2020 (3) TMI 169 - AT - Income Tax

Properties acquired by the HUF - Creation of smaller HUF - Deemed partition / Notional partition - death of a Mitakshara Coparcener - absence of partition u/s 171 of the Income Tax Act - section 6 of Hindu Succession Act - Taxability of Capital Gain - Surplus arising on sale of 3 immovable properties during the year wholly and exclusively in the hands of appellant HUF - HELD THAT - Section 6(3) of the Hindu Succession Act, 1956, as it stands post 2005 amendment, provides that where a Hindu dies after the commencement of the Hindu Succession (Amendment) Act, 2005, his interest in the property of a Joint Hindu family governed by the Mitakshara law, shall devolve by testamentary or intestate succession, as the case may be, under this Act and not by survivorship, and the coparcenary property shall be deemed to have been divided as if a partition had taken place .On the death of Shodhan Sr, who admittedly died intestate inasmuch as he did not make a will before his death, his HUF property is to devolve by intestate succession rather than survivorship of the HUF coparceners. It is also important to note that, for the purpose of devolution of property, a notional partition is to take place. When we assume that fiction, and considering that only Shodhan Sr and Shodhan Jr were coparceners in that HUF, the division of shares has to be one half to each- i.e. Shodhan Sr and Shodhan Jr. As for the share of the Shodhan Sr, that is what would go to Shodhan Jr, and as for the share of Shodhan Jr, that is what would constitute HUF nucleus for the smaller HUF of Shodhan Jr. In effect, thus, the son's share in the HUF will become property of the son's HUF, and the father's share will come to son in his individual capacity. The plea of the assessee thus indeed seems correct. As rightly contended by the learned senior counsel for the assessee, if one is to proceed on the basis that no partial partition of the HUF of Shodhan Sr has taken place as no order under section 171 is passed, the entire gains should have been assessed in the hands of that HUF of Shodhan Sr. AO however, proceeded to tax entire capital gain in the hands of the assesseen of the assessee before us i.e. HUF of Shodhan Jr. That course of action, in our humble understanding, is not permissible in law inasmuch as on one hand the AO proceeds on the basis that the larger HUF has come to an end on the death of Shodhan Sr, and, on the other hand, he also proceeds on the basis that entire assets of HUF of Shodhan Sr have also passed on to the HUF of Shodhan Jr. Once the assets of larger HUF are to go to small HUF, that can only be done only so far as of such assets are concerned. The other of the assets of HUF Sr have to essentially go to Shodhan Jr, in individual capacity, as he was the only class I heir to his father, i.e. Shodhan Sr. The stand of the Assessing Officer, which has met approval of the learned CIT (A) as well, cannot, therefore, meet our judicial approval. We uphold the plea of the assessee that the assessee HUF, at best, is taxable only in respect of of the properties acquired by the HUF headed by Shodhan Sr.

Issues Involved:
1. Taxation of surplus arising from the sale of immovable properties.
2. Continuation of HUF in the absence of a partition finding under section 171.
3. Taxation of capital gains in light of the amendment to section 6 of the Hindu Succession Act.
4. Consideration of income and interest earned on the individual share.
5. Exemption under sections 54 and 54EC for investments made out of the surplus.
6. Levy of interest under sections 234A, 234B, and 234C.
7. Initiation of penalty proceedings under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Taxation of Surplus on Sale of Properties:
The appellant contested the CIT (A)'s decision to tax the entire surplus from the sale of three immovable properties in the hands of the HUF. The appellant argued that, per the amendment to the Hindu Succession Act effective from 2005, a deemed partition entitles the HUF to only 1/2 share of the gain. The Tribunal found merit in the appellant's argument, noting that upon the death of Shodhan Sr, intestate succession should apply, resulting in a notional partition where 1/2 of the property would pass to Shodhan Jr in his individual capacity, and the other 1/2 would remain with the HUF.

2. Continuation of HUF in Absence of Partition Finding:
The CIT (A) upheld the AO's view that an HUF continues unless a finding of partition is recorded under section 171 of the Income-tax Act. The Tribunal acknowledged this legal position but emphasized that the notional partition under the Hindu Succession Act should still be recognized for determining the shares of the properties.

3. Taxation of Capital Gains:
The appellant argued that the amendment to section 6 of the Hindu Succession Act, which mandates a notional partition upon the death of a coparcener, should be considered. The Tribunal agreed, stating that 1/2 of the capital gains should be taxed in the hands of the HUF and the other 1/2 in the individual capacity of Shodhan Jr.

4. Consideration of Income and Interest Earned:
The appellant contended that the addition of ?34,650, interest of ?1,63,141, and long-term capital gain of ?2,97,99,988 pertaining to the individual share should not be sustained in the hands of the HUF. The Tribunal found that the AO's decision to tax the entire gain in the hands of the HUF contradicted the legal position of notional partition.

5. Exemption under Sections 54 and 54EC:
The appellant sought exemption under sections 54 and 54EC for investments made out of the 1/2 share of the surplus if the gain is fully assessed in the hands of the HUF. The Tribunal did not need to adjudicate this alternative plea as it upheld the main plea regarding the division of capital gains.

6. Levy of Interest under Sections 234A, 234B, and 234C:
The appellant argued against the levy of interest under sections 234A, 234B, and 234C. The Tribunal did not explicitly address this issue in the judgment, as the main plea regarding the division of capital gains was upheld.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant contested the initiation of penalty proceedings under section 271(1)(c). The Tribunal did not specifically address this issue, focusing instead on the main plea regarding the division of capital gains.

Conclusion:
The Tribunal upheld the appellant's plea that the HUF should be taxed only on 1/2 of the properties acquired by the HUF headed by Shodhan Sr, with the remaining 1/2 taxed in the individual capacity of Shodhan Jr. Consequently, the appeal was allowed in these terms, and the alternative grounds were dismissed as infructuous and academic.

Judgment Delivered:
The Tribunal pronounced the judgment in the open court on the 24th day of September, 2019.

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