Additional Commissioner Of Income-Tax, Punjab v. Inder Singh Uppal.

1. This judgment will dispose of Income-tax References Nos. 8, 9 and 10 of 1972 and Wealth-tax Reference No. 1 of 1972, as common questions of law and fact are involved in all these cases which pertain to the same assessee.

2. The assessee, Inder Singh Uppal, was assessed to Income-tax in his status as individual for the assessment years 1964-65, 1965-66 and 1966-67, to which years the income-tax references pertain. In his assessable income was included the amount received from Sovereign Knit Works and Sunrise Woollen & Silk Mills, as income of assessee's share in those firms. It was submitted by the assessee that he was a partner in those firms not in his individual capacity but as the karta of his Hindu undivided family and, therefore, the income from those firms could not be included in his income as individual. The Income-tax Officer did not accept the submission of the assessee and assessed his income inclusive of the income received from those firms. The assessee appealed to the Appellate Assistant Commissioner who accepted the contention of the assessee and held that the income from the two firms, mentioned above, belonged to the Hindu undivided family and could not be included in the income of the assessee as individual. Consequently, the appeals were accepted to that extent. The revenue went up in appeal to the Income-tax Appellate Tribunal, but all the appeals were dismissed on the ground that a transaction of throwing any self-acquired property into common hotch-pot was a valid transaction and, after the throwing, the property belonged to the ownership of the family. Reliance was placed on the judgment of the Supreme Court in N.V Narendranath v. Commissioner of Wealth-tax [1969] 174 ITR 190 SC.. Similar view was taken in the wealth-tax case. The revenue, feeling dissatisfied, applied for a reference of the question of law arising in these income-tax references and the Tribunal has referred the following question of law for our opinion:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the share incomes from Sovereign Knit Works and Sunrise Woollen and Silk Mills belonged to a Hindu undivided family and consequently had to be excluded from the assessments of the assessee made in the status of ‘individual’ for the assessment years 1964-65, 1965-66 and 1966-67?”

3. In wealth-tax reference, the following question of law has been referred:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the net wealth to the extent of Rs. 1,17,908 belonged to a Hindu undivided family and consequently had to be excluded from the assessment to wealth-tax for the assessment year 1965-66?”

4. The assessee had three daughters, Anila Uppal, born on July 24, 1953, Rishma Uppal, born on December 5, 1957, and Geeta Uppal, born on July 11, 1961. It was submitted by the assessee that he had impressed his self-acquired property, i.e, his share as a partner in the two firms, Sovereign Knit Works and Sunrise Woollen and Silk Mills, with the character of Hindu undivided family property. The Income-tax Officer did not accept this contention of the assessee with the following observation:

“Before I finalise the assessment, it is necessary to remark that the assessee had share in Messrs. Sovereign Knit Works, Amritsar, and Sunrise Woollen & Silk Mills in the capacity of Hindu undivided family. The Income-tax Officer, Distt. I(ii), Amritsar, has given a finding that the assessee is not a partner in the capacity of karta of a Hindu undivided family but in his individual capacity. His share of income from these firms would, therefore, belong to his person and not to the Hindu undivided family and would need to be brought under assessment here.”

5. While dealing with this matter, the Appellate Assistant Commissioner in his order dated November 27, 1969, reproduced the relevant portion of the order of the Income-tax Officer, District I(ii), Amritsar, as under:

“On February 22, 1963, a firm consisting of six partners, Sh. B.C Soni, Sh G.S Uppal, Sh. Inder Singh Uppal, Sh. Iqbal Singh Uppal, Sh. Manmohan Singh Uppal and Sh. Harkishan Singh Uppal came into existence. Party No. 1 agreed to share profits and losses at 5% and the parties from 2 to 6 at 19% each. It was a short-lived partnership and Sh. B.C Soni retired on August 21, 1963, when the old firm dissolved and vide deed dated August 22, 1963, a new firm consisting of Uppals (parties Nos. 2 to 6 above) came into existence. The profits and losses were to be shared as follows:

1. Sh. G.S Uppal 12% 2. Sh. Iqbal Singh 22% 3. Sh. Inder Singh 22% 4. Sh. Harkishan Singh 22% 5. Sh. Manmohan Singh 22%

Sh. Iqbal Singh, Manmohan Singh, Inder Singh and Harkishan Singh Uppal have been declared as representing their Hindu undivided families which were created by each of the four persons and their wives throwing into a common pool their self-acquired funds and declaring that the pool was the nucleus of the Hindu undivided family. On the date on which these Hindu undivided families were created, i.e, 30th July, 1962, Sh. Inder Singh Uppal had a daughter only and Sh. Harkishan Singh Uppal had no issue. A son was born to Sh. Harkishan Singh in December, 1962. Since Sh. Inder Singh Uppal did not have a son even at the close of the accounting year, he is treated as not representing the Hindu undivided family but representing his own interest only.”

