Additional Income-Tax Officer vs A. Thimmayya And Ors.

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 9 November 1964

Coram: J.C. Shah, K. Subba Rao, S.M. Sikri

In this case the Court described that Krishnappa and his two sons, Thimmayya and Venkatanarsu, formed a Hindu undivided family which carried on a mining business under the name Krishnappa and Sons. The family was formally disrupted in 1946 and its assets were divided among the members. Following the disruption the business previously known as Krishnappa and Sons was taken over by a partnership consisting of Krishnappa and his two sons. Subsequently, on 21 May 1947 a private limited company named Krishnappa Asbestos and Barytes (Private) Ltd. acquired the partnership’s business for a sum of Rs. 2,04,000. After the acquisition, Thimmayya was appointed as mines superintendent of the company and received a monthly salary of Rs. 400, while his brother Venkatanarsu was appointed as the General Manager and received a monthly salary of Rs. 500.

The Court went on to explain that at the time the Hindu undivided family was disrupted, tax assessments for the financial years 1941‑42, 1942‑43, 1944‑45, 1945‑46 and 1946‑47 were still pending. On 20 May 1946 Venkatanarsu made a claim before the Additional Income‑Tax Officer in Cuddapah that the family’s property had been partitioned into distinct shares. The record showed that this claim was not finally disposed of until 30 June 1952. In the interval, the Income‑Tax Officer issued assessments for the five years on various dates between 30 September 1948 and 30 November 1950, which together created a total tax liability of Rs. 65,750. The assessments were appealed to the Appellate Assistant Commissioner and then to the Income‑Tax Appellate Tribunal, but both appeals were unsuccessful. It was undisputed that the appellants had not argued that the Income‑Tax Officer’s assessment orders were illegal because they were made before the claim of partition had been resolved. Later, on 30 June 1952 the Income‑Tax Officer of the Special Circle in Madras recorded, under section 25‑A, that the family’s property had been partitioned as of 2 November 1946. Because the tax remained unpaid, the Officer issued, on 25 June 1958, an order under section 46(5) of the Indian Income‑Tax Act, 1922 directing the Managing Director of the company to deduct from the salaries of Thimmayya and Venkatanarsu the amount of tax due and to remit that sum to the Government of India. In response, the two brothers filed petitions under Article 226 of the Constitution in the High Court of Andhra Pradesh at Hyderabad, seeking certiorari or any other appropriate writ to set aside the June 1958 order. Their petitions were based on two grounds: first, that the 1952 order under section 25‑A(1) declared the family to have been disrupted effective 2 November 1946, and therefore any tax recovery actions taken without a subsequent order under section 25‑A(2) were invalid; and second, that tax arrears of the former Hindu undivided family could not be collected from the salaries earned by the brothers in their capacities as employees of the company.

The petitioners argued two points. First, they contended that after the Income‑tax Officer had recorded an order on 30 June 1952 under section 25‑A(1) declaring that the family was disrupted “with effect from 2 November 1946”, any steps taken to recover the assessed tax without a subsequent order under section 25‑A(2) were legally invalid. Second, they maintained that arrears of tax owed by the former Hindu undivided family could not be collected from the salaries earned by them in their capacity as employees of the Company. The High Court of Andhra Pradesh, with Justice Seshachelapati presiding, ruled in favour of the petitioners, and a Division Bench affirmed that judgment on appeal. The High Court observed that the order issued under section 25‑A(1) on 30 June 1952 operated retrospectively in a clear manner, and therefore the Income‑tax Officer was obligated to implement that order, recognise the partition, and attend to the consequences that followed. Accordingly, the Court held that the petitioners were entitled to demand an apportionment order under section 25‑A(2); without such an order, the proviso to subsection (2) of section 25‑A barred any commencement of tax‑collection proceedings against them. The Income‑tax Officer of Cuddapah, with a certificate of fitness, subsequently filed two appeals against the High Court’s order. Under the original Indian Income‑tax Act, 1922, a Hindu undivided family was treated as a single unit of assessment under section 3, yet no mechanism existed for levying tax or enforcing tax liability on individual members when the family had already been divided before assessment. This deficiency was intensified by section 14(1), which stipulated that an assessee could not be liable for tax on any sum received as a member of a Hindu undivided family. Consequently, income received by such a family could not be assessed or collected from its members if the family was divided at the time of assessment. To remedy this evident lacuna, the Legislature introduced section 25‑A to provide for assessment and enforcement of tax liability on income received by a Hindu undivided family that no longer existed at the assessment date. However, the new provision went beyond merely correcting the statutory defect. Section 25‑A, as incorporated by the Indian Income‑tax Amendment Act 3 of 1928, read: “(1) Where, at the time of making an assessment under section 23, it is claimed by or on behalf of any member of a Hindu family hitherto assessed as undivided that a partition has taken place among the members of such family, the Income‑tax Officer shall make such inquiry thereinto as he may think fit, and, if he is satisfied that the joint family property has been partitioned among various members or groups…”

