2009 (1) TMI 263 - HC - Income Tax

Hindu Undivided Family Partition Partial Partition - for the applicability of Section 171(9), two pre-requisites are essential. Firstly, the partial partition should have taken place after 31.12.19978. And secondly, such partial partition must have taken place in a Hindu Undivided Family which hitherto before was assessed as a Hindu Undivided Family. It is not a matter of dispute, that the appellant-assessee had not been assessed as a Hindu Undivided Family ever before the Assessment Year in question, namely 1997-98. We are, therefore, of the firm view, that the second essential ingredient for the applicability of Section 171(9) cannot be treated to have been fulfilled in the facts and circumstances of the present case. As such we are of the view that Section 171(9) would be clearly inapplicable to the facts of the present case - , the action of the authorities below in invoking the provision of Section 171, when the appellant was never assessed before the issuance of notice under Section 148 of the Act on 14.3.2002 for assessment year 1997-98, illegal and not sustainable

Summary

Issues Involved
1. Validity of assessment under Section 171 of the Income Tax Act, 1961.
2. Applicability of sub-section (9) of Section 171 to the facts of the case.
3. Impact of the alleged partial partition on the assessment of the Hindu Undivided Family (HUF).

Detailed Analysis

Issue 1: Validity of Assessment under Section 171 of the Income Tax Act, 1961
The core issue revolves around whether the appellant could be assessed as a Hindu Undivided Family (HUF) under Section 171 of the Income Tax Act, 1961. The appellant argued that a partial partition had occurred on 30.04.1978, dividing both movable and immovable assets among the coparceners, thus negating the possibility of assessing the appellant as an HUF. The court noted that Section 171(1) mandates that a Hindu family must have been assessed as undivided before a partition can be recognized for tax purposes. It was undisputed that the appellant had never been assessed as an HUF before the Assessment Year 1997-98. Therefore, the court concluded that the prerequisites for applying Section 171 were not met, rendering the assessment by the Income Tax Officer on 6.03.2003 invalid.

Issue 2: Applicability of Sub-section (9) of Section 171
The Revenue relied on sub-section (9) of Section 171 to argue that the partial partition should not be recognized for tax purposes. Sub-section (9) states that any partial partition after 31.12.1978 is not valid for tax assessment purposes. The court examined whether this sub-section applied to the case at hand. Two conditions must be satisfied for sub-section (9) to apply: the partial partition must occur after 31.12.1978, and the family must have been previously assessed as an HUF. The court found that while the alleged partition occurred after the specified date, the appellant had never been assessed as an HUF before the Assessment Year 1997-98. Therefore, sub-section (9) was deemed inapplicable.

Issue 3: Impact of the Alleged Partial Partition
The court also considered the factual background, noting that the property in question was sold, and the proceeds were invested in Fixed Deposit Receipts in the name of the HUF. These receipts matured on 8.09.1996, and the proceeds were allegedly apportioned among the family members. The Revenue contended that the partition should be deemed to have occurred on 8.09.1996, not on 30.04.1978. However, the court emphasized that even if the partial partition were recognized, Section 171 would only apply if the family had been previously assessed as an HUF. Given that this condition was not met, the court ruled that the assessment could not stand.

Conclusion
The court answered the substantial question of law in favor of the appellant, stating that the authorities could not invoke Section 171 when the appellant had never been assessed as an HUF before the issuance of the notice under Section 148 on 14.3.2002 for the Assessment Year 1997-98. Consequently, the appeal was allowed, and the order passed by the Income Tax Appellate Tribunal on 10.6.2005 was set aside.