1975 (12) TMI 144 - SC - Income Tax

Hindu family members cannot be held personally liable for tax recovery under new Income Tax Act provisions when assessment completed under old Act

GovindDas And Ors. Versus The Income Tax Officer And Anr.

The SC held that Sub-section (6) of Section 171 of the Income Tax Act, 1961 cannot be applied retrospectively to assessments completed under the old ... Change in law - Entitlement to recover the tax from every member of the Hindu Undivided Family and severally liable for share of the tax computed according to the portion of the joint family property allotted at the partial partition - Enactments of new provisions - Validity of Sub-section (6) read with Sub-section (7) of Section 17 of the Income Tax Act, 1961 - assessment of a Hindu' Undivided Family made under the provisions of the Indian Income Tax Act, 1922 (the old Act) - effect of provisions imposing on the members of the Hindu Undivided Family a new liability which did not exist before - retrospective operation - meaning and effect of Section 297(2)(d) - Section 171 of the new Act corresponds to Section 25A of the old Act and provides for assessment of a Hindu undivided family after partition. HELD THAT:- If we apply this principle of interpretation, it is clear that Sub-section (6) of Section 171 applies only to a situation where the assessment of a Hindu undivided family is completed under Section 143 or Section 144 of the new Act. It can have no application where the assessment of a Hindu undivided family is completed under the corresponding provisions of the old Act. Such a case would be governed by Section 25A of the old Act which does not impose any personal liability on the members in case of partial partition and to construe Sub-section (6) of Section 171 as applicable in such a case with consequential effect of casting on the members personal liability which did not exist under Section 25A, would be to give retrospective operation to Sub-section (6) of Section 171 which is not warranted either by the express language of that provision or by necessary implication. Sub-section (6) of Section 171 can be given full effect by interpreting it as applicable only in a case where the assessment of a Hindu undivided family is made under Section 143 or Section 144 of the new Act. We cannot, therefore consistently with the rule of interpretation which denies retrospective operation to a statute which has the effect of creating or imposing a new obligation or liability, construe Sub-section (6) of Section 171 as embracing a case where assessment of a Hindu undivided family is made under the provisions of the old Act. Here in the present case, the assessments of the Hindu Undivided Family for the assessment years 1950-51 to 1956-57 were completed in accordance with the provisions of the old Act which included Section 25A and the Income-tax Officer was, therefore, not entitled to avail of the provision enacted in Sub-section (6) read with Sub-section (7) of Section 171 of the new Act for the purpose of recovering the tax or any part thereof personally from any members of the joint family including the petitioners. Admittedly, in the present case, Clause (ii) of Section 297(2)(d) applied since no proceedings under Section 34 of the old Act in respect of escaped income of the Hindu Undivided Family were pending at the time of the commencement of the new Act and it was for this reason that notices under Section 148 were issued by the Income Tax Officer for reopening the assessments of the Hindu Undivided Family for the assessment years 1950-51 to 1956-57. Now Clause (ii) of Section 297(2)(d) provides that when a notice under Section 148 is issued for reopening an assessment 'all the provisions of this Act shall apply accordingly.' The argument of the Revenue Authorities, therefore, was that when notices under Section 148 were issued for reopening the assessments of the Hindu Undivided Family, all the provisions of the new Act became applicable and they included Sub-sections (6) of Section 171 and, therefore, that Sub-section was applicable for recovery of the tax reassessed on the Hindu Undivided Family pursuant to the notices under Section 148. This argument is without force. It is based on a misconstruction of the words 'all the provisions of this Act shall apply accordingly' in Clause (ii) of Section 297(2)(d) These.' words merely refer to the machinery provided in the new Act for the assessment of the escaped income. They do not import any substantive provisions of the new Act which create rights or liabilities. The word 'accordingly' in the context means nothing more than 'for the purpose of assessment' and it clearly suggests that the provisions of the new Act which are made applicable are those relating to the machinery of assessment. The substantive law to be applied for determining the liability to tax must necessarily be the law under the old Act, for that is the law which applied during the relevant assessment years and it is that law which must govern the liability of the parties. Though Sub-sections (1) to (5) of Section 171 merely lay down the machinery for assessment of a Hindu undivided family after partition, Sub-section (6) of Section 171 is clearly a substantive provision imposing new liability on the members for the tax determined as payable by the joint family. The words 'all the provisions of this Act shall apply accordingly' cannot therefore be construed as incorporating by reference Sub-section (6) of Section 171 so as to make it applicable for recovery of the tax reassessed on the Hindu Undivided Family in cases falling within Clause (ii) of Section 297(2)(d). This contention of the Revenue Authorities must accordingly be rejected. Thus, we allow these appeals and issue a writ in each appeal quashing and setting aside the orders. The core legal questions considered by the Court revolve around the applicability and retrospective effect of Section 171, Sub-sections (6) and (7) of the Income Tax Act, 1961 (the new Act), particularly in relation to assessments and tax liabilities of a Hindu Undivided Family (HUF) for assessment years prior to the commencement of the new Act. Specifically, the issues are:1. Whether Section 171(6) and (7) of the new Act, which impose joint and several personal liability on members of an HUF for tax assessed on the family after a partition (total or partial), apply retrospectively to assessments completed under the Indian Income Tax Act, 1922 (the old Act) for years