petitions.
Issues Involved:
1. Validity, scope, and interpretation of Section 171(9) of the Income-tax Act, 1961. 2. Constitutionality of Section 171(9) under Article 14 of the Constitution of India. 3. Impact of Section 171(9) on partial partitions recognized before its enactment. 4. Legislative competence to enact Section 171(9) and its alignment with charging provisions under Sections 4 and 5 of the Income-tax Act. 5. Penal implications of Section 171(9) on Hindu undivided families (HUFs). Detailed Analysis: 1. Validity, Scope, and Interpretation of Section 171(9) Section 171(9) was introduced by the Finance (No. 2) Act, 1980, to curb tax evasion through partial partitions in Hindu undivided families (HUFs). The court noted that the section provided that any partial partition after December 31, 1978, would not be recognized for tax purposes. The court highlighted that this provision was intended to prevent the creation of multiple HUFs to evade taxes. However, it was argued that the section should only apply to partitions claimed for the first time in the assessment year 1980-81, and not to those already recognized in earlier years. 2. Constitutionality of Section 171(9) under Article 14 The court found that Section 171(9) violated Article 14 of the Constitution of India due to the arbitrary fixation of December 31, 1978, as the cutoff date for recognizing partial partitions. This date created an irrational classification, treating similar partitions differently based on an arbitrary date, which lacked a rational nexus to the objective of the law. 3. Impact on Partial Partitions Recognized Before Enactment The court held that Section 171(9) should not invalidate partial partitions that were already recognized before the section came into force. It was emphasized that once a partial partition was recognized in the assessment year 1979-80, it should remain valid for subsequent years unless revoked by a competent authority. 4. Legislative Competence and Charging Provisions The court concluded that Section 171(9) entrenched upon the charging provisions of Sections 4 and 5 of the Income-tax Act, which define the scope of taxable income. By mandating the inclusion of income from partitioned properties in the HUF's income, the section effectively expanded the scope of taxable income beyond what was permissible under the charging provisions. 5. Penal Implications on HUFs The court noted that Section 171(9) imposed an unfair penal liability on HUFs for income over which they had no control. This was deemed arbitrary, as it exposed HUFs to penalties for non-disclosure of income earned by individual members from partitioned properties, over which the HUF had no oversight. Conclusion: The court declared Section 171(9) of the Income-tax Act, 1961, as unconstitutional and invalid on several grounds: 1. It could not be sustained as a measure to counteract tax avoidance. 2. It violated Article 14 due to arbitrary classification. 3. It expanded the scope of taxable income beyond the charging provisions. 4. It imposed an unfair penal liability on HUFs. Disposition of Individual Writ Petitions: - W.Ps. Nos. 992 and 993 of 1981: Allowed; notices of demand and wealth-tax assessment quashed. - W.P. No. 162 of 1983: Allowed; notices and reassessment under Section 147(b) quashed. - W.P. No. 6036 of 1983: Allowed; order rejecting the claim for partial partition quashed. - W.Ps. Nos. 904 to 906 of 1984: Allowed; notices for rectification under Section 154 quashed. - W.Ps. Nos. 994, 995, and 5430 of 1984: Allowed; notices under Section 147(b) and assessment proceedings quashed. - W.P. No. 6162 of 1984: Allowed; assessment order quashed. - W.P. No. 9283 of 1984: Allowed; declaration granted that Section 171(9) is unconstitutional. No order as to costs was made in these writ petitions.
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