Additional Income-Tax Officer vs A. Thimmayya and Others

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 1019-1020 of 1963

Decision Date: 9 November 1964

Coram: J.C. Shah, S.M. Sikri

In the matter styled Additional Income‑Tax Officer, Cuddapah versus A. Thimmayya and others, the judgment was delivered on 9 November 1964 by a Bench of the Supreme Court of India consisting of Justice J. C. Shah, Justice S. M. Sikri and Justice Subbarao. The petition was filed by the Additional Income‑Tax Officer for Cuddapah as the petitioner, and the respondents were A. Thimmayya and other members of the family. The case appears in the law reports as 1965 AIR 1238 and 1965 SCR (2) 91, and it has been cited in subsequent authorities including RF 1972 SC 294, R 1976 SC 1678, RF 1977 SC 552, R 1981 SC 1965, and R 1982 SC 760. The statutory provision under consideration was section 25‑A (1) and (2) of the Income‑Tax Act (XI of 1922), together with section 46 (5) of the same Act.

The factual backdrop involved pending proceedings for the assessment of income tax payable by a Hindu undivided family, of which the respondents were members. During those proceedings the family experienced a partition, and a claim was made before the Income‑Tax Officer to have the partition recognized under section 25‑A (1) of the Income‑Tax Act. Despite the claim, the Officer proceeded to assess tax on the basis that no partition had occurred, and after issuing the assessment order, subsequently passed an order acknowledging the partition. The amount of tax determined in that assessment was contested by the respondents on appeal to the Tribunal, but the Tribunal upheld the assessment. Because the tax remained in arrears, the Officer sought to attach the respondents’ salaries earned as employees of a firm, invoking section 46 (5) of the Act. The respondents challenged this attachment by filing a writ petition, which the High Court allowed on the ground that the Officer could not collect the tax without first apportioning the liability in accordance with section 25‑A (2). On appeal, the Supreme Court held that although the High Court was incorrect in stating that a final assessment could be reopened under section 25‑A (2) after a separate order under section 25‑A (1) was made, the appeal must nevertheless be dismissed. The Court explained that while an assessment of a Hindu undivided family remains in force, the liability for tax payment lies on the family’s estate and not on the individual members personally. The statutory scheme requires that a family assessed on its aggregate income continues to be treated as undivided even after a partition of property among its members. If a claim of partition is raised at the time of assessment, the Officer must conduct an inquiry after giving notice to all family members and, if satisfied, issue an order declaring that the family property has been partitioned into definite portions. Nevertheless, the Officer is legally obliged to make the assessment on the income of the undivided family as if no partition had occurred and then to apportion the tax liability to each member or group of members according to their respective portions of the family property.

According to the governing provision, when a claim for partition of a Hindu undivided family’s property is not made, or when such a claim is made but subsequently disallowed or left unconsidered by the Income‑tax Officer, the assessment of tax proceeds as if no partition had occurred. In that situation, the assessment is made on the income of the family as an undivided entity, and the responsibility to pay the tax is confined to the estate of the family. However, when a partition is recorded, the tax liability is apportioned among the members of the family in proportion to the portion of the family property allotted to each member. The proviso to sub‑section (2) of the relevant section further provides that, despite such apportionment, the members of the family remain jointly and severally liable for the entire amount of tax. This legal framework is reflected in the cited authorities [96 B‑F].

The appeal concerned civil appellate jurisdiction under Civil Appeals Nos. 1019‑1020 of 1963, which arose from judgments and orders dated 3 August 1961 of the Andhra Pradesh High Court in Writ Appeals Nos. 49 and 50 of 1960. Counsel for the appellant included the Solicitor‑General and two additional legal representatives, while counsel for the respondent comprised two advocates. The Court’s judgment was delivered by Justice Shah. The parties were Krishnappa and his two sons, Thimmayya and Venkatanarsu, who together formed a Hindu undivided family engaged in mining business under the name “Krishnappa and Sons.” The family was disrupted in 1946, resulting in the division of all family properties among its members. Subsequently, the mining business was taken over by a partnership consisting of Krishnappa and his two sons, and on 21 May 1947 a private limited company, “Krishnappa Asbestos and Barytes (Private) Ltd.,” acquired the partnership’s business for a sum of Rs. 2,04,000. Thimmayya was employed by the company as Mines Superintendent with a monthly salary of Rs. 400, while Venkatanarsu served as General Manager receiving Rs. 500 per month. At the time of the family’s disruption, assessments for the years 1941‑42, 1942‑43, 1944‑45, 1945‑46 and 1946‑47 were still pending. On 20 May 1946, Venkatanarsu asserted before the Additional Income‑tax Officer at Cuddapah that the family’s property had already been partitioned among its members in indefinite portions. For reasons not evident from the record, this claim remained unresolved until 30 June 1952. In the interim, the Income‑tax Officer issued assessments for the five years on various dates between 30 September 1948 and 30 November 1950, which together imposed a tax liability of Rs. 65,750. Appeals against those assessment orders were made to the Appellate Assistant Commissioner and to the Income‑tax Appellate Tribunal, but both appeals were dismissed. It was uncontested that the appeals did not challenge the legality of the assessments on the ground that the claim regarding the 1946 disruption had not been decided before the assessments were made. Finally, on 30 June 1952, the Income‑tax Officer of the Special Circle, Madras, entered an order concerning the matter.

