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S.N.R. Sundara Rao And Sons v. Commissioner Of Income-Tax
Structured Summary of the Opinion (Rajagopala Ayyangar, J.)
Factual and Procedural Background
The reference under Section 66(1) of the Income-tax Act raised two questions about assessments and ownership of certain house properties. The assessee was a Hindu undivided family (HUF) consisting of Sundara Rao (the Karta/manager) and his minor sons. The family owned several properties including houses that produced rental income which is the subject-matter of this dispute.
Sundara Rao as Karta executed four registered trust/settlement deeds on 6-12-1942, 13-7-1944, 14-1-1946 and 12-2-1947, settling certain houses for public charities and appointing himself trustee and manager. From the dates of execution he assumed possession of the trust properties. During accounting years 1942–1946 the family brought the existence of these deeds to the notice of income-tax authorities and claimed the properties were not assessable as they were set apart for charitable purposes. Because nothing ex facie cast doubt on the deeds, the department initially accepted the claim and excluded the income from these items in computing family income.
One of Sundara Rao's sons filed O.S. No. 105 of 1949 in the Sub-ordinate Judge, Madurai, seeking a declaration that the settlement deeds executed by the Karta were null and void; it was admitted in those proceedings that the properties were ancestral properties of the joint family. The Sub-ordinate Judge decreed the suit on 4-11-1949, holding the deeds null and void and that the properties belonged to the joint family.
Upon being apprised of the decree, the Income-tax Officer issued a notice under Section 34 on 10-2-1951, and after hearing objections completed re-assessments giving effect to the Sub-Court's judgment, including the income attributable to the houses. The assessee challenged the legality of the S.34 action and argued that alienations by the Karta were merely voidable and effective until repudiated, meaning the alienee remained owner until repudiation. This contention was rejected by the Income-tax Officer, the appellate Assistant Commissioner and the Tribunal. The two questions stated at the outset were accordingly referred to this Court.
Legal Issues Presented
- Whether the proceedings under Section 34 of the Income-tax Act had validly been initiated and completed for the four assessment years in question?
- Whether the trust deeds are voidable or void and whether the assessee (the HUF) can be assessed in regard to the properties under Section 9 of the Income-tax Act, including for any period before the date of the judgment in O.S. No. 105 of 1949?
Arguments of the Parties
Assessee's Arguments (as presented)
- The alienations effected by the Karta were only voidable (and not void), and therefore until the coparceners repudiated the transactions a good title vested in the alienee; on repudiation the alienee's title would only be lost from the date of repudiation, not from the date of the original alienation.
- Under Hindu law a father of the family (Jather/Karta) had a right to set apart a reasonable portion of family property for charity; if that power were exceeded the transaction would be voidable at the instance of dissenting coparceners (the Court noted that it would for the purposes of argument assume this submission to be correct).
- Before the Income-tax Officer the assessee contended that because the alienations were validable at the instance of the coparceners they were good until repudiated by the suit in 1949, and thus the alienee continued to be the owner until that date, negating family ownership before then.
Revenue's / Income-tax Authorities' Position (as reflected in the opinion)
- Initially, the Income-tax Department accepted the assessee's claim because the deeds were ex facie valid and excluded the income from assessment.
- After the Sub-ordinate Judge decreed O.S. No. 105 of 1949 setting aside the deeds, the Income-tax Officer treated the decree as definite information showing the assessee had been under-assessed and proceeded under Section 34 to re-open and complete reassessments, including income attributable to the houses.
- The departmental authorities rejected the assessee's contention that the alienee retained ownership until the date of repudiation and decided against the assessee on appeal and in the Tribunal.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Visweswara Rao v. Suryarao, ILR 59 Mad 667 : AIR 1936 Mad 440 | Observation by Stone, J. that it is "preferable to regard such an alienation as perfect unless and until it is set aside" and that repudiation "goes back to the date of the original alienation." | The Court noted the statement and that its correctness has been questioned. Even if accepted, the Court held that Stone, J.'s own words confirm repudiation goes back to the date of the original alienation; however, the Court found the Visweswara Rao observation did not assist the assessee's argument that avoidance operates only from the date of avoidance. |
| Satgur Prasad v. Harnarain Das, 59 Ind App 147 : AIR 1932 PC 89 | Principle (as explained by the Privy Council) that when a voidable contract is avoided, the position falls within the terms of Section 65 of the Contract Act so that advantages received under such a contract must be restored (i.e., avoidance has retroactive/restorative effect). | The Court relied on the Privy Council's reasoning to support the view that the principle of retroactive effect on avoidance applies equally to voidable transactions here, reinforcing that avoidance operates as if the transaction had never taken place. |
Court's Reasoning and Analysis
The Court addressed the two questions sequentially.
