Facts: The assessee is a Karta of a HUF with his wife, minor son and minor daughter as co-parceners. The HUF’s funds were invested in a partnership firm in which it was a partner. A partial partition of certain assets belonging to the HUF was effected on 13-04-1979 by executing a deed of partition. An application under section 171(2) of the Act was filed with the AO for recognizing the partial partition and an order was passed by the AO on 28-12-1979 recognizing the partial partition. Subsequently, a return of income of the HUF for  AY 1980-81 was filed on 12-04-1980 without including the income from the property which was subject matter of the partial partition as the income derived from those assets was declared by the individuals in their respective returns. These returns as well as wealth tax returns were accepted by the AO and the assessment was finalised.

Thereafter, assessee received a notice under section 148 of the Act on 04-03-1983 seeking to reopen the assessment for AY 1980-81. The assessee objected to the reopening by contending that order under section 171 of the Act which recognised the partition had not been cancelled or revoked but in fact continued to be effective and hence no income from the partitioned properties could be assessed in the hands of the assessee-HUF. These objections were rejected by the AO and a fresh assessment order was passed including the income relating to assets which were partially partitioned which belonged to the individual members of the HUF.

The reassessment proceedings were challenged by way of a writ petition in the High Court . The High Court struck down the provisions of section 171(9) of the Act as it suffered from legislative incompetence and also violated Article 14 of the Constitution of India. 

Issue: Whether section 171(9) of the Act suffers from legislative incompetence and is in violation of Article 14 of the Constitution of India. Further, whether section 171(9) of the Act entrenches upon the charging provisions of section 4 and 5 of the Act, thereby enlarging the scope of section 4 and 5 of the Act?

Views: The decision of Balaji v. ITO [1961] 43 ITR 393 (SC) held that entries in the Lists are not powers but are only fields of Legislation and Entry 82 can sustain law made to prevent the evasion of tax. The Court dealt with the validity of section 16(3)(a)(i)/(ii) of the 1922 Act and held that the provisions were enacted for preventing evasion of tax and was well within the competence of Federal Legislature. Further, the decision of Sardar Baldev Singh v. CIT [1960] 40 ITR 605 (SC) held that Entry 54 of the Government of India Act, 1935 should be read not only as authorising the imposition of a tax but also as authorising an enactment which prevents the tax imposed being evaded.

Further, the Supreme Court  in ITO v. Smt. N.K. Sarada Thampatty  (1991) 187 ITR 696)(SC) held that considering the factum of partition for the purpose of amendment, it is not permissible to ignore the special meaning assigned to ‘partition’ under the Explanation to section 171 even if the partition is to be effected by a decree of the Court. The Legislature has assigned special meaning to the word ‘partition’ under the Explanation which is different from general principles of Hindu Law and it contains the deeming provision under which partition of the property of the HUF could be accepted.

Held: The Honourable Supreme Court referred to the provisions of section 171(9) of the Act and held that the language of the section was clear. The Act recognised the concept of partial partition of a HUF but after the amendment partial partitions taking place after 31-12-1978 were not to be recognised. Further, no claims of such partial partition were to be enquired into and no findings were to be recorded by the AO of such partial partition. Where, an inquiry is complete and a finding is given, the same would be treated as null and void. Hence, in this case where the partial partition took place on 13-4-1979 i.e. after the cut off date, the AO is not required to inquire into / record his findings and even if inquired into, such findings would be null and void. The assessee-HUF should be assessed as if no partial partition had taken place.

Further, the Supreme Court held that the amendment to section 171 of the Act is not beyond the legislative competence of the Parliament. The Constitution of India empowers the Parliament to enact the legislation for imposition of taxes on income other than agricultural income. Thus, the Parliament has the authority to delete or amend any provision of the Act. The Supreme Court also noted that the concept of partial partition of a HUF was not recognised under the 1922 Act and was recognised only under the 1961 Act. Thus, the amendment seeks to restore the ‘status quo ante’ that prevailed prior to 1961 Act. Further, it is for the legislature to decide whether the recognition of a partial partition should continue or not, because if it leads to abuse of the provision or inconvenience the legislature is entitled to amend or delete such a provision.

As regards the contention of whether the provisions of section 171 of the Act was violative of Article 14, the Supreme Court observed that two distinct classes were created where partial partition had taken place prior to the cut off date and another after the cut off date. The benefit given to assessee’s who partially partitioned their property prior to cut off date is not withdrawn and assessee’s who partitioned their property after cut off date would not get the same benefit. The Supreme Court held that this cannot be the ground for holding that the provision was violative of Article 14. Further, the Supreme Court held that it was settled law that differentiation is not always discriminatory and does not violate principles of Article 14. Further, the Supreme Court held that the cut off date of 31-12-1978 cannot be said to be arbitrary. The choice of a date as a basis for classification cannot be dubbed as arbitrary unless it is shown to be capricious or whimsical. Since, the assessee was not in a position to point out any reason for holding the said date as capricious or whimsical, the SC held that the finding given by the High Court  of there being no valid basis of justification for treating HUF separately in a hostile manner with reference to the date of 31-12-1978 is erroneous.

The Supreme Court analysed the reasoning of the High Court order pertaining to enlarging the charging provisions of section 4 and 5 of the Act where the provisions of section 171 purports to charge income which does not belong to the HUF to be assessed in its hands. The Supreme Court held that section 4 and 5 must be read with the definition of person in section 2(31) of the Act. The word “person” is given the meaning in section 2(31) of the Act which, inter alia, includes a HUF. It is open to the Legislature to give a different meaning to the word ‘person’ for the purpose of the Act which may or may not include HUF or such other legal entities. In such a situation, it is open to the HUF to take the benefit of the Act as available or to partition the family as a whole. Even prior to the amendment, all partial partitions were not recognised under the Act. Only partial partitions which were in accordance with the Explanation were recognised.

Further, the legislature has assigned a special meaning to the word ‘partition’ which is different from the general principles of Hindu Law and it contained the deeming provision under which partition of the property of the HUF could be accepted. Hence, it cannot be held that section 171(9) of the Act enlarges the scope of section 4 and 5 of the Act and it is not beyond legislative competence.           

Hence, the Supreme Court held that it is for the legislature to recognise or not to recognise partial partition of HUF property for the purpose of levy and collection of tax. Further, hardship is totally irrelevant for deciding legislative competence. Thus, the Supreme Court  quashed and set aside the High Court  order treating section 171(9) of the Act and section 20A of Wealth-tax Act as unconstitutional.  (AY.1980 -81)  ( CA Nos .1612 of 1988 , 2618 of 1994 , 5743 of 1994  and ors  27 -7 1999)

Editorial: Decision of Madras High Court  in M.V. Vallippan v. ITO [1988] 170 ITR 238 (Mad) (HC)  and of Karnataka High Court  reversed. Refer, UOI v. Nitdip Textile Processors (P.) Ltd [2011] 245 CTR 241 (SC)

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