1996 (2) TMI 114 - HC - Income Tax

Capital gains: Share inherited from deceased excluded, property retains dual character until partition

The court held that for computing capital gains, the share attributable to the interest of the deceased Nanubhai, which devolved by succession on his ... Computation of capital gains in the hands of a Hindu undivided family - Devolution by succession vis-a-vis devolution by survivorship in coparcenary property - Deemed partition under section 6 of the Hindu Succession Act and resulting indefeasible right - Dual character of property (partly vested in heirs individually and partly remaining joint until physical partition) - Apportionment of capital gains between Hindu undivided family and individual heirs - Effect of absence of actual physical partition on exclusion of notional sharesDevolution by succession vis-a-vis devolution by survivorship in coparcenary property - Deemed partition under section 6 of the Hindu Succession Act and resulting indefeasible right - Apportionment of capital gains between Hindu undivided family and individual heirs - Capital gains attributable to the share of the deceased coparcener (Shri Nanubhai) which devolved by succession on his heirs are to be excluded from the capital gains computed in the hands of the Hindu undivided family. - HELD THAT: - The court accepted that on the death of a male coparcener where section 6 of the Hindu Succession Act applies, the deceased's interest devolves by succession and, by the legal fiction of deemed partition, vests in his heirs as an indefeasible right. That portion of the interest thus ceases to be part of the HUF coparcenary property and acquires a separate character vested in the heirs. Where the transfer involves an asset that bears this dual character (partly HUF property and partly individual property of heirs), the capital gain arising on sale must be apportioned and only the portion attributable to the HUF-owned interest is taxable in the hands of the HUF. The court therefore held that the value of the share referable to the interest of the deceased devolving on his heirs must be excluded while computing the capital gains assessable to the HUF.Exclude from HUF's capital gains the portion attributable to the interest of the deceased coparcener which devolved by succession on his heirs.Effect of absence of actual physical partition on exclusion of notional shares - Dual character of property (partly vested in heirs individually and partly remaining joint until physical partition) - Computation of capital gains in the hands of a Hindu undivided family - No exclusion from the HUF's capital gains can be made for the notional share of the widow (Smt. Maniben) where she did not claim actual allotment and the property was not physically partitioned prior to sale. - HELD THAT: - While section 6 creates a deemed partition and vests an indefeasible right in heirs, the court emphasised the distinction between the vesting of a notional share and the effect of an actual physical partition. Female members are not coparceners and, absent voluntary claim and actual allotment of specific property to them, their notional share continues as part of the joint hotchpotch and remains subject to management by the karta. The court followed authority distinguishing the legal fiction's operation: it fixes shares for succession purposes but does not alter the state of jointness of property until actual partition occurs. Accordingly, where the widow did not claim and no allotment took place, her notional share could not be excluded from the HUF's asset for computation of capital gains.Do not exclude any share on account of the death of the widow (Smt. Maniben) for computing the HUF's capital gains.Final Conclusion: The reference is answered by holding that the capital gains on the sale of the plot must be computed after excluding the portion attributable to the deceased coparcener's share which devolved by succession on his heirs; however, no exclusion is permissible in respect of the widow's notional share which remained part of the joint family property in the absence of an actual claim and physical allotment. Issues Involved:1. Exclusion of the share of Shri Nanubhai and Smt. Maniben in computing capital gains.2. Status and continuity of the Hindu undivided family (HUF) after the death of Nanubhai.3. Effect of the Hindu Succession Act, 1956, on the devolution of property.4. Legal implications of deemed partition under Section 6 of the Hindu Succession Act.5. Taxability of capital gains in the hands of the HUF.Detailed Analysis:1. Exclusion of the Share of Shri Nanubhai and Smt. Maniben in Computing Capital Gains:The central issue was whether the Tribunal was right in excluding the share of Shri Nanubhai and Smt. Maniben for computing capital gains on the sale of property. The Tribunal concluded that the share of Nanubhai and Smt. Maniben should be excluded based on the Supreme Court decision in Gurupad Khandappa Magdum v. Hirabai Khandappa Magdum [1981] 129 ITR 440. The Tribunal found that the Hindu undivided family continued even after the death of Nanubhai, and at most, the share of Nanubhai and his widow could be excluded from the joint property of the HUF.2. Status and Continuity of the Hindu Undivided Family (HUF) after the Death of Nanubhai:The Tribunal and the court assumed that the HUF continued to exist after Nanubhai's death, despite the operation of Section 6 of the Hindu Succession Act. The property was not subjected to actual physical partition, and the family continued in the status of the HUF. The court noted that the property bore a dual character, with part of it vesting in the heirs of Nanubhai as their separate property and the remainder as HUF property.3. Effect of the Hindu Succession Act, 1956, on the Devolution of Property:The court discussed the impact of the Hindu Succession Act, particularly Section 6, which stipulates that the interest of a deceased coparcener devolves by succession and not by survivorship when a male Hindu dies leaving behind a female heir specified in Class I of the Schedule. This results in a deemed partition immediately before the death of the coparcener, giving each heir an indefeasible right to their share. The court noted that the property inherited by heirs ceases to be HUF property and becomes their individual property.4. Legal Implications of Deemed Partition under Section 6 of the Hindu Succession Act:The court clarified that the legal fiction of deemed partition under Section 6 does not extend beyond determining the share of the deceased for inheritance purposes. It does not result in an actual physical partition or disrupt the HUF unless a partition is claimed and executed. The court emphasized that the share of a female heir remains part of the HUF property until she voluntarily claims partition and it is actually allotted to her.5. Taxability of Capital Gains in the Hands of the HUF:The court held that for computing capital gains, the share of the property that devolved by succession on Nanubhai's heirs must be excluded from the HUF's property. The capital gains attributable to the interest inherited by the heirs cannot be taxed as HUF property. However, the share of Smt. Maniben, who did not claim partition before her death, remains part of the HUF property and cannot be excluded. The court concluded that the capital gains arising from the sale of the property should be apportioned between the HUF and the individual heirs based on their respective shares.Conclusion:The court answered the reference by stating that for computing capital gains, the share attributable to the interest of the deceased Nanubhai, which devolved by succession on his heirs, must be excluded. However, no exclusion of any share on account of the death of Maniben can be made. The court emphasized that the property retains its dual character until actual partition takes place, and the capital gains should be apportioned accordingly.