1965 (9) TMI 75 - HC - Income Tax

Summary

Issues Involved

1. Service of Notices under Section 13 of the Excess Profits Tax Act
2. Assessment of Excess Profits Tax on a Hindu Undivided Family (HUF) after its Disruption
3. Liability of Members of a Disrupted HUF for Debts Incurred by the HUF
4. Applicability of Section 25A of the Indian Income Tax Act to Excess Profits Tax
5. Legal Interpretation of "Debt" under Hindu Law and Tax Law

Detailed Analysis

1. Service of Notices under Section 13 of the Excess Profits Tax Act

The Tribunal submitted a case to the High Court questioning whether the business of a Hindu undivided family (HUF) on which notices under section 13 of the Excess Profits Tax Act had been served before its disruption could be subjected to excess profits tax after the disruption. The Tribunal stated that notices under section 13 were served on the karta of the HUF on June 8, 1942. The assessee contested the service of these notices, asserting that there was no finding in the Tribunal's judgments confirming the service. The High Court noted that the assessee did not press the argument regarding non-service of notices during the appeals and thus, the Tribunal could treat the service of notices as undisputed.

2. Assessment of Excess Profits Tax on a Hindu Undivided Family (HUF) after its Disruption

The core issue was whether the HUF, which was disrupted after the chargeable accounting periods but before the assessment orders were passed, could still be subjected to excess profits tax. The High Court observed that the Excess Profits Tax Act charged the tax on the business, not the individual. However, the assessment had to be done in the presence of a human being, specifically the person who carried on the business. Since the HUF ceased to exist after its disruption, there was no entity on whom the assessment orders could be passed.

3. Liability of Members of a Disrupted HUF for Debts Incurred by the HUF

Under Hindu law, when a HUF is disrupted, the members remain liable for the debts incurred by the HUF to the extent of the assets received by them. However, the High Court concluded that there was no debt due from the HUF before its disruption. The Excess Profits Tax Act did not impose any liability on the members of the disrupted HUF for the excess profits tax that was chargeable on the business carried on by the HUF.

4. Applicability of Section 25A of the Indian Income Tax Act to Excess Profits Tax

The High Court noted that Section 25A of the Indian Income Tax Act, which allows for the assessment of a disrupted HUF under certain conditions, was not made applicable to the Excess Profits Tax Act. Therefore, the HUF could not be assessed to excess profits tax after its disruption. The absence of a provision analogous to Section 25A in the Excess Profits Tax Act meant that there was no legal basis for assessing the disrupted HUF or its members for the excess profits tax.

5. Legal Interpretation of "Debt" under Hindu Law and Tax Law

The High Court extensively discussed the definition of "debt" and concluded that a debt must be a sum payable in respect of a liquidated demand recoverable by action. The court referred to various legal precedents to establish that a mere liability to be taxed does not amount to a debt. Since no enforceable assessment order was passed and no notice of demand was issued before the disruption of the HUF, there was no debt due from the HUF to the State on account of excess profits tax. The liability to pay the tax could only arise upon the issuance of a notice of demand following an assessment order, which did not occur before the disruption.

Conclusion

The High Court answered the question in the negative, stating that the business of a HUF on which notices under section 13 of the Excess Profits Tax Act had been served before its disruption could not be subjected to excess profits tax after the disruption. The court emphasized that there was no provision in the Excess Profits Tax Act for assessing the members of a disrupted HUF or for transferring the liability of the HUF to its members. Consequently, the assessment orders passed against the disrupted HUF were invalid.

Costs

The assessee was awarded costs of the reference, assessed at Rs. 400, to be paid by the Commissioner of Income Tax. The counsel's fee was also assessed at Rs. 400.

Judgment

The question was answered in the negative, and a copy of the order was directed to be sent to the Income Tax Appellate Tribunal as required by section 66(5) of the Income Tax Act.