1967 (7) TMI 13 - HC - Income Tax

HUF - partition - penalty - Whether the imposition of penalty under s. 28(1)(c) on Feb. 13, 1959, is bad in law as the assessee HUF had already disrupted on March 31, 1956 - Held, yes

Summary

Issues Involved:
1. Imposition of penalty under section 28(1)(c) of the Indian Income-tax Act, 1922.
2. Disruption of Hindu Undivided Family (HUF) and its effect on penalty proceedings.
3. Interpretation of section 25A(3) of the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Imposition of Penalty under Section 28(1)(c) of the Indian Income-tax Act, 1922
The core issue revolves around the imposition of a penalty on the assessee under section 28(1)(c) for concealing income or furnishing inaccurate particulars. The penalty was imposed by the Income-tax Officer on November 26, 1958, following a notice issued on October 1, 1958. The relevant part of section 28(1)(c) states: "If the Income-tax Officer...is satisfied that any person...has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, he or it may direct that such person shall pay by way of penalty...". The provision requires two conditions: the existence of a person who has concealed income and that such person is given a reasonable opportunity to be heard.

2. Disruption of Hindu Undivided Family (HUF) and Its Effect on Penalty Proceedings
The assessee, a Hindu Undivided Family (HUF), claimed disruption on March 31, 1956, supported by a registered partition deed dated December 1, 1956. An application under section 25A was filed on March 13, 1957, and the Income-tax Officer eventually accepted the partition on January 29, 1960, with effect from March 31, 1956. The key issue here is whether the penalty imposed before the acceptance of the partition is valid. The court noted that a HUF is treated as a separate legal entity distinct from its members, and its existence ends upon disruption. Consequently, no penalty proceedings can be initiated against a dissolved HUF unless section 25A(3) applies.

3. Interpretation of Section 25A(3) of the Indian Income-tax Act, 1922
Section 25A(3) states: "Where such an order has not been passed in respect of a Hindu family hitherto assessed as undivided, such family shall be deemed, for the purposes of this Act, to continue to be a Hindu undivided family." The court interpreted this to mean that a HUF continues to be assessed as such until an order under section 25A(1) is passed. The Tribunal had argued that since the penalty was imposed before the order under section 25A(1), the penalty was valid. However, the court found that the order under section 25A(1) related back to the date of disruption (March 31, 1956), making the penalty imposed on November 26, 1958, invalid as the HUF had ceased to exist.

The court referred to several precedents, including Commissioner of Income-tax v. Sanichar Sah Bhim Sah, Mahankali Subba Rao v. Commissioner of Income-tax, and S. A. Raju Chettiar v. Collector of Madras, to support its interpretation. It concluded that the word "where" in section 25A(3) should be interpreted as "cases in which" and not "until," meaning that once an order under section 25A(1) is passed, it takes effect from the date specified in the order, which in this case was March 31, 1956.

Conclusion:
The court answered the question in the affirmative, ruling in favor of the assessee. The imposition of the penalty under section 28(1)(c) was deemed invalid as the HUF had already disrupted on March 31, 1956, and the order under section 25A(1) confirmed this disruption. The parties were left to bear their own costs.