6. The Appellate Assistant Commissioner, while accepting the contention of the assessee, made the following observation:

“I have considered the various submissions made before me very carefully. No doubt previously there was a difference of opinion regarding the status to be adopted for income-tax and wealth-tax assessments in the cases of Hindu undivided families consisting of a single male coparcener; this issue has now been finally decided by the Supreme Court in the case of N.V Narendranath referred to above. Keeping in view this decision of the Supreme Court I hold that the finding given by the Income-tax Officer, Distt. I(ii), Amritsar, in her order in the case of Sunrise Woollen & Silk Mills was incorrect and that the present Income-tax Officer has erred in following the same and consequently in including the share income from Messrs. Sunrise Woollen & Silk Mills and Sovereign Knit Works in the assessee's individual total income. The additions of Rs. 1,721 and Rs. 1,960 are, therefore, deleted.”

7. This finding of the Appellate Assistant Commissioner was accepted by the Income-tax Appellate Tribunal. It is, thus, clear that the allegation of fact made by the assessee that he had impressed self-acquired property with the character of Hindu undivided family property by throwing in the hotch-pot was accepted by the Appellate Assistant Commissioner as well as the Income-tax Appellate Tribunal. It has now to be determined whether, in the absence of another male member of the Hindu undivided family, the income from the Hindu undivided family property could be considered the income of the assessee as an individual, as has been urged by the revenue. In N.V Narendranath's case, the question for determination before their Lordships of the Supreme Court Was:

“Whether the status of the appellant was that of a Hindu undivided family consisting of himself, his wife and his daughters?”

and it was held that:

“……………there is no warrant for the contention of the respondent that there must be at least two male members to form a Hindu undivided family as a taxable unit. The expression ‘Hindu undivided family’ in the Wealth-tax Act is used in the sense in which a Hindu joint family is understood in the personal law of Hindus. Under the Hindu system of law a joint family may consist of a single male member and his wife and daughters and there is nothing in the scheme of the Wealth-tax Act to suggest that a Hindu undivided family as an assessable unit must consist of at least two male members.”

8. In that case N.V Rangarao, the father of the appellant, was the holder of an impartible estate called the “Munogala Estate” in the Krishna District in the State of Andhra Pradesh. This estate was abolished under the Madras Estates (Abolition and Conversion into Ryotwari) Act, 1948, and compensation under section 45 of the Act was paid severally to the appellant, his father and his brothers. Other properties belonging to the joint family of the appellant, his father and brothers were also partitioned between them from time to time. The assets forming the subject of reference to the High Court consisted of investments made from the compensation amount received by the appellant in securities, shares, etc., and also other assets such as deposits in banks. The appellant filed returns for the assessment years 1957-58, 1958-59 and 1959-60 in the status of a Hindu undivided family. The appellant's family during the material time consisted of himself, his wife and his two minor daughters and there was no other male member. The appellant claimed to be assessed in the status of a Hindu undivided family inasmuch as the wealth returned consisted of ancestral property received or deemed to have been received by him on partition with his father and brothers. The Wealth-tax Officer did not accept the contention of the appellant and assessed him as an individual for those assessment years. On appeal to the Appellate Assistant Commissioner of Wealth-tax, the finding that he must be assessed as an individual was confirmed. The Income-tax Appellate Tribunal, however, on appeal by the appellant held that he should be assessed in the status of a Hindu undivided family. The question that was referred to the High Court for opinion by the Tribunal in that case was:

“Whether the status of the assessee was rightly determined as Hindu undivided family?”

and the answer returned by the High Court was against the appellant, whose appeal succeeded before the Supreme Court and it was held that the status of the appellant was that of a Hindu undivided family consisting of himself, his wife and his daughters. Another question which was then determined by their Lordships was:

“Whether the assets which came to the share of the appellant on partition ceased to bear the character of joint family properties and became the individual property in his hands?”