before 1st April 1962.2. Whether the personal liability imposed by Section 171(6) can be invoked where the assessment of the HUF was completed under the old Act, and the family had effected only a partial partition.3. Whether reopening of assessments under Section 148 of the new Act for assessment years governed by the old Act brings into operation all substantive provisions of the new Act, including Section 171(6), for the purpose of recovery of tax.Issue-Wise Detailed AnalysisIssue 1: Applicability and retrospective operation of Section 171(6) and (7) of the new ActThe relevant legal framework includes Section 25A of the old Act and Section 171 of the new Act. Section 25A of the old Act addressed the lacuna in tax recovery from HUFs that had ceased to exist due to partition at the time of assessment. It allowed the Income Tax Officer to treat the family as undivided for assessment purposes unless a total partition was recorded after inquiry. Upon total partition, the tax liability could be apportioned among members, who would be jointly and severally liable. However, Section 25A applied only to total partitions, not partial partitions.Section 171 of the new Act corresponds to Section 25A but extends its scope to include partial partitions. Sub-section (6) of Section 171 imposes joint and several liability on members of the HUF for tax assessed on the family after partition, whether total or partial, even if the partition was effected before the assessment. Sub-section (7) provides for apportionment of liability according to the portion of the joint family property allotted to each member.The Court reasoned that the language of Section 171(6) is prospective and applies only to assessments completed under the new Act (post 1st April 1962). Applying the well-settled principle of statutory interpretation, retrospective operation that imposes new liabilities or obligations is not to be given unless expressly stated or necessarily implied. Since the assessments in question were completed under the old Act, the new personal liability under Section 171(6) cannot be imposed retrospectively. The old Act's Section 25A does not impose personal liability on members in case of partial partition; hence, the members' liability remains limited to the joint family property.Issue 2: Personal liability under Section 171(6) in cases of partial partition assessed under the old ActThe facts showed a partial partition of the HUF's movable properties in 1955. Under the old Act, only total partition could trigger personal liability of members for the family's tax. Since the partition was partial, Section 25A did not authorize apportionment of tax liability among members or personal recovery from them. The Court emphasized that the new Act's Section 171(6) cannot be read to apply retrospectively to assessments governed by the old Act, and thus the Income Tax Officer was not entitled to recover tax personally from members for the assessment years 1950-51 to 1956-57.Issue 3: Effect of reopening assessments under Section 148 of the new Act on applicability of Section 171(6)The Revenue argued that reopening assessments under Section 148 of the new Act, pursuant to Section 297(2)(d), brings all provisions of the new Act into operation, including Section 171(6), allowing personal recovery of tax from members. Section 297(2)(d)(ii) states that where income chargeable to tax escaped assessment under the old Act and no proceedings were pending under the old Act at the commencement of the new Act, notices under Section 148 may be issued and all provisions of the new Act shall apply accordingly.The Court rejected this contention, interpreting 'all the provisions of this Act shall apply accordingly' to mean only the machinery and procedural provisions for assessment, not substantive provisions creating new liabilities. The substantive law governing tax liability remains the law applicable during the relevant assessment years, i.e., the old Act. Hence, Section 171(6), which imposes new personal liabilities, cannot be invoked by virtue of reassessment under the new Act for assessment years prior to its commencement.Treatment of competing argumentsThe petitioners argued that Section 171(6) imposes a new liability not existing under the old Act and cannot be applied retrospectively. They also contended that no proper finding of partition was recorded by the Income Tax Officer under the new Act's procedural requirements. The Court found the first argument dispositive and did not consider the second. The Revenue's argument based on reopening assessments was held to be a misinterpretation of the scope of Section 297(2)(d).Significant HoldingsThe Court held:'Sub-section (6) of Section 171 applies only to a situation where the assessment of a Hindu undivided family is completed under Section 143 or Section 144 of the new Act. It can have no application where the assessment of a Hindu undivided family is completed under the corresponding provisions of the old Act.''To construe Sub-section (6) of Section 171 as applicable in such a case with consequential effect of casting on the members personal liability which did not exist under Section 25A, would be to give retrospective operation to Sub-section (6) of Section 171 which is not warranted either by the express language of that provision or by necessary implication.''The words 'all the provisions of this Act shall apply accordingly' in Clause (ii) of Section 297(2)(d) ... do not import any substantive provisions of the new Act which create rights or liabilities... The substantive law to be applied for determining the liability to tax must necessarily be the law under the old Act.'Core principles established include:The principle against retrospective operation of statutes imposing new liabilities or obligations except where expressly provided.The distinction between procedural provisions and substantive provisions in tax legislation.The limitation of personal liability of HUF members under the old Act to cases of total partition only.The non-applicability of new Act provisions imposing personal liability to assessments completed under the old Act, even if reassessed under the new Act's procedural machinery.Final determinations on the issues were that the Income Tax Officer was not entitled to recover tax personally from the members of the HUF for the assessment years 1950-51 to 1956-57 under Section 171(6) of the new Act, and the orders imposing such personal liability were quashed and set aside.