Validity of proceedings under Section 34: The Court observed that the original assessments proceeded on the basis that the trust deeds were operative and enforceable, and the department properly accepted the assessee's position where the deeds presented no ex facie defect. When O.S. No. 105 of 1949 was filed and subsequently decreed (4-11-1949), the judgment created a new state of things: the settlement deeds were no longer binding. The Court regarded the decree as "definite information" that the assessee had been under-assessed. On that basis, proceedings under Section 34 to re-open and complete reassessment were valid. The Court therefore answered the first question in the affirmative and against the assessee.
Whether avoidance is effective only from date of avoidance or from original dates: The Court examined the assessee's contention that alienations by a father of family are voidable and that the alienee retains title until avoidance, meaning liability to tax would commence only from the date of avoidance. The Court first noted the particular alienations here were gifts (not for value). It then accepted for argument that under Hindu law a Karta might have power to set apart a reasonable portion for charity (and that excess might render the transaction voidable), but rejected the further contention that avoidance only operates prospectively.
The Court explained the legal principle governing avoidance of voidable transactions: when an entitled person dissents, the dissent relates to the transaction itself, not merely to possession at the date of dissent. The effect of avoidance is to "get rid of the transaction," so in law it is as if the transaction had never taken place. The Court referred to Stone, J.'s observations in Visweswara Rao but observed that even accepting those observations, they do not support the assessee's position once the legal effect of avoidance is properly understood. The Court further relied on the Privy Council in Satgur Prasad v. Harnarain Das to illustrate that the restorative principle (analogous to Section 65 of the Contract Act) supports treating a voidable transaction as avoided retrospectively.
While acknowledging that some authorities differ on whether an alienee must account for mesne profits for the full antecedent period, the Court clarified that such equitable or estoppel-based refusals to grant mesne profits do not negate the legal position that the transaction itself is avoided and the title is treated as revested in the family from the dates of the deeds. Consequently, upon avoidance by the decree in O.S. No. 105 of 1949, the settlement deeds were treated as avoided from their respective dates of execution, and legal title revested in the family as from those dates.
Application to taxation under Section 9: Section 9(1) imposes tax on "income from property" in respect of property "of which he is the owner" (the Court quoted the provision). Since ownership is the criterion for tax under S.9 (and not mere receipt of rents by the trustee), the HUF, having had title revested from the dates of the trust deeds, was liable to include the bona fide annual value of those houses in its income as from the respective dates.
Holding and Implications
Holding: The Court answered both questions against the assessee:
- Proceedings under Section 34 were validly initiated and completed for the four assessment years in question (the re-assessments were valid because the Sub-ordinate Judge's decree provided definite information of under-assessment).
- The trust/settlement deeds were avoided by the decree, and that avoidance operated retrospectively — the settlement deeds were treated as avoided from the dates of those deeds, and legal title revested in the family from those dates; accordingly the assessee (the HUF) was assessable under Section 9 in respect of the bona fide annual value of the houses from those dates.
Implications (direct consequences to the parties):
- The reassessments giving effect to the Sub-Court's decree and including the relevant house income in the family's assessable income were upheld.
- The assessee failed on the reference and was ordered to pay the costs of the reference and counsel's fee of Rs. 250.
The opinion does not elaborate any broader doctrine beyond applying existing principles about the retrospective effect of avoidance of voidable transactions to the taxation context; the Court confined its decision to the facts and legal questions in the case.
Rajagopala Ayyangar, J.:— The questions referred to this Court for determination under Section 66(1) of the Income-tax Act are:
1. Whether the proceedings under Section 34 of the Act have validly been initiated and completed for the four assessment years in question?
2. Whether the trust deeds are voidable or void and whether the assessee can be assessed in regard to the properties under Section 9 of the Income-tax Act and for any period before the date of the judgment in the O.S No. 105 of 1949 on the file of the Sub-ordinate Judge, Madurai?
