K. Ramesh Reddy Vs ACIT (ITAT Bangalore)
In this case 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. There is no other provision to assess the HUF after disruption. Apart from Section 171 of the Income-tax Act, 1961, and perhaps to a certain extent, Sub-section (4) of Section 170 of the Income-tax Act, 1961, there is no machinery to assess a Hindu undivided family which had disrupted and the said machinery provides only in the case of ‘families hitherto assessed as undivided’, it is difficult to find any machinery to assess a Hindu undivided family which had never been assessed before, after it had disrupted. A Hindu undivided family is a taxable entity and is a juristic person. It can only be proceeded against in the manner provided in the Act or under the general principles of the Hindu law after the disruption of the family. The general law does not provide for any machinery to determine the liability of the individual members of the undivided family before disruption. Unfortunately, the machinery provisions of Section 171 and the corresponding provisions in Section 25A are limited in scope to tax only the Hindu undivided family, which has been ‘hitherto assessed’. Undoubtedly, after Hindu undivided family had disrupted and in the view of the fact that assessment were completed after the HUF got disrupted, it must be held, therefore, that the proceedings were irregular and without jurisdiction. The following judicial pronouncements lays down the view as stated above: Roshan Di Hatti v. CIT [1968] 68 ITR 177 (SC), Rameswar Sirkar v. ITO [1973] 88 ITR 374 (Cal.), Shyam Sundar Bajaj v. ITO [1973] 89 ITR 317 (Cal.). Thus, we are of the view that the assessment made on 30.11.2006 on the assessee as HUF is not valid as on that date, the HUF was not in existence. Thus, we cancel the assessment made on the assessee in the status of HUF.
FULL TEXT OF THE ORDER OF ITAT DELHI
This is an appeal by the assessee against the Order dated 24.03.2017 of CIT(A)-4, Bengaluru, relating to Assessment Year 2002-03.
2. The assessee Sri. K.Ramesh Reddy(HUF) did not file any return of income for AY 2002-03. K.Ramesh (Individual) filed return of income for AY 2002-03. In the case of Sri K Ramesh Reddy(Indl) an assessment u/s 143(3) of the IT Act was completed on 31.3.2005. During the course of assessment proceedings in the case of K.Ramesh Reddy(Individual), the assessee took stand stating that all the income(other than the rental income derived by him from Renuka Commercial complex which is his separate property) that arose during the previous year relevant to assessment year 2002-03 belonged to his erstwhile joint family vide page 2 of written explanation dated 25.2.2005 addressed to the then AO. However the assessee has not filed the Return of income in the status of HUF for the assessment year 2002-03. Since the income chargeable to tax in the hands of the HUF has escaped assessment, the proceeding u/s 147 of the IT Act were initiated in the status of HUF by recording the reasons. Notice u/s 148 of the IT Act was issued by the then AO, Bangalore on 15.04.2005. However the assessee did not file the Return of income in the status of HUF in response to the said notice.
3. By an order dated 30.11.2006, passed u/s.143(3) read with Sec.147 of the Act, wherein the AO recorded the fact that in a reply dated 18.2.2005, K.Ramesh Reddy (Individual) has stated that except income derived from Renuka complex, the rest of the properties belong to his HUF. The portionof the reply reads as under:
“ ….All the income which is accruing to me or received by me are from out of the properties which are ancestral and they do not constitute my separate properties. Therefore, income except rent derived from a complex called Renuka complex, which was received by me by way of gift/settlement from my mother and on that count my separate property assessable in the status of (individual) are assessable in the hands of my joint family and not in my hands in “individual status”.
4. After taking note of the above, statement, the AO observed as follows:
“Keeping in view of the above statement and circumstances of the case, a protective assessment is made in the status of HUF to protect the interest of revenue.”
5. Thereafter the AO completed the Assessment and computed total income as under:
“Income from house property
Flats at KrishnaNagar Apartments as discussed Rs. 2,30,385/-
Income from Business
ij Profit on sale of 12 flats as discussed – Rs.49,21,884/-
ii] Profit on sale of sites as discussed – Rs.41,50,000/-
iii] Profit on sale of sites 44 to 37
survey no.39/2, as discussed – Rs. 2,90,000/- Rs.93,61,884/-
Income from long term capital gains
Long term capital gains as discussed above Rs. 17,11,203/-
Total assessed income Rs.1.13,03,472”
6. Aggrieved by the aforesaid order of the AO, the assessee preferred appeal before CIT(A) and the date of institution of appeal before CIT(A) was 17.1.2007. However, the impugned order was passed by the CIT(A) only on 24.3.2017.
7. During pendency of appeal before CIT(A) certain development took place in the case of assessment of K.Ramesh (individual). We have already seen that for AY 2002-03, K.Ramesh (Individual) filed return of income and K.Ramesh (HUF) did not file any return of income. In the assessment of K.Ramesh (Individual), the income that is sought to be taxed in the hands of the K.Ramesh (HUF) was taxed in the hands of K.Ramesh (individual). Against such Assessment the Assessee filed appeal contending that,except the income from Renuka Complex, all other income are assessable in the hands of K.Ramesh (HUF) and not in the status of K.Ramesh (Individual). Such plea of the Assessee was not accepted by the First appellate Authority and by the Tribunal, which held that income from property were assessable in the hands of K.Ramesh (individual). On appeal against the order of the Tribunal, the Hon’ble High Court by their orders dated 12/12/2014 and 08/12/2014 held that the properties, which the department contended as the separate properties and income therefrom assessable in “Individual” status were ancestral in nature and therefore, the income therefrom were not assessable in the hands of the in the status, of “Individual” and such income required to be excluded and thus, the stand of the appellant that they were joint family properties and therefore the income therefrom was not assessable on that count in their individual hands was been upheld.