9. It was pointed out that;

“………a distinction must be drawn between two classes of cases where an assessee is sought to be assessed in respect of ancestral property held by him: (1) where property not originally joint is received by the assessee and the question has to be asked whether it has acquired the character of a joint family property in the hands of the assessee, and (2) where the property already impressed with the character of joint family property comes into the hands of the assessee as a single coparcener and the question required to be considered is whether it has retained the character of joint family property in the hands of the assessee or is converted into absolute property of the assessee.”

10. Reliance was placed on the decision of their Lordships of the Privy Council in Kalyanji Vithaldas v. Commissioner of Income-tax on behalf of the Commissioner of Wealth-tax in which it has been held:

“……though the income was from an ancestral source, the fact that each partner had a wife or daughter did not make that income from ancestral source income of the Hindu undivided family of the partner, his wife and daughter.”

11. This decision was not accepted by their Lordships of the Supreme Court and reliance was placed on its own decision in Gowli Buddanna v. Commissioner of Income-tax [1966] 60 ITR 293, 302 SC., wherein it was held that:

“Property of a joint family, therefore, does not cease to belong to the family merely because the family is represented by a single coparcener who possesses rights which an owner of property may possess. In the case in hand the property which yielded the income originally belonged to a Hindu undivided family. On the death of Buddanna, the family which included a widow and females born in the family was represented by Buddanna alone, but the property still continued to belong to that undivided family and income received therefrom was taxable as income of the Hindu undivided family.”

12. On the basis of that judgment it was held3:

“It is clear that the present case falls within the ratio of the decision of this court in Gowli Buddanna's case. The Appellate Tribunal was right in holding that the status of the respondent was that of a Hindu undivided family and not that of an individual.”

13. The principle of law settled was that a joint family can consist of one male member along with other female members and it is not necessary that there must be two male members and that the property once belonging to the Hindu undivided family continues to bear that character even if the number of male members is reduced to one.

14. The learned counsel for the petitioner, however, submits that the present case is not a case wherein the property claimed to be the property of the Hindu undivided family was previously Hindu undivided family property. The case set up was that the assessee himself impressed his self-acquired property with the character of joint family property by putting it in the common hotch-pot and, therefore, the case is governed by the decision of the Bombay High Court in Surjitlal Chhabda v. Commissioner of Income-tax. He placed before us the following two propositions:

(1) A joint Hindu family with one male member can exist but cannot own any joint family property unless and until a second male member is born or brought into the family by adoption or the property in the hands of the sole male member, before devolving on him, belonged to a joint family or had been impressed with the character of joint family property.

(2) Even if it can own a joint property which was originally not ancestral or joint family property qua the male member, the income from such property will be none the less the income of the sole member.

15. In Surjitlal's case, the assessee made a declaration before the Presidency Magistrate that a particular property which was a self-acquired property shall be the property belonging to the Hindu undivided family consisting of himself, his wife and daughters. On the basis of this declaration, the assessee claimed that the income from this property should be assessed in the status of a Hindu undivided family as he had thrown the property into the common hotch-pot of the Hindu undivided family of which he was the karta and he had abandoned all claims to hold the property as a separate property. This claim was rejected by the departmental authorities and the Tribunal. On a reference to the High Court it was held that:

“The property being admittedly the self-acquired property of the assessee before the declaration, it was never joint family property in its origin and, therefore, could not partake of the character of joint family property in the hands of the assessee simply because two female members entitled only to maintenance were there with him to constitute the family and, even assuming that he held it in the capacity of a sole surviving coparcener after the declaration, the case of the assessee would fall squarely within the principle enunciated by the Privy Council in Kalyanji's case and hence the income in the hands of the assessee was liable to be assessed as his individual income.”

