1972 (8) TMI 15 - HC - Income Tax

Undisclosed income of the HUF - penalty order passed on the date of division of the family whereas order under section 25A(3) was passed subsequently

Summary

Issues Involved:
1. Validity of penalty imposed under section 28(1)(c) of the Indian Income-tax Act, 1922, on a Hindu undivided family (HUF) after its partition.
2. Applicability of section 25A(3) of the Indian Income-tax Act, 1922, in penalty proceedings.

Issue-wise Detailed Analysis:

1. Validity of Penalty Imposed Under Section 28(1)(c) on HUF After Partition:
The core issue revolves around whether a penalty imposed on a Hindu undivided family (HUF) under section 28(1)(c) of the Indian Income-tax Act, 1922, remains valid if the family had already been partitioned before the penalty order was passed. The Tribunal had upheld the assessee's contention that no penalty could be imposed on a non-existent entity, as the HUF had been partitioned on May 6, 1958, and the penalty order was passed on August 22, 1963. The Tribunal's decision was challenged by the Commissioner of Income-tax, who argued that since no order under section 25A(1) had been passed at the time of the penalty order, the penalty was justified.

2. Applicability of Section 25A(3) in Penalty Proceedings:
The department's argument hinged on the legal fiction created by section 25A(3), which states that if no order under section 25A(1) has been passed, the family shall be deemed to continue as a Hindu undivided family for tax purposes. The department contended that this fiction allowed the penalty to be imposed as the appellate order recognizing the partition was passed after the penalty order.

The court examined various precedents from other High Courts, including the Patna High Court in Commissioner of Income-tax v. Sannichar Sah Bhim Sah, which held that penalty proceedings could not be sustained if the HUF did not exist at the time of the penalty order. Similar views were expressed by the Madras High Court in S. A. Raju Chettiar v. Collector of Madras and the Andhra Pradesh High Court in Mahankali Subba Rao v. Commissioner of Income-tax, among others.

The lone contrary view was from the Allahabad High Court in Commissioner of Income-tax v. Gauri Shanker Chandra Bhan, which upheld the penalty based on the fiction created by section 25A(3). However, the court found this decision unpersuasive, noting that it relied on a Supreme Court case (A. Thimmayya) that dealt with assessment proceedings, not penalty proceedings.

The court emphasized that the fiction in section 25A(3) should not be extended to penalty proceedings, as it would result in injustice. The court also noted that an appellate order recognizing partition retroactively nullifies the basis for the penalty. The court concluded that the fiction in section 25A(3) does not apply once an order under section 25A(1) has been passed, even if it is at the appellate stage.

Conclusion:
The court held that the penalty imposed on the HUF was invalid as the family had already been partitioned before the penalty order was passed. The fiction created by section 25A(3) does not apply to penalty proceedings once an order under section 25A(1) has been passed, even if it is at the appellate stage. The decision in Commissioner of Income-tax v. Gauri Shanker Chandra Bhan was not correctly decided. The question was answered in the affirmative and in favor of the assessee, with costs assessed at Rs. 200.