1938 (5) TMI 16 - HC - Income Tax

Assessment of Hindu Undivided Family Income Post-Partition: Section 26(2) Prevails

The High Court held that in a scenario where a Hindu undivided family undergoes partition, and a new firm is established, the assessment of joint income ... - Issues:Interpretation of Sections 25-A(2) and 26(2) of the Indian Income Tax Act in the context of assessing joint income of a Hindu undivided family following its disruption and emergence of a genuine firm.Analysis:The case involved a reference under Section 66(2) of the Indian Income Tax Act seeking an opinion on the assessment of joint income of a Hindu undivided family following its disruption and the emergence of a genuine firm. The dispute arose during the assessment year 1933-34 when the family, previously assessed as a joint Hindu family, claimed a partition had occurred, and a new firm was constituted. The Income-tax Officer assessed the income under Sec. 25-A(2) despite the emergence of the new firm, leading to an appeal and subsequent reference to the High Court.The central question was whether the assessment should be conducted under Sec. 25-A(2) or Sec. 26(2) of the Income Tax Act. The Court opined that Sec. 25-A applies only in cases of partition within an undivided family, while Sec. 26 is applicable when a new firm is constituted, regardless of its origin from individual strangers or divided family members forming a partnership. In this case, where a firm emerged post-family partition, the assessment should proceed under Sec. 26(2).The Court referred to precedents from the Lahore High Court, emphasizing that the mere continuation of business by all former family members as a newly constituted firm signifies succession under Sec. 26(2). The Court rejected the argument that since the new firm comprised former family members, there was no succession as per Sec. 26(2). It highlighted the exclusivity of terms like individual, Hindu undivided family, firm, etc., under the Income Tax Act, supporting the view that the family's business entity had succeeded to a new entity, the firm.In alignment with the Lahore High Court's interpretation, the Court concluded that the assessment in the present case should be conducted under Section 26(2) of the Indian Income-tax Act. The judgment directed the Commissioner of Income-tax to be informed accordingly, with costs of the reference to be borne by the department.