Commissioner Of Income-Tax, Madras vs M. K. Stremann, Madras

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

Court: supreme-court

Case Number: Civil Appeal No. 1105 of 1963

Decision Date: 09/11/1964

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

In the matter titled Commissioner of Income‑Tax, Madras versus M K Stremann, Madras, the judgment was delivered on 9 November 1964 by a bench of the Supreme Court of India consisting of Justice S M Sikri and Justice J C Shah. The citation for this decision appears as 1965 AIR 1494 and 1965 S C R (2) 106, and it is also referenced in the citation index as RF 1970 SC1722 (12). The case concerned the application of the Income‑Tax Act 1922 (Act 11 of 1922) to a situation involving a partition deed that purported to blend self‑acquired property with property belonging to a Joint Hindu family. The central question was whether the deed constituted a valid partition that could justify an order under section 25A of the Act, or whether it was merely a transfer to minors within the meaning of section 16(3)(a)(iv). For several years up to the assessment year 1952‑53, the assessee had been assessed individually on income derived from a house that was openly acknowledged as Joint Hindu family property, as well as from a selling agency, with a single set of accounts maintained for both sources. On 19 December 1952, a deed of partition was executed in which the assessee divided his estate between himself and his three minor children, who were represented by their mother.

During the assessment proceedings for the year 1953‑54 the assessee applied for an order under section 25A, seeking that separate assessments be made for each member of the former family unit as of the date of the partition deed, 19 December 1952. The Income‑Tax Officer rejected this application, holding that the lack of separate accounting for income from ancestral and self‑acquired property did not cause the latter to become part of the Joint family property, and further concluding that the deed did not effect a partition but rather operated as a direct or indirect transfer of the assessee’s self‑acquired property within the scope of section 16(3)(a)(iv). This view was affirmed by the Appellate Assistant Commissioner and subsequently by the Appellate Tribunal. Upon a reference made to the High Court, however, the High Court determined that the deed executed on 19 December 1952 constituted a valid partition and was not a transfer within the meaning of section 16(3)(a)(iv). The revenue side argued that the sole evidence of the transfer of all assets and liabilities, including the agency business, to the Joint Hindu family lay in a recital within the partition deed, and that there was no prior blending of the self‑acquired property with ancestral property before the partition; all clauses of the deed were said to have taken effect at the moment of signing, leaving no interval between any alleged blending and the partition. The Court held that once instructions were given that the self‑acquired property should be treated as Joint family property in the deed to be executed, the property assumed the character of Joint family property, and that the execution of the deed served as evidence of a pre‑existing fact—that is, the insertion of a self‑acquired property into the

The Court observed that the High Court was correct in finding that the partition was carried out on the premise that the self‑acquired property was placed before the partition together with the sole item of joint family property. That circumstance, the Court explained, served as proof that, even if only for a brief period before the partition, the self‑acquired property of the assessee had been blended with his ancestral joint family property. Consequently, the Court held that by the date of 19 December 1952, and prior to the actual division, the properties in question had acquired the character of joint family property. The partition itself took place on 19 December 1952, and after that date the portions allotted to the shares of the assessee and to the members of his divided family were held by each of them separately. The Court further noted that the partition deed did not constitute a direct or indirect transfer of assets to the minor children by the assessee within the meaning of section 16(3)(a)(iv), and it affirmed the decision in C.I.T. Gujarat v. Keshavlal Lallubhai, [1965] 2 S.C.R. 99, as being applicable.

The judgment was delivered in a civil appellate jurisdiction under Civil Appeal No. 1105 of 1963, filed by special leave against the Madras High Court judgment dated 30 August 1960 in Criminal Revision No. 49 of 1956. Counsel for the appellant represented the petitioner, while counsel for the respondent represented the assessee. Counsel for the intervener also appeared. The opinion was authored by Justice Sikri. The appeal challenged the High Court’s answer to a question referred by the Appellate Tribunal in a dispute with the Revenue. The Tribunal had posed three questions: first, whether there was material for the Tribunal to conclude that the various assets in question belonged solely to the assessee in his individual capacity until 19 December 1952; second, assuming an affirmative answer to the first, whether the deed identified as Annexure ‘B’ effected a transfer of assets to the three minor children that would engage the provisions of section 16(3)(a)(iv) of the Income‑Tax Act; and third, assuming a negative answer to the first question, whether the Income‑Tax Officer’s rejection of the claim of partition under section 25A, together with the assessee’s failure to appeal that decision independently, entitled the assessee to any modification of the assessment other than the status alone. The High Court had answered the first question in favour of the Revenue, the second question against the Revenue, and the third question in favour of the assessee. The respondent, M. K. Stremann, had not appealed against the answer to the first question, which therefore became final. The Court therefore confined its review to whether the High Court had correctly answered the second question.

