2015 (2) TMI 290 - HC - Income Tax

Court Revives Commissioner's Order, Upholds Family Arrangement Exclusion

The appeals were allowed, setting aside the Tribunal's order and reviving the Commissioner's order dated 09.05.1997. The court recognized the family ... Assessment after partition of a Hindu undivided family - legal character of a family arrangement - whether any amount or property covered by family arrangement can still continue to be the wealth of HUF? - AO entertained a doubt as to whether the arrangement can be treated as a partial partition - Held that:- Family arrangement, wherever it exists and is proved, is a sui generis i.e. a class by itself, with full legal enforceability, de hors the fact that it is not dealt with under any specific provision of an enactment. The settlement deserves to be given full effect and the legal consequences flowing therefrom cannot be ignored, on the ground that they do not fit into any specific provision of law. Once the HUF has settled a sum of ₹ 1,25,000/-, each, in favour of six minor daughters of the Karta, the corresponding amount ceased to be the wealth or the assets of the HUF. The same cannot be treated as part of the wealth of the HUF even thereafter. The returns filed by the HUF is not the avenue to examine the question as to how the amount so settled must be treated in the hands of the person on whom it was settled.Two other reasons assigned by the Tribunal are: (a) the insertion of Section 29A of the Hindu Succession Act in the context of State of Andhra Pradesh, makes the arrangement not binding and (b) clause - IV of the Deed of Settlement, is not legally correct. Both the aspects are totally outside the jurisdiction of the adjudication or determination under the Act. - Decided in favour of assessee. Issues Involved:1. Legal character of a family arrangement.2. Whether the amount or property covered by a family arrangement can continue to be the wealth of the Hindu Undivided Family (HUF).3. Applicability of Section 171 of the Income Tax Act, 1961.4. Impact of Section 29A of the Hindu Succession Act in the context of the State of Andhra Pradesh.5. Validity of clause IV of the Deed of Settlement.Detailed Analysis:1. Legal Character of a Family Arrangement:The judgment underscores that a family arrangement is a unique legal phenomenon distinct from other forms of property transfer recognized under the Transfer of Property Act or the Sale of Goods Act. The Supreme Court in Kale v. Deputy Director of Consolidation explained that family arrangements aim to resolve disputes, promote harmony, and avoid litigation within a family. They are governed by a special equity and are enforceable if honestly made, even if they stem from mutual mistakes or ignorance of rights. The court emphasized that such arrangements should be upheld to maintain family unity and social justice, rather than being disturbed on technical grounds.2. Wealth Status of Property under Family Arrangement:The court concluded that once a HUF settles a sum in favor of its members, such as the minor daughters in this case, the corresponding amount ceases to be part of the HUF's wealth. The mere fact that the transfer was in favor of HUF members does not alter this status. The judgment referenced the Madras High Court's decision in Commissioner of Income Tax v. S.M.M. Muthappa Chettiar, which held that sums transferred to minor daughters could not be treated as part of the HUF's wealth.3. Applicability of Section 171 of the Income Tax Act, 1961:Section 171 deals with the assessment of a HUF after partition. The Assessing Officer initially doubted whether the family arrangement could be treated as a partial partition but ultimately concluded that no member of the HUF claimed partition under Section 171(3). Consequently, the arrangement was not considered a partition, and the wealth remained with the HUF. However, the court found this approach flawed, as the family arrangement should be given full effect and the corresponding amounts should not be treated as HUF wealth.4. Impact of Section 29A of the Hindu Succession Act:The Tribunal suggested that Section 29A of the Hindu Succession Act, specific to Andhra Pradesh, rendered the family arrangement non-binding. The court dismissed this reasoning, stating that such considerations fall outside the jurisdiction of adjudication under the Income Tax Act.5. Validity of Clause IV of the Deed of Settlement:The Tribunal also questioned the legality of clause IV of the Deed of Settlement. The court found this aspect irrelevant to the determination under the Income Tax Act, emphasizing that the family arrangement, once proved, should be fully recognized and its legal consequences respected.Conclusion:The appeals were allowed, and the Tribunal's order was set aside. The Commissioner's order dated 09.05.1997 was revived, recognizing the family arrangement and excluding the corresponding amounts from the HUF's wealth. The court emphasized the enforceability of family arrangements and dismissed the Tribunal's additional reasons as outside its jurisdiction. The judgment reinforces the legal sanctity of family arrangements and their impact on the assessment of HUF wealth under the Income Tax Act.