1967 (9) TMI 8 - HC - Income Tax

Whether the HUF consisting of R and her adopted son, is liable to be taxed on the income from the 1/2 share of the property or only on the income of the 1/4 share therein - held that HUF is liable to be taxed on the income from the i/4th share of the income from the property

Summary

Issues Involved:
1. Validity of post-adoption agreement
2. Tax liability of Hindu undivided family (HUF) on income from property

Detailed Analysis:

Validity of Post-Adoption Agreement
The primary issue was whether the agreement dated 25th February 1955, executed after the adoption of Ranjitsinh, was valid. The Income-tax Officer and the Appellate Assistant Commissioner both rejected the claim that one-fourth share of the property should not be assessed in the hands of the HUF, arguing that the agreement was invalid because it was made after the adoption, thus not binding on the adopted son. The Tribunal, however, held that the agreements were bona fide arrangements and should be effective, excluding one-fourth share of the property from the joint family income.

The court noted that the document dated 25th February 1955 referred to an agreement related to the adoption, suggesting it was intended to be effective from the date of adoption. Despite the Tribunal's finding that no agreement existed until 25th February 1955, the court emphasized that the rights of the adopted son could not be curtailed by an agreement made after adoption unless the adopted son, upon attaining majority, chose to ratify it.

Ranjitsinh, upon attaining majority, executed a document on 18th January 1957, confirming and ratifying the earlier agreement. This ratification was considered voluntary, and thus, the second document had a proper and legal effect. The court concluded that the agreement dated 18th January 1957 was valid and effective as it was executed by Ranjitsinh of his own volition.

Tax Liability of Hindu Undivided Family (HUF) on Income from Property
The second issue was whether the HUF, consisting of Ratanbai and her adopted son Ranjitsinh, was liable to be taxed on the income from the entire one-half share of the property called Kastoorchand Mills Estate or only on the income of the one-fourth share.

The Tribunal had held that the agreements effectively removed one-fourth share of the property from the joint family assets during Ratanbai's lifetime, thus, the income from this one-fourth share should not be assessed in the hands of the HUF. The court agreed with this view, stating that there was no partial partition, but the property had effectively gone out of the joint family fold to the extent of one-fourth share due to the bona fide arrangements.

The court concluded that the HUF is liable to be taxed only on the income from the one-fourth share of the property and not on the entire one-half share. This decision was based on the valid and effective agreement ratified by Ranjitsinh upon attaining majority.

Conclusion
The court held that the HUF is liable to be taxed on the income from only the one-fourth share of the property called Kastoorchand Mills Estate. The agreement dated 18th January 1957, executed by Ranjitsinh, was valid and effective, thus excluding the one-fourth share from the joint family income. The Commissioner was ordered to pay the costs of the assessee.