2021 (6) TMI 408 - HC - Income Tax

Court rules notice time-barred, invalid, exempts sale of agricultural land

Sri. A.P. Oree Versus The Income Tax Officer, Non-Corporate Ward 1 (1), Chennai

The court ruled in favor of the petitioner, finding the notice dated 31.03.2015 to be time-barred and invalid. It held that Section 171 of the Income Tax ... Revision u/s 263 - Applicability of Section 171 of the Income Tax Act, 1961 - division of income without physical division of property - income earned from sale of the lands - denial of deduction u/s 54 in the hands of Individual - Partition of HUF or not - Assessment as a Hindu Undivided Family(HUF) - definition of the 'partition' in Explanation to Section 171 -Joint sale of property and there was no new ownership by the coparceners - Share orally divided between and proceeds from the sale of parcel of the land were distributed in proportion with their respective shares in the land and the balance parcel continued in their name without physical division. Notice u/s 263 as issued primarily on the ground that there was no physical division of the property and therefore the exemption under Section 54 F on sale appeared to be contrary to section 171 of the Income Tax Act, 1961. HELD THAT:- In considering the factum of partition for the purposes of assessment it is not permissible to ignore the special meaning assigned to partition under the explanation, even if the partition is effected through a decree of the court. Ordinarily decree of a civil court in a partition suit is good evidence in proof of partition but under Section 171 a legal fiction has been introduced according to which a preliminary decree of partition is not enough. Instead there should be actual physical division of the property pursuant to final decree, by metes and bounds. The legislature has assigned special meaning to the expression partition under the aforesaid Explanation with a view to safeguard the interest of the revenue. Any assessee claiming partition of HUF must prove the disruption of the status of HUF in accordance with the provisions of Section 171 having special regard to the Explanation. The assessee must prove that a partition effected by agreement or through court's decree, was followed by actual physical division of the property. In the absence of such proof partition is not sufficient to disrupt the status Hindu Undivided Family for the purpose of assessment of tax. A reading of sub- section 171 of the Income Tax Act, 1961 makes it very clear that it is applicable only where a Hindu family was already assessed as an Hindu Undivided Family(HUF). Otherwise, there is no meaning to the expression “hither to” in Section 171(1) of the Income Tax Act, 1961. It shall for the purpose of the Act be deemed to continue to be a Hindu Undivided Family, except where and insofar as a finding of partition has been given under the said section in respect of the said Hindu Undivided Family(HUF). Admittedly, during the lifetime of Shir.A.R.Pandurangan, the family was not assessed as a Hindu Undivided Family(HUF). It is only where there is a prior assessment as a Hindu Undivided Family(HUF) and during the course of assessment under section 143 or section 144 it is claimed by or on behalf of member of such Hindu Undivided Family which was assessed as a Hindu Undivided Family that there was a partition whether total or partial among the members of such family, such assessing officer shall make an enquiry thereto after giving notice of enquiry of all members. Where no such claim is made, question of making such enquiry by an Assessing Officer does not arise. Thus, the definition of “partition” in Explanation to Section 171 of the Income Tax Act, 1961 is attracted. The above definition cannot be read in isolation. Where a Hindu family was never assessed as a HUF, Section 171 of the Income Tax Act, 1961 will not apply even when there is a division or partition of property which does not answer to the above definition. Therefore, we are inclined to interfere with impugned notice dated 31.3.2015 and the impugned communication dated 16.11.2016 overruling the objection of the petitioner against the petitioner - Writ petition stands allowed Issues Involved:1. Validity of the impugned notice dated 31.03.2015.2. Applicability of Section 171 of the Income Tax Act, 1961.3. Assessment of capital gains under Section 54F of the Income Tax Act, 1961.4. Legality of the oral partition and its recognition under the Income Tax Act, 1961.Detailed Analysis:1. Validity of the Impugned Notice Dated 31.03.2015:The petitioner challenged the notice dated 31.03.2015 issued to the estate of A.R.Pandurangan (HUF) and the consequential speaking order dated 16.11.2016. The petitioner argued that the notice was dispatched after the due date, making it time-barred. The court found that the notice was indeed booked for delivery on 01.04.2015, beyond the period of limitation, as evidenced by the speed post cover. Despite this, no serious objection was raised by the petitioner at the earliest occasion. However, the court allowed the writ petition on this preliminary ground.2. Applicability of Section 171 of the Income Tax Act, 1961:The petitioner contended that Section 171 does not apply as the father, A.R.Pandurangan, was never assessed as a HUF during his lifetime. The court confirmed that Section 171 is applicable only where a Hindu family was already assessed as a HUF. Since A.R.Pandurangan was never assessed as a HUF, the provisions of Section 171, including the definition of 'partition,' do not apply. The court cited precedents, including Govind Das v. ITO and ITO v. N. K. Sarada Thampatty (Smt), to support this interpretation.3. Assessment of Capital Gains Under Section 54F of the Income Tax Act, 1961:The petitioner and his siblings had claimed exemption under Section 54F for the sale of agricultural land. The Income Tax Department argued that the income should be assessed in the hands of the estate of A.R.Pandurangan (HUF) due to the lack of physical division of property. However, the court noted that the Income Tax Appellate Tribunal had previously allowed the appeal of one of the brothers, A.P.Began, recognizing the oral partition and allowing the Section 54F exemption. The court upheld this view, stating that the assessment order allowing the deduction under Section 54F was not erroneous or prejudicial to the interests of the Revenue.4. Legality of the Oral Partition and Its Recognition Under the Income Tax Act, 1961:The petitioner claimed that the oral partition recorded in a memorandum on 23.08.2007 was valid. The Income Tax Department contended that the partition was not valid under Section 171 due to the lack of physical division. The court referred to the Explanation to Section 171, which defines 'partition' as requiring physical division of property. However, since Section 171 did not apply to the case, the court accepted the oral partition as valid. The court also noted that the memorandum of oral partition was not disputed by the Income Tax Department in the case of the petitioner's siblings.Conclusion:The court concluded that the impugned notice dated 31.03.2015 was time-barred and that Section 171 of the Income Tax Act, 1961, did not apply as the family was never assessed as a HUF. The oral partition was recognized, and the exemption under Section 54F was upheld. The writ petition was allowed, and the impugned notice and communication were quashed. No costs were awarded.