1965 (8) TMI 4 - HC - Income Tax

Receipts - Capital nature or revenue nature - when after the disruption of the joint status of the Hindu family, interest accrued on a principal amount which had belonged to the erstwhile coparcenary, each member of the tenancy-in-common has a distinct interest not merely in the principal but also in the interest and such a member can enforce his right to a share in the specific fund, either principal or interest.

Issues Involved:
1. Nature of the receipt: Capital or Revenue
2. Impact of joint family status and subsequent disruption on the nature of the receipt

Detailed Analysis:

1. Nature of the Receipt: Capital or Revenue
The primary issue was whether a certain receipt included in the taxable income for the assessment year 1958-59 was of a capital or revenue nature. The Tribunal had held that the receipt was of a capital nature, differing from the view of the Income-tax Officer and the Appellate Assistant Commissioner of Income-tax. The Tribunal's decision was based on two primary grounds:
- There was no allocation of the receipt to any of the sharers.
- The entire receipt, without any allocation as principal or interest, was credited to one account in the books of the estate.

The Tribunal concluded that when the estate was divided on February 17, 1947, the sharers divided the fund as capital. Thus, whatever the character of the amount might have been before partition, it was treated as capital at the time of division.

2. Impact of Joint Family Status and Subsequent Disruption on the Nature of the Receipt
The court examined whether the joint family status and its subsequent disruption affected the nature of the receipt. The revenue argued that at the time the estate duties were paid, there was no joint family, and when the refunds, including the interest, were received, the joint family had ceased to exist. The source of the interest was the decree, and the receipt of interest had no existence independent of it.

The court noted that in the case of *Ramanathan Chettiar v. Commissioner of Income-tax*, it was held that interest awarded for the wrongful collection of estate duties was income chargeable to tax. However, the court also considered the principle laid down in *Veerappa Chettiar v. Commissioner of Income-tax*, which stated that when an estate belonging to a joint Hindu family is divided, irrespective of the character of a particular property or fund before division, it would only be capital in the hands of the sharer.

The court found that the funds for payment of the estate duties should be regarded as having come from joint family funds by virtue of the doctrine of relation back with reference to the adoption of the three sons in June 1945. Therefore, the principle of *Veerappa Chettiar v. Commissioner of Income-tax* would apply, and when the interest was divided between the sharers, they would take their respective shares only as capital.

However, the court also acknowledged that there was a disruption in the status of the family on February 17, 1947, due to a compromise between the three widows. This disruption changed the character of the common estate from coparcenary to tenancy-in-common. As a result, the peculiar incidents of coparcenary property no longer governed its character on division. Each member of the tenancy-in-common had a distinct interest in the common estate, including both principal and interest.

The court concluded that the receipt, to the extent it related to a period prior to February 17, 1947, should be regarded as capital, and to the extent it related to a period subsequent to that date, should be regarded as revenue. This conclusion was in line with the court's view in *Ramanathan Chettiar v. Commissioner of Income-tax*.

Judgment:
The court partially favored both the assessee and the revenue. The receipt was to be treated as capital for the period before February 17, 1947, and as revenue for the period after that date. No order as to costs was made.

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