1940 (10) TMI 1 - HC - Wealth-tax

Declaration notice under section 20(2) by WTO - severance of the status of a Hindu Undivided Family before the valuation date, eventhough there was no division

Issues Involved:
1. Validity of the notice issued under section 17 read with section 14(2) of the Wealth-tax Act, 1957, and the assessment made in accordance thereto.
2. Applicability of section 20 of the Wealth-tax Act, 1957, and the direction to re-do the assessment.

Detailed Analysis:

Issue 1: Validity of the Notice and Assessment
The primary question was whether the notice issued under section 17, read with section 14(2) of the Wealth-tax Act, 1957, and the subsequent assessment were valid. The assessee was assessed for wealth-tax in the status of a Hindu undivided family (HUF) for the assessment year 1957-58. The assessee contended that there was no HUF on the relevant valuation date due to a severance of status among the family members, which allegedly occurred two years prior. The Wealth-tax Officer rejected this claim and computed the net wealth of the assessee at Rs. 28,09,291.

Upon appeal, the Appellate Assistant Commissioner and the Tribunal upheld the Wealth-tax Officer's decision but noted that an order under section 20(2) was necessary before proceeding with the assessment. The High Court examined the relevant provisions of the Wealth-tax Act, particularly sections 3, 14, 17, and 20. Section 3 is the charging section, and section 14 deals with the return of wealth. Section 17 allows the Wealth-tax Officer to issue a notice if there is reason to believe that wealth chargeable to tax has escaped assessment.

The court concluded that the notice issued under section 17 read with section 14(2) was valid. The Wealth-tax Officer had reason to believe that the net wealth chargeable to tax had escaped assessment due to the assessee's failure to file a return. Therefore, the assessment made in pursuance thereof was also valid.

Issue 2: Applicability of Section 20 and Direction to Re-do Assessment
The second issue was whether the provisions of section 20 were rightly attracted and whether the direction to re-do the assessment was in accordance with the same. Section 20 deals with the assessment of HUFs after partition. It requires the Wealth-tax Officer to conduct an inquiry if it is brought to his notice that a partition has taken place among the members of an HUF. If satisfied that the joint family property has been partitioned as a whole in definite portions, the officer must record an order to that effect and proceed with the assessment.

The court noted that section 20 is in pari materia with section 25A of the Indian Income-tax Act, 1922, but with some differences. The court disagreed with the Calcutta High Court's interpretation in Srilal Bagri v. Commissioner of Wealth-tax, which held that section 20 is merely a machinery section and does not empower the assessment of an HUF that ceased to exist prior to the valuation date.

The High Court emphasized that the Wealth-tax Officer must be satisfied that there has been a physical partition by metes and bounds. If not satisfied, the officer must declare that the family shall continue to be assessed as an HUF under section 20(2). This declaration affects the assessment under section 5(1)(ii) as well, meaning the individual members' interests in the coparcenary property are excluded from their net wealth.

The court concluded that the provisions of section 20 were rightly attracted in this case. The Appellate Assistant Commissioner correctly directed the Wealth-tax Officer to pass an order under section 20(2) before proceeding with the assessment. Therefore, the direction to re-do the assessment was in accordance with section 20(2).

Conclusion:
- Question 1: Answered in the affirmative. The notice issued under section 17 read with section 14(2) and the assessment made were valid.
- Question 2: Answered in the affirmative. The provisions of section 20 were rightly attracted, and the direction to re-do the assessment was in accordance with section 20(2).

The assessee was ordered to pay the costs of the reference to the Commissioner of Wealth-tax. Additionally, a certificate was granted for appeal to the Supreme Court under section 29(1) of the Wealth-tax Act, considering the differing interpretation by the Calcutta High Court.