2021 (9) TMI 987 - AT - Income Tax

Validity of the order of assessment passed in the status of an HUF - assessment in the hands of the non exisiting HUF - whether assessment can be made in the case of disrupted HUF when the HUF ceased to exist on the date when the order of assessment is made? - whether an HUF which was not hitherto assessed in the status of a HUF, can be assessed by taking recourse to Sec.171? - HELD THAT - The words 'hitherto assessed as undivided' u/s 171(1) are very important while considering the section. If the family has already been assessed as a Hindu family, then, under the above provision, it shall be deemed to continue to be undivided family. In the instant case, prior to the assessment year 2002-03, the assessee-family was not assessed as a HUF. Hence, on 30.11.2006, when the assessment was made, the HUF was not in existence. In such a case, the procedure prescribed under Section 171 will have no application as the assessee was not hitherto assessed as HUF and so, the fiction created under that section to deem it as HUF will not arise. Where a claim was made on the basis of statute, viz., the provisions of Section 14(1) or Section 6 of the Hindu Succession Act, 1956, insofar as income tax law is concerned the matter has to be governed by Section 171(1) of the Act. The aforesaid decision is on completely different facts and not applicable to the present case in which the HUF was never assessed to tax prior to its disruption and hence provisions of Sec.171 of the Act are not attracted at all. The decision in the case of Thimmaiah 1964 (11) TMI 12 - SUPREME COURT is on a different point as to whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer, while passing the order under section 155 of the Act, was not justified in treating the share income of profit from the partnership firms as unearned. The same is of no relevance to the present case. The decision in the case of Narendra Kumar J. Modi 1976 (8) TMI 1 - SUPREME COURT is a case where there was a challenge to an order passed under Sec.25A (3) of the Income Tax Act, 1922. The Hon ble Supreme Court held that Sub section (3) of s. 25A provides that where an order accepting partition had not been passed in respect of a Hindu Undivided Family assessed as undivided, such family shall be deemed for the purposes of the Act to continue to be Hindu Undivided Family. It was further held that a junior member of the family can, with the consent of all the other members act as a karta, if the senior member gives up his right. The aforesaid decision has no application to the facts of the present case. We allow the appeal of the Assessee and hold that the assessment in the hands of the HUF is liable to be held as invalid and consequently annulled. In view of the above conclusion the other grounds of appeal are not taken up for consideration. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of assessment on a Hindu Undivided Family (HUF) that has been disrupted.
2. Applicability of Section 171 of the Income Tax Act, 1961, to a HUF not previously assessed as such.
3. Protective assessment and its implications.

Detailed Analysis:

1. Validity of Assessment on a Disrupted HUF:
The primary issue was whether an assessment could be made on a HUF that had been disrupted before the assessment order was passed. The assessee contended that the joint family was partitioned on 14.01.2005, and thus, the HUF ceased to exist on the date of the assessment order (30.11.2006). The Tribunal referred to the Karnataka High Court's decision in CIT Vs. Lakanna & Sons, which stated, "no assessment can be made on a HUF if at the time of assessment, it has become divided because at that point of time, there could be no undivided family in existence which could be taxed." Consequently, the Tribunal held that since the HUF was not in existence on the date of assessment, the assessment was invalid.

2. Applicability of Section 171 of the Income Tax Act, 1961:
The Tribunal examined whether Section 171, which deals with the assessment after partition of a HUF, applied to this case. Section 171(1) states, "A Hindu family hitherto assessed as undivided shall be deemed for the purposes of this Act to continue to be a Hindu undivided family except where and insofar as a finding of partition has been given under this section in respect of the Hindu undivided family." The Tribunal noted that the assessee HUF had never been assessed as a HUF before, and thus, the provisions of Section 171 did not apply. The Tribunal cited various judicial pronouncements supporting the view that Section 171 applies only to families previously assessed as undivided.

3. Protective Assessment and Its Implications:
The AO had made a protective assessment in the status of HUF to safeguard the revenue's interest, pending the finalization of the issue by the High Court. The CIT(A) upheld this action, noting that the Karnataka High Court had held the properties in question were joint family properties and the income therefrom should be assessed in the hands of the HUF, not the individual. However, the Tribunal found that the CIT(A) did not fully substantiate the partition facts and doubted the disruption of the HUF. The Tribunal emphasized that the CIT(A) had not given any findings on the partition and that the High Court's decision did not address the disruption of the HUF but only the nature of the properties and income assessment.

Conclusion:
The Tribunal concluded that the assessment made on 30.11.2006 on the assessee as HUF was invalid since the HUF was not in existence at that time. The provisions of Section 171 did not apply as the HUF had never been previously assessed as such. Consequently, the Tribunal annulled the assessment in the hands of the HUF and allowed the appeal of the assessee. The other grounds of appeal were not considered due to the annulment of the assessment.

Pronouncement:
The appeal of the assessee was allowed, and the assessment in the hands of the HUF was annulled.