An order was issued under section 25‑A stating that the property belonging to the Hindu undivided family of Krishnappa and his sons had been partitioned on 2 November 1946. Because the tax that had become payable on that assessment remained unpaid, the Income‑tax Officer issued a further order on 25 June 1958 under section 46(5) of the Indian Income‑tax Act, 1922. That later order directed the Managing Director to deduct from the salaries of the defaulters, namely Thimmayya and Venkatanarsu, the amount of tax that was outstanding and to remit the deducted sum to the credit of the Government of India. In response, Thimmayya and Venkatanarsu filed petitions under article 226 of the Constitution in the High Court of Andhra Pradesh at Hyderabad. They prayed that the court issue writs of certiorari or any other appropriate writs to set aside the Income‑tax Officer’s order dated 25 June 1958 made under section 46(5). Their petitions were founded on two separate grounds. First, they contended that after the Income‑tax Officer had recorded an order on 30 June 1952 under section 25‑A(1) that the family had been disrupted “with effect from 2 November 1946”, any steps taken thereafter to recover the tax assessed without a subsequent order under section 25‑A(2) were legally invalid. Second, they argued that arrears of tax attributable to the former Hindu undivided family could not be recovered from the salaries they earned as employees of the Company. The High Court, through Justice Seshachelapati, decided in favour of the petitioners, and that decision was affirmed on appeal by a Division Bench of the High Court of Andhra Pradesh. The High Court held that the order recorded under section 25‑A(1) on 30 June 1952 operated retrospectively in a clear manner, thereby obliging the Income‑tax Officer to give effect to that order, to recognise the partition, and to carry out the consequences flowing from it. Accordingly, the Court observed that the petitioners were entitled to demand an apportionment order under section 25‑A(2), and that, in the absence of such an order, the Income‑tax Officer could not lawfully commence tax‑collection proceedings against them under the proviso to subsection (2) of section 25‑A. The Income‑tax Officer, Cuddapah, filed two appeals against the High Court’s decision, each supported by a certificate of fitness. Originally, under the Indian Income‑tax Act, 1922, section 3 treated a Hindu undivided family as a single unit for assessment purposes, yet the statute did not provide any mechanism for levying tax or enforcing tax liability against individual family members when the family had been divided prior to the assessment. This deficiency became especially problematic because section 14(1) 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 a Hindu undivided family could not be assessed or collected from its members if the family was already divided at the time of assessment. To remedy this evident gap in the legislation, the Legislature later introduced section 25‑A.

Section 25‑A was enacted to provide for the assessment and enforcement of tax liability on income that had been received by a Hindu undivided family which no longer existed at the date of assessment. While the purpose of the amendment was to correct the defect that arose from the earlier statutory scheme, the new provision extended its reach far beyond a simple correction. The Indian Income‑Tax Amendment Act 3 of 1928 inserted Section 25‑A, which at the material time read as follows:

“(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 there into as he may think fit, and, if he is satisfied that the joint family property has been partitioned among the various members or groups of members in definite portions he shall record an order to that effect. Provided that no such order shall be recorded until notices of the inquiry have been served on all the members of the family. (2) Where such an order has been passed, or where any person has succeeded to a business, profession or vocation formerly carried on by a Hindu undivided family whose joint family property has been partitioned on or after the last day on which it carried on such business, profession or vocation, the Income‑tax Officer shall make an assessment of the total income received by or on behalf of the joint family as such, as if no partition had taken place, and each member or group of members shall, in addition to any income‑tax for which he or it may be separately liable and notwithstanding anything contained in sub‑section (1) of section 15, be liable for a share of the tax on the income so assessed according to the portion of the joint family property allotted to him or it; and the Income‑tax Officer shall make assessments accordingly on the various members and groups of members in accordance with the provisions of section 23. Provided that all the members and groups of members whose joint family property has been partitioned shall be liable jointly and severally for the tax assessed on the total income received by or on behalf of the joint family as such. (3) Where such an order has not been passed in respect of a Hindu family hitherto assessed as undivided, such family shall be deemed, for the purposes of this Act, to continue to be a Hindu undivided family.”

