Commissioner Of Wealth-Tax v. Chander Sen

Gulati, J.:— This is a consolidated reference relating to assessment years 1966–67 and 1967–68, arising out of proceedings under the Wealth-tax Act of the Hindu undivided family consisting of Lala Chander Sen, the karta, and his four sons. The connected reference is under the Income-tax Act and relates to the assessment year 1968–69. A common question of law arises in both these cases. Hence, they are being disposed of by a common judgment.

2. Late Rangi Lal and his son, Chander Sen, constituted a Hindu undivided family. This family had some immovable property and a business carried on in the name of Khushi Ram Rangi Lal. On October 10, 1961, there was a partial partition in the family by which the business was divided between the father and the son, and, thereafter, it was carried on by a partnership consisting of the two.

3. The firm was being assessed to income-tax as a registered firm and the two partners were being separately assessed in respect of their share of income. The house property of the family continued to remain joint. On July 17, 1965, Rangilal died leaving behind him his son, Chander Sen, and his grandsons, i.e, the sons of Chander Sen. His wife and mother had predeceased him and he had no other issue except Chander Sen. On his death there was a credit balance of Rs. 1,85,043 in his account in the books of the firm.

4. For the assessment year 1966–67 (valuation date, October 3, 1965), Chander Sen, who constituted a joint family with his own sons, filed a return of his net wealth. The return included the property of the joint family which on the death of the Rangi Lal passed on to Chander Sen by survivorship and also the assets of the business which devolved upon Chander Sen on the death of his father. The sum of Rs. 1,85,043 standing to the credit of Rangi Lal was not included in the net wealth of the family of Chander Sen (hereinafter referred to as “the assessee-family”) on the ground that this amount devolved on Chander Sen in his individual capacity and was not the property of the assessee-family. The Income-tax Officer did not accept this contention and held that the sum of Rs. 1,85,043 also belonged to the assessee-family.

5. At the close of the previous year ending on October 22, 1966, relating to the assessment year 1967–68, a sum of Rs. 23,330 was credited to the account of late Rangi Lal on account of interest accruing on his credit balance. In the proceedings under the Income-tax Act for the assessment year 1967–68, the sum of Rs. 23,330 was claimed as a deduction. It was alleged that interest was due to Chander Sen in his individual capacity and was an allowable deduction in the computation of the business income of the assessee-family. At the end of the year the credit balance in the account of Rangi Lal stood at Rs. 1,82,742 which was transferred to the account of Chander Sen. In the wealth-tax assessment for the assessment year 1967–68, it was claimed, as in the earlier year, that the credit balance in the account of Rangi Lal belonged to Chander Sen in his individual capacity and not to the assessee-family. The Income-tax Officer who completed the assessment disallowed the claim relating to interest on the ground that it was a payment made by Chander Sen to himself. Likewise, in the wealth-tax assessment, the sum of Rs. 1,82,742 was included by the Wealth-tax Officer in the net wealth of the assessee-family. On appeal the Appellate Assistant Commissioner of Income-tax accepted the assessee's claim in toto. He held that the capital in the name of Rangi Lal devolved on Chander Sen in his individual capacity and as such was not to be included in the wealth of the assessee-family. He also directed that in the income-tax assessment the sum of Rs. 23,330 on account of interest should be allowed as a deduction. The income-tax department felt aggrieved and filed three appeals before the Income-tax Appellate Tribunal, two against the assessments under the Wealth-tax Act for the assessment years 1966–67 and 1967–68 and one against the assessment under the Income-tax Act for the assessment year 1967–68. The Tribunal has dismissed the department's appeals but, at its instance, has referred the following question for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the conclusion of the Tribunal that the sum of Rs. 1,85,043 and Rs. 4,82,742 did not constitute the assets of the assessee-Hindu undivided family is correct?”

6. In the connected reference under the Income-tax Act, it has referred the following question:

“Whether, on the facts and in the circumstances of the case, the interest of Rs. 23,330 is allowable deduction in the computation of the business profits of the assessee-joint family?”

7. The answer to both the questions will depend upon the answer to the question as to whether the amount standing to the credit of late Rangi Lal was inherited, after his death, by Chander Sen in his individual capacity or as a karta of the assessee-joint family consisting of himself and his sons.

8. The amount in question represents the capital allotted to Rangi Lal on partial partition and accumulated profits earned by him as his share in the firm. While Rangi Lal was alive this amount could not be said to belong to any joint Hindu family and qua Chander Sen and his sons it was the separate property of Rangi Lal. On Rangi Lal's death the amount passed on to his son, Chander Sen, by inheritance. Under the Hindu law when a son inherits separate and self-acquired property of his father, it assumes the character of joint Hindu family property in his hands qua the members of his own family. But this principle has been modified by sec tion 8 of the Hindu Succession Act which admittedly governs the present case. Under that provision the property of a male Hindu dying intestate devolves firstly upon the heirs being the relatives specified in class I of the Schedule. It is common ground that the only heir of the deceased in class I was his son, Chander Sen, and, as such, the property of the deceased would pass on to Chander Sen. That he holds such property in his individual capacity and not as the karta of his own family is settled by a decision of a Division Bench of this court in Khudi Ram Laha v. Commissioner of Income-tax [1968] 67 I.T.R 364 All.. The facts of that case are almost identical with the facts of the present case. It was held by the Bench that in view of the pro visions of the Hindu Succession Act, 1956, the income from assets inherited by a son from his father from whom he had separated by partition could not be assessed as the income of the Hindu undivided family of himself and his sons. The case of N.V Narendranath v. Commissioner of Wealth-tax [1969] 74 I.T.R 190 S.C. relied upon by the learned counsel for the department has no applica tion. There the Supreme Court held that where a coparcener having a wife and two minor daughters received a share of the joint Hindu family property on partition, such property in the hands of the coparcener belonged to the Hindu undivided family of himself, his wife and minor daughters and could not be assessed as his individual property for purposes of wealth-tax. A Full Bench of this court in the case of Lala Narendra Lal Shamli v. Commissioner of Income-tax has also laid down the same proposition. The principle laid down in these cases would apply to the share of Chander Sen allotted to him on partition with his father in 1961. That share would undoubtedly belong to the Hindu undivided family of himself and his sons. There is no dispute with regard to that. The assessee itself has treated the share of Chander Sen obtained on partition as the property of the assessee-family. The question in the instant case relates to the separate property of Rangi Lal, which passed on his death to his son, Chander Sen. In view of the decision of this court in Khudi Ram Laha v. Commissioner of Income-tax it has to be held that such property was the separate property of Chander Sen in which the assessee-family had no interest. We accordingly answer the question in the affirmative, in favour of the assessee and against the department.

9. As regards the connected reference under the Income-tax Act, since we have held that the amount standing to the credit of Rangi Lal belonged to Chander Sen in his individual capacity and not to the joint family of himself and his sons, the interest of Rs. 23,330 was allowable deduction in computing the income of the assessee-family from business. We accordingly answer the question in the connected reference also in the affirmative in favour of the assessee and against the department.

10. The assessee is entitled to costs which we assess at Rs. 200. There will be one set of costs only.

11. I.T.R No. 452 of 1971.—For order, see our judgment and order of date in connected Wealth-tax Reference No. 371 of 1971 (above).