In that provision, the Income‑tax Officer was required to record an order stating that the members of a Hindu family had received their property in definite portions, but only after notices of the inquiry had been served on every member of the family. The provision went on to state that, when such an order had been passed, or when a person had taken over a business, profession or vocation that had previously been carried on by a Hindu undivided family whose joint family property had been partitioned on or after the last day on which the family had carried on that activity, the Officer was to make an assessment of the total income that had been received by or on behalf of the joint family as if no partition had occurred. Each member or each group of members was then to be liable, in addition to any tax for which he or it might be separately responsible and notwithstanding anything contained in sub‑section (1) of section 15, for a share of the tax on the assessed income proportionate to the portion of the joint family property that had been allotted to him or to that group. The Officer was further directed to make assessments on the various members and groups in accordance with the provisions of section 23. A proviso to this sub‑section stipulated that all members and all groups of members whose joint family property had been partitioned were to be liable jointly and severally for the tax assessed on the total income received by or on behalf of the joint family. The provision also contained a third sub‑section which provided that, where no such order had been passed in respect of a Hindu family that had previously been assessed as undivided, that family was to be deemed, for the purposes of the Act, to continue to be a Hindu undivided family. The Court observed that the Section therefore created two substantive rules. The first rule was that a Hindu undivided family which had been assessed to tax was to be deemed, for the purposes of the Act, to remain undivided and therefore liable to tax in that status unless an order was passed recording a partition of its property as contemplated by sub‑section (1). The second rule was that, if at the time of making an assessment it was claimed by or on behalf of the family members that the joint family property had been partitioned among the members or groups of members in definite portions—that is, if a complete partition of the entire estate had been effected resulting in the physical division of the estate to the extent possible—the Income‑tax Officer was to conduct an inquiry and, if satisfied that such a partition had taken place, to record an order to that effect. Even after an order was passed, the Officer was required to assess the total income received by or on behalf of the undivided family as if no partition had occurred, and then to apportion the tax on that total income and to assess each member or each group of members in accordance with the share of the family property allotted to them.

In the judgment, the Court explained that when an order under the first‑sub‑section of section 25‑A was recorded, the Income‑Tax Officer had to apply the provisions of section 23 by adding to the tax that each member or group of members might separately owe a portion of tax that corresponded to the share of the undivided family property allotted to that member or group. The Court emphasized that this apportionment and the resulting new assessment were to be made even though sub‑section (1) of section 14 contained different provisions. The Court further noted that the proviso to sub‑section (2) introduced a significant change: in a normal assessment of a joint family’s income, the tax liability rested on the family’s assets, but once a partition order under sub‑section (1) was recorded, the proviso expressly declared that all members and groups of members became jointly and severally liable for the tax assessed on the total income received by or on behalf of the joint family. Consequently, while previously, absent a partition order under section 25‑A(1), liability was limited to the assets of the Hindu undivided family, the proviso to sub‑section (2) transformed that liability into a personal responsibility of the individual members for the amount of tax due by the family. The Court then outlined that an order under sub‑section (1) could be made only when two conditions were satisfied: the family had previously been assessed as an undivided entity, and at the time of assessment a claim was made that the family property had been partitioned among members or groups in definite portions. The Court clarified that sub‑section (2) of section 25‑A became operative solely when an order under section 25‑A(1) was made; it did not take effect otherwise. Accordingly, the sub‑section required the Income‑Tax Officer to assess the total income received by or on behalf of the joint family and to apportion it in the manner prescribed by sub‑section (2) whenever an order under sub‑section (1) was issued. The Court described the overall scheme of section 25‑A as follows: a Hindu undivided family that had been assessed on its income would continue to be assessed in that status even if its property was partitioned among its members. If, at the time of assessment, a claim was raised that a partition had occurred, the Income‑Tax Officer was required to conduct an inquiry, after giving notice to all family members, and to issue an order confirming that the family property had been partitioned in definite portions, provided the Officer was satisfied with the claim. Even after such an order, the Officer was statutorily obliged to assess the income of the Hindu undivided family as if no partition had taken place, then to apportion the total tax liability, and to add to each member’s or group’s separate income a tax amount proportionate to the share of the joint family property allotted to them, finally making an assessment under section 23 on the members accordingly. The Court noted that if no claim for recording a partition was made, or if a claim was made but was disallowed or not considered, the assessment would continue as if the family remained undivided.