8. In the proceedings before the CIT(A) against the order of assessment dated 30.11.2006 in the case of K.Ramesh (HUF) which is the subject matter of this appeal, the Assessee contended that K.Ramesh (HUF) was Partitioned on 14.1.2005 and the partition deed was registered on 12.2.2005. The further contention of the Assessee before CIT(A), was that the joint family ceased to exist the HUF as on the date of order of assessment and HUF was never assessed to tax in such status in the past and therefore the HUF was not a “hitherto assessed HUF” u/s. 171 of the Act and therefore assessment order in the status of a HUF was invalid, void in law and had to be annulled. The Assessee relied on the decision of the Hon’ble jurisdictional High Court in the case of CIT V. LAKANNA in ITA No.57/1994 DATED 26/04/2005 wherein the Hon’ble Court dealt in extenso of making an assessment on the HUF, which was not a hitherto assessed u/s. 171 of the Act as in the case of the Assessee, which ceased to exist at the time of assessment. The Hon’ble Court had to deal with the following substantial question of law in the case of Lakanna (supra):
I. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee – HUF could not have been assessed to income-tax in 1980-1981 on account of the fact that there was a partition in the joint family subsequent to the last day of the accounting year?
II. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of Section 171 were not applicable to this case in as mirth as the assessed – HUF had not been assessed earlier to 1980-1981?’
9. The facts of the case which related to AY 1980-81 were that prior to the assessment year 1980-1981, M/s Lakkanna and Sons — assessee was not assessed as a HUF in the past. It was only for the first time in the Assessment for AY 1980-81, by a letter dated 30.08.1980, the assessee had informed the Income Tax Officer, that there was a total partition of the HUF on 25.4.1980, much prior to passing of the assessment order i.e., on 28.11.1980. Therefore the HUF was not in existence on the date when the assessments were concluded by the Income Tax Officer. It was the contention of the Assessee that the Income Tax Officer could not have assessed the assessee as HUF after the disruption of HUF status of the assessee since the HUF had not assessed in that status prior to the relevant assessment year. The Hon’ble High Court held as follows:
12. The rationale for the introduction of Section 25(A) in the Indian Income Tax Act. 1922 which corresponds to Section 171 of the Income Tax Act,1961, the Apex Court in the case of LAKHMICHAND BAIJNATH vs. COMMISSOINER OF INCOME TAX reported in (1959) 35 ITR 416 (SC) at Pg 421 has held as under:
“When the assessee was Undivided no assessment could be made thereon at the time of the assessment it had become divided because at that point of time, there was no undivided family in existence which could be taxed, though when the income was received in the year of account the family was joint, nor could the individual members of the family be taxed in respect of such income as the same is exempt from tax under section 14(1) of the Act. The result of these provisions was that a joint family which had become divided at the time of the assessment escaped tax altogether. To remove this defect, s. 25A enacted that until an order is made under that section, the family should be deemed to continue as an undivided family.”
13. From the aforesaid observation it is clear that the assessee is an undivided family no assessment can be made thereon if at the time of assessment it has become divided, because at that point of time there was no undivided family in existence which could be taxed, though when the income was received in the year of accounts the family was joined. In other words under the Income Tax Act, the definition of ‘person’ includes a HUF though it is not a legal entity or a juristic person. Section 4 of the Act is a charging section. The tax shall be assessed in respect of the total income of the previous year of every person. In the scheme of the Act, every person whose total income exceeds the maximum amount which is not chargeable to Income Tax shall furnish the return of his income before the date as provided under Section 139 of the Act When such return is filed, the assessment is done in accordance with the procedure prescribed under the Act. However, if no such return is filed by a person and the income has escaped assessment under Section 147, the Assessing Officer has been vested with the power to reopen the assessment. However, before embarking upon such reassessment, he shall Issue notice as contemplated under Section 148. It is only after hearing the person, the order of assessment could be made under Section 148. Therefore, under the scheme of the Act, an order of assessment could be passed against the person who is in existence on the day the order is passed.”
10. It was argued that from para 13 of this judgment as reproduced above, it comes out that it was held by Hon’ble Karnataka High Court that 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 though when the income was received in the year of accounts, the family was joint. In the present case also, the Assessment Order is dated 30.11.2006 and HUF was disrupted by partition deed dated 14.1.2005 which was registered on 12.2.2005. Hence, from the facts of the present case it is clear that when the Assessment Order was passed by AO under section 143 r.w.s. 147 of the Act, for Assessment Year 2002-03, the HUF was not in existence because the same was already partitioned on 14.1.2005. Therefore if on the date of assessment, the HUF is not in existence, then such HUF cannot be taxed even for an earlier year when the income was received.
11. The CIT(A) however did not agree with the contention of the Assessee and he held (i) when the income was assessed in the hands of the individual, the plea that the income was assessable in the status of an HUF was accepted by the Hon’ble Karntaka High Court and therefore the assessment in the status of the HUF was valid. (ii) The factum of partition of the HUF prior to passing the order of assessment in the case of the HUF does not emanate from the order of the Hon’ble High Court. The following were the relevant observations of the CIT(A).
“6. The action of the AO in re-opening the assessment proceedings and concluding the same in the status of HUF, on protective basis, was in view of the Assessee’s claim that, it continued to press the issue of status, inspite of the Hon’ble ITAT’s finding that, impugned incomes were assessable in the individual hands. The purpose therefore for the protective assessment was to safeguard the interest of the revenue and await the finalization of the issue by the jurisdictional Hon’ble High Court of Karnataka. in these facts and circumstances there is no legal infirmity in the AO’s action.