The effect of the section was to create two substantive rules. First, a Hindu undivided family that had already been assessed for tax would, for the purposes of the Act, continue to be treated as undivided and therefore remain liable to tax in that status unless the Income‑tax Officer recorded an order confirming that the family property had been partitioned in accordance with sub‑section (1). Second, where at the time of assessment a claim was made by or on behalf of the members that the joint family property had been divided into definite portions, the Officer was required to conduct an inquiry, and if satisfied that a complete partition had occurred, to record an order and then assess the total income of the former undivided family as if no partition had taken place. After such assessment, the tax on the total income had to be apportioned among the members or groups of members in proportion to the share of the joint family property allotted to each, and each member or group was liable for that share in addition to any separate tax liability. The provision also stipulated that all members and groups whose property had been partitioned were jointly and severally liable for the tax assessed on the total income of the former undivided family.

The Court observed that when a Hindu undivided family asserts that its joint family property has been divided among its members or among separate groups of members in clearly defined portions – that is, when a full partition of the entire estate has been effected resulting in a physical division of the property to the extent that such division is possible – the Income‑Tax Officer is required to conduct an inquiry. If, after conducting that inquiry, the Officer is satisfied that the partition actually occurred, he must record an order confirming the partition. Once such an order is recorded, the Officer is still obligated to assess the total income that was received by or on behalf of the undivided family as though the partition had never taken place. Following that assessment, the Officer must then apportion the income‑tax that has been assessed on the total family income among the individual members or groups of members in accordance with the provisions of section 23. This apportionment is carried out by adding to the tax that each member or group may already be liable to pay on their separate income a portion of tax that is proportional to the share of the undivided family property that has been allotted to that member or group. The Court emphasized that this fresh apportionment and assessment operate notwithstanding any provision contained in sub‑section (1) of section 14.

Further, the Court explained that the proviso to sub‑section (2) introduces a significant departure from the earlier rule. In a situation where the income of the joint family is being assessed, the tax liability normally attaches to the assets of the family as a whole. However, when a partition order under sub‑section (1) has been recorded, the proviso expressly declares that all members and groups of members become jointly and severally liable for the tax that was assessed on the total income received by or on behalf of the joint family. Until such an order is recorded under section 25‑A(1), liability for tax is limited to the assets of the Hindu undivided family; the proviso to sub‑section (2) transforms that liability, upon recording of the order, into a personal liability of each member for the amount of tax due by the family. The Court noted that an order under sub‑section (1) can be made only when two conditions exist simultaneously: the family in question has previously been assessed as an undivided family, and at the time of making an assessment a claim is made that the family property has been partitioned among members or groups in definite portions. Sub‑section (2) of section 25‑A becomes effective only after an order under section 25‑A(1) has been made and does not apply otherwise. Accordingly, the scheme of section 25‑A is clear: a Hindu undivided family that has previously been assessed on its income continues to be assessed in that capacity even after its property is partitioned. If a claim of partition is raised at the time of assessment, the Income‑Tax Officer must issue notice to all members of the family and conduct an inquiry to determine whether a partition has indeed taken place.

The Court explained that when a claim was made that the family property had been divided into distinct portions, the Income‑tax Officer was required to give notice to each member of the family and to determine, after being satisfied of the claim, that a partition had indeed occurred. Even after reaching that determination, the law mandated that the Officer continue to assess the income of the Hindu undivided family as if no partition had taken place. Subsequently, the total tax liability was to be apportioned among the members or groups of members. The Officer was required to add to the tax on the separate income of each member or group the amount of tax that corresponded proportionately to the share of the joint family property allotted to that member or group, and then to make an assessment under section 23 against the individual members in accordance with that calculation. The Court further noted that if no claim was filed for recording a partition, or if a claim was filed but was either dismissed or left unconsidered by the Officer, the assessment of the Hindu undivided family would continue as though the family remained undivided and its income remained fully assessable. The Court stressed that failure to issue an order on a claim did not diminish the Officer’s jurisdiction to assess the family that had previously been treated as undivided. Likewise, the Officer could still assess the income of a family that had been partitioned if the Officer either received no claim, was not convinced of the claim’s truth, or failed to dispose of the claim because of an error or inadvertence. In every such situation, the Officer’s power to assess the family’s income remained intact because the assessment procedure was prescribed by statute, and any error or irregularity could be corrected only by the statutory remedy, without allowing a collateral attack on the assessment.

