2020 (3) TMI 169 - AT - Income Tax

Tribunal rules HUF taxed on half properties, individual taxed on other half. Appeal allowed, alternative grounds dismissed.

The Tribunal ruled in favor of the appellant, determining that the Hindu Undivided Family (HUF) should be taxed on only half of the properties acquired, ... Deemed partition under section 6(3) of the Hindu Succession Act, 1956 - Continuance of HUF for income-tax purposes under section 171 of the Income-tax Act, 1961 - Taxation of capital gains on sale of HUF property after notional partitionDeemed partition under section 6(3) of the Hindu Succession Act, 1956 - Continuance of HUF for income-tax purposes under section 171 of the Income-tax Act, 1961 - Taxation of capital gains on sale of HUF property after notional partition - Whether capital gains arising on sale of three properties should be assessed wholly in the hands of the HUF of the son or apportioned so that only one half is taxable in that HUF in view of the notional partition under section 6(3) of the Hindu Succession Act, 1956. - HELD THAT: - The Tribunal found that section 6(3) of the Hindu Succession Act, 1956 (as amended in 2005) creates a notional division of coparcenary property immediately before the death of a Mitakshara coparcener so that, in the facts of this case, half the HUF property of the deceased father devolved to the son in his individual capacity and the other half constituted the nucleus of the son's HUF. The Assessing Officer taxed the entire capital gain in the hands of the son's HUF; that approach was inconsistent and legally impermissible because it proceeded both on the premise that the larger HUF ceased on the father's death and also that the entire assets of the larger HUF passed to the son's HUF. If no partition under section 171 of the Income-tax Act were found, the larger HUF (the father's HUF) alone would be taxable; conversely, applying the notional partition under section 6(3) leads to an apportionment - half to the son individually and half to the son's HUF. The Tribunal accepted the assessee's contention that, on the facts, the son's HUF is taxable only for one half of the properties and the Assessing Officer's action to tax the entire gains in the son's HUF was not sustainable. As the main plea was allowed, alternative contentions (including claims for exemptions and other consequential adjustments) were not adjudicated and treated as academic.Capital gains on the sale of the three properties are taxable in the hands of the son's HUF only to the extent of one half; the Assessing Officer's taxation of the entire gains in the son's HUF is set aside.Final Conclusion: The appeal is allowed: the assessee HUF is held taxable only in respect of one half of the properties acquired by the HUF headed by the deceased father for AY 2012-13; alternative and consequential grounds are rendered academic. Issues Involved:1. Taxation of surplus arising from the sale of immovable properties.2. Continuation of HUF in the absence of a partition finding under section 171.3. Taxation of capital gains in light of the amendment to section 6 of the Hindu Succession Act.4. Consideration of income and interest earned on the individual share.5. Exemption under sections 54 and 54EC for investments made out of the surplus.6. Levy of interest under sections 234A, 234B, and 234C.7. Initiation of penalty proceedings under section 271(1)(c).Issue-wise Detailed Analysis:1. Taxation of Surplus on Sale of Properties:The appellant contested the CIT (A)'s decision to tax the entire surplus from the sale of three immovable properties in the hands of the HUF. The appellant argued that, per the amendment to the Hindu Succession Act effective from 2005, a deemed partition entitles the HUF to only 1/2 share of the gain. The Tribunal found merit in the appellant's argument, noting that upon the death of Shodhan Sr, intestate succession should apply, resulting in a notional partition where 1/2 of the property would pass to Shodhan Jr in his individual capacity, and the other 1/2 would remain with the HUF.2. Continuation of HUF in Absence of Partition Finding:The CIT (A) upheld the AO's view that an HUF continues unless a finding of partition is recorded under section 171 of the Income-tax Act. The Tribunal acknowledged this legal position but emphasized that the notional partition under the Hindu Succession Act should still be recognized for determining the shares of the properties.3. Taxation of Capital Gains:The appellant argued that the amendment to section 6 of the Hindu Succession Act, which mandates a notional partition upon the death of a coparcener, should be considered. The Tribunal agreed, stating that 1/2 of the capital gains should be taxed in the hands of the HUF and the other 1/2 in the individual capacity of Shodhan Jr.4. Consideration of Income and Interest Earned:The appellant contended that the addition of Rs. 34,650, interest of Rs. 1,63,141, and long-term capital gain of Rs. 2,97,99,988 pertaining to the individual share should not be sustained in the hands of the HUF. The Tribunal found that the AO's decision to tax the entire gain in the hands of the HUF contradicted the legal position of notional partition.5. Exemption under Sections 54 and 54EC:The appellant sought exemption under sections 54 and 54EC for investments made out of the 1/2 share of the surplus if the gain is fully assessed in the hands of the HUF. The Tribunal did not need to adjudicate this alternative plea as it upheld the main plea regarding the division of capital gains.6. Levy of Interest under Sections 234A, 234B, and 234C:The appellant argued against the levy of interest under sections 234A, 234B, and 234C. The Tribunal did not explicitly address this issue in the judgment, as the main plea regarding the division of capital gains was upheld.7. Initiation of Penalty Proceedings under Section 271(1)(c):The appellant contested the initiation of penalty proceedings under section 271(1)(c). The Tribunal did not specifically address this issue, focusing instead on the main plea regarding the division of capital gains.Conclusion:The Tribunal upheld the appellant's plea that the HUF should be taxed only on 1/2 of the properties acquired by the HUF headed by Shodhan Sr, with the remaining 1/2 taxed in the individual capacity of Shodhan Jr. Consequently, the appeal was allowed in these terms, and the alternative grounds were dismissed as infructuous and academic.Judgment Delivered:The Tribunal pronounced the judgment in the open court on the 24th day of September, 2019.