2. The question raised by this reference is whether a Hindu undivided family, which is the assessee, was the owner of certain house property, so as to render it liable to be assessed on the income thereof under Section 9 of the Income-tax Act. A subsidiary question that is raised is as regards the propriety or the legality of the reopening of the assessment under Section 34 of the Act. The Hindu Undivided family which is the assessee owned considerable nroperties which consisted among others, of certain houses, the income from which is the subject-matter of the present dispute. Besides, it was carrying on a money lending business sharing-the income from two firms in which it was a partner.
3. The family consisted of Sundara Rao and his minor sons. The father and manager Sundar Rao executed certain registered trust deeds settling certain of the houses for the benefit of some public charities, appointing himself as the trustee and manager thereof. These deeds were four in number and were executed on 6-12-1942, 13-7-1944, 14-1-1946 and 12-2-1947. The Karta, as the trustee, assumed possession of the trust properties from the date of the execution of the deeds. During the accounting year commencing from 1942 to 1946, the assessee, as the Karta of the family, brought to the notice of the income-tax authorities the existence of these trust deeds and claimed that, as the properties had been set apart for charitable purposes, they had ceased to be the properties of the assessee and were therefore not subject to assessment to income-tax. As there was nothing ‘ex facie’ the deeds to throw doubt on their validity, the department accepted the contention of the assessee and excluded the income from these items in the computation of the assessable income of the family.
4. While things were in this condition, one of the sons of Sundara Rao filed O.S No. 105 of 1949 in the court of the Sub-ordinate Judge of Madurai, for a declaration that these settlement deeds executed by the Karta Sundara Rao were null and void and impleaded thereto Sundara Rao and his other sons. It was admitted in the course of these proceedings that the properties, which were the subject of settlement were ancestral properties belonging to the joint family.
5. Sundara Rao defended the suit, however, on the ground that the deeds were executed ‘bona fide’ in the expectation that the other members of the family would consent to the performance of the charities set out in each. The Sub-ordinate Judge of Madurai decreed the suit on 4-11-1949, holding that the deeds executed by the Karta, first defendant were null and void and not binding on the family properties, and that the plaint properties belonged to the joint family of the plaintiff and the defendants in that suit.
6. When the Income-tax officer was apprised of these proceedings and their result he took action under S. 34 by a notice issued on 10-2-1951. After hearing the objections of the assessee, he Proceeded to complete the re-assessment by giving effect to the judgment of the Sub Court and included in the assessable income of the family that attributable to the houses which were the subject-matter of the settlement deeds which had been set aside.
7. Before the Income-tax Officer besides disputing the legality of the action under S. 34, the assessee contended that as the alienations effected by the Karta were only validable at the instance of the other coparceners, they were good until they were repudiated by the claim in the suit in 1949 and that this necessarily meant that the alienee continued to be the owner till that date, thus negativing the ownership by the family before that date. This contention was rejected by the Income-tax officer and on appeal by the appellate Assistant Commissioner. On further appeal, the Tribunal also decided against the assessee. It is in these circumstances that the two questions formulated above have been raised.
8. The first of these questions does not merit serious consideration. There was no doubt that the original assessment proceeded upon the trust deeds being enforceable and operative. Though it was open to the members of the family to have the deeds set aside, it was a right which inhered in them alone, and the Income-tax officer could not assume that they would exercise their right to avoid the alienations. When the suit O.S No. 105 of 1949 was filed and was decreed a new state of things emerged. The deeds were then no longer binding. This was undoubtedly a definite information which showed that the assessee had been under-assessed. Proceedings taken under Section 34 of the Act were therefore valid, and the answer to the first question is in the affirmative and against the assessee.
9. As regards the second question, Mr. Gopalaswami Aiyangar, learned counsel for the assessee urged that an alienation by a father of family property was only voidable and not void, and that this necessarily involved that until the persons entitled to avoid the transaction did so a good title inhered in the alienee and that even when the transaction was repudiated the title of the alienee stood till the date of the avoidance. We are unable to agree with this contention. In the first place the alienations in question in the present case were not for value but were merely by way of gift.
10. Learned counsel, however, urged that under the Hindu law a Jather had a right to set apart a reasonable portion of family property for charity, and that in such a case, if the power was exceeded, the transaction was not void but was voidable at the instance of the dissenting coparcener. It is unnecessary to discuss the correctness or otherwise of this submission and we shall assume for the purpose of argument that learned counsel is right.