16. In that case the Appellate Assistant Commissioner had observed that no doubt the assessee had made a declaration but it had to be seen whether it was actually acted upon and that there must be some evidence to show that after the declaration the property was differently dealt with from the date on which it was alleged there was a change in the character of the property and held that there was no such evidence forthcoming. On the other hand, he pointed out that the assessee continued to deal with the income from the property in exactly the same manner as he dealt with that income when it was separate property. This finding of fact arrived at by the Appellate Assistant Commissioner was accepted by the Income- tax Appellate Tribunal and this fact distinguishes that case from the present case. In the present case the Appellate Assistant Commissioner accepted the plea of the assessee that he had impressed his self-acquired property with the character of joint family property. It is admitted by the learned counsel for the revenue that it is not necessary to constitute a Hindu undivided family that joint family property must exist prior to its constitution. It was held by a Division Bench of the Madras High Court in R. Subramania Iyer v. Commissioner of Income-tax that:

“Under the Hindu law in order that a joint family may exist, it is not necessary that there should be joint family property. A father and his son constitute members of a joint Hindu family and even if there was no ancestral nucleus or other joint family property, there is nothing to prevent the father from impressing upon any self-acquired property belonging to him the character of joint family property. No formalities are necessary in order to bring this about and the only question is one of intention on the part of the father to abandon his separate rights and invest it with the character of joint family property. Where an inference of this sort is sought to be deduced from the conduct of the parties, there might be room for ambiguity and for difference of opinion. Where, however, there is a declaration by the father that a certain property is joint family property, the inference that the character of joint family property is impressed upon the separate property follows, unless the words are incapable of that construction or they represent merely a future intention not yet given effect to.”

17. In Damodar Krishnaji Nirgude v. Commissioner Of Income-Tax, Bombay South., a Division Bench of the Bombay High Court held:

“It was open to a member of a Hindu undivided family to throw his self-acquired property into the family hotchpot even though there was no joint or ancestral property” and

“Throwing of his self-acquired property into the hotchpot of the family did not amount to any transfer of such property to the assessee's wife or son; the partition of the property after it was thrown into the hotchpot also did not amount to a transfer by the assessee of his property to his wife and child.”

18. In Goli Eswariah v. Commissioner of Gift-tax, their Lordships of the Supreme Court held that:

“The unilateral declaration of a Hindu coparcener, whereby he throws his self-acquired property into the common stock of joint family property, does not amount to a transfer so as to attract the provisions of the Gift-tax Act, 1958.”

19. It was further observed (at page 678) that:

“The existence of a coparcenary is absolutely necessary before a coparcener can throw into the common stock his self-acquired properties. The separate property of a member of a joint Hindu family may be impressed with the character of joint family property if it is voluntarily thrown by him into the common stock with the intention of abandoning his separate claim therein. The separate property of a Hindu ceases to be separate property and acquires the characteristics of joint family or ancestral property not by any physical mixing with his joint family or his ancestral property but by his own volition and intention by his waiving and surrendering his separate rights in it as separate property. The act by which the coparcener throws his separate property in the common stock is a unilateral act. There is no question of either the family rejecting or accepting it. By his individual volition he renounces his individual right in that property and treats it as a property of the family. No sooner he declares his intention to treat his self-acquired property as that of joint family property, the property assumes the character of joint family property. The doctrine of throwing into the common stock is a doctrine peculiar to the Mitakshara school of Hindu law. When a coparcener throws his separate property into the common stock, he makes no gift under Chapter VII of the Transfer of Property Act. In such a case there is no donor or donee. Further, no question of acceptance of the property thrown into the common stock arises.”

20. From these observations, it is abundantly clear that the existence of joint family property, before a member of the joint family throws his self-acquired property into the common stock, is not necessary. In other words the joint family property can be created by any member of the joint family by impressing it with the character of joint family property by an act which shows his volition and the intention to surrender his separate rights in the property and to treat it as the property of the joint Hindu family. As we have pointed out above the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal accepted the version of the assessee that he had thrown his share in the two firms into the joint stock of the Hindu undivided family and had impressed that property with the character of joint family property and, therefore, for the decision of these cases it has to be assumed that the share of the assessee in the two firms was held by him as karta of the Hindu undivided family and not as his separate property in the relevant assessment years. In the light of the observations of their Lordships, it does not appear to us to be necessary, as has been urged by the learned counsel for the revenue, that there should exist at least two male members of a joint Hindu family to bring into existence any joint family property or that some joint Hindu family property must be in existence before a member of that family impresses his self-acquired property with the character of joint family property by throwing it voluntarily and intentionally into the common stock of the family.

21. The result of the above discussion is that the decision of the Appellate Assistant Commissioner, upheld by the Income-tax Appellate Tribunal, is held to be correct. Consequently, our answer to the question of law, referred in all these references, is in the affirmative, that is, in favour of the assessee and against the revenue. The assessee will be paid his costs by the revenue which are assessed at Rs. 400 for all the four references.