2005 (4) TMI 16 - HC - Income Tax

Whether, on the facts and in the circumstances of the case and in law, the Tribunal was right in upholding the order of the Commissioner of Income-tax (Appeals) directing the Assessing Officer to work out the capital gains on 2/3rds of the sale consideration of Rs. 64,80,000 amounting to Rs. 43,20,000? - we are unable to agree with the order of the Tribunal that there is a deemed partition and disruption of the Hindu undivided family as per Explanation 1 to section 6 of the Hindu Succession Act and the share of the deceased karta is liable to be excluded for the purposes of computation of income under the head Capital gains - we answer the above question referred to us in the negative, i.e., in favour of the Revenue and against the assessee

Issues Involved:
1. Whether the Tribunal was correct in upholding the Commissioner of Income-tax (Appeals) order directing the Assessing Officer to compute capital gains on 2/3rds of the sale consideration.
2. Interpretation and application of Section 6 of the Hindu Succession Act in the context of Hindu undivided family (HUF) property and capital gains tax.

Issue-wise Detailed Analysis:

1. Tribunal's Decision on Capital Gains Calculation:
The Tribunal upheld the Commissioner of Income-tax (Appeals) order which directed the Assessing Officer to compute the capital gains based on 2/3rds of the sale consideration of Rs. 64,80,000, amounting to Rs. 43,20,000. This decision was based on the premise that after the death of the karta, Dharam Pal Singh, his 1/3rd share in the HUF property should be excluded from the capital gains calculation.

2. Interpretation of Section 6 of the Hindu Succession Act:
Section 6 of the Hindu Succession Act deals with the devolution of interest in coparcenary property. It states that upon the death of a male Hindu, his interest in the Mitakshara coparcenary property devolves by survivorship to the surviving members, unless there are female relatives specified in Class I of the Schedule or male relatives claiming through such female relatives. In such cases, the interest devolves by testamentary or intestate succession under the Hindu Succession Act and not by survivorship.

Explanation 1 to Section 6:
Explanation 1 to Section 6 provides that the interest of a Hindu Mitakshara coparcener shall be deemed to be the share that would have been allotted to him if a partition had taken place immediately before his death. The assessee argued that this deemed partition should exclude the deceased karta's 1/3rd share from the capital gains computation.

Supreme Court Precedents:
The Supreme Court in Gurupad Khandappa Magdum v. Hirabai Khandappa Magdum interpreted Section 6 and its Explanation to ascertain the share of the deceased's widow in the coparcenary property. The Court held that the fiction of partition created by Explanation 1 must be given full effect, meaning that the share of the deceased must be considered as if a partition had occurred immediately before his death. However, this case was primarily concerned with determining the widow's share and not with the disruption of the HUF status.

Subsequent Supreme Court Ruling:
In State of Maharashtra v. Narayan Rao Sham Rao Deshmukh, the Supreme Court clarified that the judgment in Gurupad Khandappa Magdum does not imply an automatic partition of the HUF property upon the death of a coparcener. It emphasized that a female heir inheriting an interest does not cease to be a member of the family unless she explicitly expresses her intention to separate.

Physical Division Requirement Under Income-tax Act:
The Supreme Court in Kalloomal Tapeswari Prasad (HUF) v. CIT held that for a partition to be recognized under Section 171 of the Income-tax Act, there must be a physical division of the property. Mere severance of status under Hindu law is insufficient. In the present case, there was no evidence of physical partition or severance of status after the karta's death. The sale deed was executed by the son on behalf of the HUF, indicating no partition had occurred.

Conclusion:
The High Court concluded that there was no deemed partition or disruption of the HUF upon the karta's death. The share of the deceased karta should not be excluded from the capital gains computation. The Tribunal's order was not approved, and the question was answered in the negative, in favor of the Revenue and against the assessee. There was no order as to costs.

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