11. We are, however, unable to follow him in the further submission, that when a voidable transaction is avoided, the avoidance is effective from that date and not from the date of the original transaction itself. In our opinion, this proceeds upon a misappreciation of the legal principle involved in the avoidance of voidable transaction. When a person, who is entitled to dissent from the alienation, does so, his dissent is in relation to the transaction as such and not merely to the possession of the alienee on the date of such dissent.
12. The effect of the avoidance is, therefore, to get rid of the transaction, with the result that in law it is as if the transaction had never taken place. Learned counsel placed some reliance on certain observations of Stone, J. in Visweswara Rao v. Suryarao, ILR 59 Mad 667 : (AIR 1936 Mad 440 (A)), where the learned Judge has said that it was preferable “to regard such an alienation as perfect unless and until it is set aside.” The correctness of this statement of law has been questioned in Mayne's Hindu law by Srinivasa Aiyangar 11th Edn. page 508, note b.
13. But even assuming it were correct, it does not really help learned counsel for the assessee, because one has still to consider the legal effect of the avoidance. Stone, J. leaves one in no doubt on this point, for he says at page 675 (of ILR Mad): (at p. 443 of AIR):
“Bearing in mind the fact that it is common place that a transaction of this nature can be perfected by the subsequent consent of the sons and that it can be repudiated and set aside by the subsequent action of the sons and that ‘such repudiation goes back to the date of the original alienation’, we think that it is preferable to regard such an alienation as perfect unless and until set aside.” (underlining here into ??? is ours.)
14. There is no doubt that some difference of opinion exists in the decided cases as regards the liability of an alienee in such circumstances to account for mesne profits for a period anterior to the suit. But in our opinion, this does not affect in any manner the undoubted legal position, that it is the transaction that is avoided. In such cases. The decisions which refuse to permit the logic of this position in regard to mesne profits payable by such alienees do not contradict this proposition but proceed to negative the claim of the dissenting coparceners on grounds of estoppel or on grounds of equity in favour of the alienee.
15. Even if these decisions are right a point regarding which we do not express any opinion, it does not follow that they are authorities for the position that when an alienation is avoided the transaction is avoided only from the date of the avoidance. We do not see any legal foundation for this argument. As pointed out by the Privy Council in Satgur Prasad v. Harnarain Das, 59 Ind App 147 : (AIR 1932 PC 89) (B), where dealing with the relief open to a person who had avoided a transaction brought about by fraud practised against him, Sir George Lowndes said:
“If the matter could be regarded as one of contract, their Lordships think that it would fall within the terms of Section 65 of the Contract Act, which provides that ‘when a contract becomes void’ — and their Lordships would have no difficulty in holding these words sufficient to cover the case of a voidable contract which had been avoided — any person who has received any advantage under such contract is bound to restore it to the person from whom he received it or make compensation therefor.”
16. We consider that the principle enunciated would equally apply to cases of every voidable transaction. But as we said earlier, it is unnecessary to decide whether in every case an avoiding coparcener would be entitled to mesne profits for the full period allowed under the law of limitation or whether equitable considerations would determine this being exigible only for a shorter duration. In any event, in our opinion, it is clear that when the trust deeds were avoided by decree in O.S No. 105 of 1949 its legal effect was that the settlement deeds were avoided from the dates of those deeds. If so the legal title of the trustee became divested from the inception, with the result that the title became revested in the family as from those dates.
17. Section 9(1) of the Income-tax Act enacts:
“9(1): The tax shall be payable by an assessee under the head ‘income from property’ in respect of the ‘bona fide’ annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax subject to the following allowances, namely …….”
18. on the avoidance of the trust deeds the title of the family revived and it had to be treated as the owner all along. No doubt the trustee might as a fact have been in reception of the rents and profits from these houses during the intermediate time when the deeds were thought to be operative but it is not the receipt of the rent that is the criterion for tax under S. 9 but only ownership. In these circumstances, the assessee became liable to have included in its income the ‘bona fide’ annual value of the houses which were the subject of the trust deeds which were set aside as on the several dates. Therefore the second question also is answered in the affirmative and in favour of the Commissioner. As the assessee has failed it will pay the costs of the reference, counsel's fee Rs. 250.
V.S.B
19. Answer against assessee.
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