Applying these principles to the case at bar, the Court observed that a claim had undeniably been made at the time the assessment was being prepared, asserting that the family property had been partitioned. That claim had not been resolved before the assessment was finalized, and consequently the Income‑tax Officer proceeded to assess the family’s income on the basis that the property remained undivided. The Officer later issued an order dated 30 June 1952, whereby he held that the family property had been partitioned on 2 November 1946. However, the Court held that the statute provided no mechanism that permitted an Income‑tax Officer to reopen an assessment of a Hindu undivided family on the basis of an order made under section 25‑A(1) after the assessment order had already been issued. The parties had filed appeals, and it was undisputed that no objection had been raised concerning the regularity or legality of the Officer’s procedure. The assessment matters were taken to the Income‑tax Appellate Tribunal, which confirmed the assessment orders. After those confirmations, the Court found that the assessment could not be reopened on the ground of the later partition order, and therefore the assessment remained in force.

The Court observed that the Income‑tax Officer had attempted to reopen assessment orders by relying on an order that recorded the partition of the family property, thereby seeking to overturn orders that had become final under the seal of the Income‑tax Appellate Tribunal. The Court held that the High Court was mistaken in concluding that a final assessment order could be reopened under section 25‑A(2) when the officer later passed an order under section 25‑A(1) after the assessment had already been made. Nevertheless, the Court decided that the appeals filed by the Income‑tax Officer must nevertheless fail. The Court explained that an order recording a partition that was made after the date of the assessment order must be disregarded for the reasons previously discussed, and tax must be levied as if no such partition order had been made. As a result, in the absence of an order under section 25‑A(1) and the consequent proceedings under sub‑section (2), the liability to pay tax must rest upon the property of the Hindu undivided family and cannot be enforced against individual members of the family personally.

The Court further noted that the Income‑tax Officer had attempted to invoke section 46(5) to attach the remuneration earned by Thimmayya and Venkatanarsu in their capacities as employees of Krishnappa Asbestos and Barytes (Private) Ltd., a step the Court found the officer to be incompetent to take. The Court reiterated that while the assessment concerns the income of the Hindu undivided family, the liability to satisfy the tax remains confined to the family’s estate; only after a partition is recorded and an assessment is made under sub‑section (2) of section 25‑A does the proviso to that sub‑section become operative. The Solicitor‑General argued that the second paragraph of sub‑section (2), which is drafted as a proviso, effectively operates as a substantive provision that imposes joint and several liability on all members of the family for tax assessed on the total income received by or on behalf of the joint family. That argument was predicated on the contention that the Legislature, by means of the proviso, intended that once a partition is effected—whether or not such partition is recorded under sub‑section (1)—all members of the family would be jointly and severally liable for the tax assessed on the family’s total income. The Court rejected that construction, stating that however the proviso is read, it does not convey such meaning. The Court explained that the scheme of the section provides that, so long as the Hindu undivided family continues to exist, the liability for payment of tax rests on the family’s property and not on the members personally. When an order recording the partition of the family’s property is made, the liability of the members must be apportioned in accordance with the provisions of the sub‑section, but one of the consequences of assessment after such apportionment is that the members stand jointly and severally liable for the entire amount of tax assessed against the family. In the present case, no orders were

There was no order recorded by the Income‑Tax Officer at the time the assessments for the five‑year period were made, and consequently no personal liability for the members of the Hindu undivided family arose under the proviso to subsection (2). The Officer was not attempting to attach to Thimmayya and Venkatanarsu the land or other assets that formerly constituted the property of the Hindu undivided family; rather, the Officer sought to seize the personal income of the two respondents. Such a seizure could be justified only if, by operation of the proviso to subsection (2), a personal liability had been created against them. In the absence of an order made under subsection (1), however, that personal liability does not arise against members of the Hindu undivided family, even though the family may have been disrupted. Accordingly, the Court was of the view—though for reasons different from those expressed by the High Court—that, because no order recording the partition of the family’s property among its members had been made before the assessment orders were issued, the two respondents were not personally liable to satisfy the tax that was due by the joint family. The appropriate remedy for the Income‑Tax authorities in the circumstances of this case would have been to proceed against any property that still belonged to the Hindu undivided family, a step which, as the record shows, they did not take. In light of these observations, the order of the High Court was to be confirmed and the appeals were dismissed with costs. The Court further ordered that there would be one hearing fee and that the appeals be dismissed.