In this matter the Court observed that when a claim of partition is not finally considered by the Income‑tax Officer, the assessment of a Hindu undivided family that has previously been treated as undivided must continue to be made as though the family itself had received the income and remained liable to be assessed. The Court further explained that the mere failure to pass an order on a claim of partition does not diminish the Officer’s authority to assess the family’s income. The Officer is therefore empowered to assess the income of a Hindu undivided family even after a partition, provided that either no claim of partition has been made, the Officer is not convinced that the property has actually been divided into definite portions, or the claim has not been disposed of because of an oversight or inadvertence. In each of these situations the Officer’s jurisdiction to assess the family’s income remains intact because the assessment procedure is prescribed by statute. The Court noted that any mistake or irregularity in the assessment may be corrected only in the manner set out by the statute, and that such an assessment cannot be attacked on collateral grounds.

The Court then turned to the facts of the present case. It was undisputed that a claim that the family property had been partitioned was raised at the time the assessment was being made, but the claim had not been resolved before the Officer proceeded with the assessment as though the property remained undivided. By an order dated 30 June 1952 the Officer had recorded that the partition had taken place on 2 November 1946. However, the Court held that the statute provides no mechanism for the Officer to reopen an assessment of a Hindu undivided family on the basis of a later order under section 25‑A(1) after the assessment order had been issued. The parties had filed appeals, and it was common ground that no objection was raised to the regularity or legality of the Officer’s procedure. The assessment was taken to the Income‑tax Appellate Tribunal, whose confirmation made the assessment final. Accordingly, the Officer could not later reopen the assessment by relying on the partition order, nor could he attempt to overturn the final orders of the Tribunal. The Court found that the High Court erred in holding that a final assessment could be reopened under section 25‑A(2) when a subsequent order under section 25‑A(1) was made. Consequently, the Court concluded that the Officer’s appeals must fail; the partition order recorded after the assessment date must be disregarded, and tax must be levied as if no such partition order had been made.

In the present circumstances, the Court observed that when there is no order made under section 25‑A(1) and consequently no proceedings under sub‑section (2), the liability to pay tax must rest solely upon the property of the Hindu undivided family and cannot be enforced against the individual members personally. The Income‑tax Officer attempted to invoke section 46(5) to attach the salaries earned by Thimmayya and Venkatanarsu in their capacity as employees of Krishnappa Asbestos & Barytes (Private) Ltd., an action the Court held to be beyond his competence. The Court explained that as long as the assessment concerns income of the Hindu undivided family, the obligation to satisfy the tax is confined to the estate of the family. Only after a formal order recording the partition of the family property is made and an assessment is carried out under sub‑section (2) of section 25‑A does the proviso to that sub‑section become operative. Until such an order exists, the tax liability remains limited to the family’s collective assets and does not extend to the personal property of its members.

The Solicitor‑General argued that the second paragraph of sub‑section (2), which appears as a proviso, functions as a substantive provision imposing joint and several liability on every member of the family for tax assessed on the total income received by or on behalf of the joint family. He contended that the Legislature intended that once a partition occurs—whether recorded under sub‑section (1) or not—all family members would be jointly and severally liable for the tax on the family’s total income. The Court rejected this interpretation, noting that the wording of the proviso does not support such a meaning. The scheme of the section is clear: while the assessment pertains to the Hindu undivided family, the tax liability rests on the family’s property and not on the members personally. When an order indicating that the family property has been partitioned is recorded, the liability of the members is apportioned according to the sub‑section, and one consequence of that assessment after apportionment is that the members become jointly and severally liable for the entire tax assessed against the family. Applying this to the facts, the Court found that no orders were recorded by the Income‑tax Officer at the time assessments were made for the five years in question; consequently, no personal liability arose for the family members under the proviso to sub‑section (2). The Officer’s attempt to reach the personal incomes of Thimmayya and Venkatanarsu would be permissible only if the proviso had generated personal liability against them. In the absence of an order under sub‑section (1), such liability does not arise, even though the family is disrupted.

In this matter the Court held, although not for the reasons articulated by the High Court, that because no order had been recorded before the issuance of the assessment orders indicating that the property of the Hindu undivided family had been partitioned among its members, the two respondents could not be treated as personally liable for the tax liability of the joint family. The Court explained that the statutory scheme provides that personal liability of family members arises only when a partition order has been made and recorded, and that in the absence of such an order the liability remains with the family as a whole. Accordingly, the proper remedy available to the income‑tax authorities, given the situation, was to proceed against any property that belonged to the Hindu undivided family itself. The Court noted that the tax authorities had, in fact, not taken that step and had not attempted to attach or recover the family’s property. On that factual basis the Court concluded that the order passed by the High Court should be affirmed. Accordingly, the appeals filed by the respondents were ordered to be dismissed. The Court further directed that the respondents be ordered to pay the costs of the proceedings and that a single hearing fee be imposed. In sum, the Court confirmed the High Court’s decision and dismissed the appeals, with costs awarded against the appellants.