The Court considered the factual background that gave rise to the present appeal. The father of the appellant, Kulandavelu Mudaliar, had acted as an agent for Muller & Phipps (India) Ltd., selling the company’s pharmaceutical preparations in Madras. During the period when his father performed this agency work, the appellant himself was employed by the same company as an assistant. Kulandavelu Mudaliar died on 27 July 1938, leaving behind a house situated on Ayalur Muthial Mudali Street, several insurance policies and a number of income‑tax refunds that were due to him. The appellant realised the total value of those assets, amounting to Rs. 26,600, and used the proceeds to acquire a new house at No. 3, Varadarajulu Naidu Street in December 1945. The parties did not dispute that the house acquired with the realised sum was held as joint Hindu family property. After his father retired from the agency of Muller & Phipps Ltd., the appellant was appointed to the agency in his own individual capacity. From the assessment year 1938‑39 through the year 1952‑53, the appellant was assessed as an individual on both the income derived from the agency and the income generated from the joint Hindu family property. For the purpose of assessing his tax liability, the appellant kept a single set of accounts that covered the income from the agency as well as the income from the family property. In 1944 the appellant’s first son was born, and a second son was born in 1945. On 19 December 1952 the appellant executed a deed of partition. Relying on that deed, he applied before the Income Tax Officer, during the assessment proceedings for the assessment year 1953‑54 (the accounting year ending 31 March 1953), for an order under section 25A of the Income‑Tax Act and for separate assessments to be made of each member of the former family as of the date of the partition deed. The Income Tax Officer rejected the appellant’s claim and held that the mere existence of any ancestral property, however small, did not cause all self‑acquired property to become part of the joint family assets merely because the incomes were not separately accounted for. The Officer further concluded that no partition had occurred; instead, he described the appellant’s conveyance of his self‑acquired property as a donation, thereby invoking section 16 (3) (a) (iv) of the Act. In an alternative view, the Officer held that even if the appellant’s assets had been “thrown into the common stock” of the joint family and thereafter divided between the appellant and his minor children, section 16 (3) (a) (iv) would still apply because the provision covers both direct and indirect transfers of assets to minor children. The Officer explained that an indirect transfer to minor children would arise where the transfer is effected by the interposition of a joint family as a legal fiction. On appeal, the appellant attempted to introduce an additional argument that the commission business itself was an ancestral business that he had inherited, but the Appellate Assistant Commissioner rejected that contention. That Commissioner also affirmed that the Income Tax Officer was correct in disregarding the partition deed. The Appellate Tribunal examined the evidence and found that there was no proof that all assets and liabilities, including the agency business, had been transferred to the joint Hindu family in 1944 when the first son was born, or at any later date. The Tribunal observed that the first instance in the record where the family’s possession of the assets was mentioned was in the deed of dissolution, which only recited such an arrangement. Consequently, the Tribunal concluded that the partition deed fell within the scope of section 16 of the Act.

In its analysis, the Court observed that the only evidence indicating that the family possessed the assets in dispute was the deed of dissolution, which merely contained a recital to that effect. The Court held that such a recital could not be taken as a clear and unequivocal declaration that the individual had invested his self‑acquired properties as joint family property, as was described in the earlier decision reported in 28 I.T.R. 352 (R. Subramania Ayyar v. Commissioner of Income Tax). Consequently, the Court concluded that the partition deed fell within the scope of section 16. The Appellate Tribunal had previously referred three specific questions to the High Court, and the High Court had answered those questions in the manner previously noted. The counsel for the Revenue then urged three particular points. First, the counsel argued that question No. 2 did not arise from the order of the Appellate Tribunal and that the High Court should have declined to answer it. Second, the counsel contended that before the partition there had been no prior blending of self‑acquired property with ancestral property. Third, the counsel maintained that the partition deed effected a direct transfer of assets to the minor children, thereby bringing the transaction within section 16(3)(a)(iv). The Court noted that the first point had not been raised before the High Court, nor was it mentioned in the statement of the case before this Court, and therefore it could not be permitted to be raised at this stage. The second point required an interpretation of the partition deed dated 19 December 1952. That deed had been executed among the assessee, his two minor sons and his minor daughter, the latter three being represented by their mother. The deed stated that the father of the assessee had died on 27 July 1938, leaving a house, other movable investments and cash, and that the assessee had succeeded to that property and to the agency of Messrs Muller & Phipps. Two clauses were identified as crucial. The first clause recited that the assessee had been earning commission, acquiring properties and blending his money with the assets inherited from his father, treating the entire property that existed before and after the birth of the second and third parties as joint family property without any distinction. The second clause expressed the assessee’s desire to define the legal character of the existing assets, to clarify the legal relationship among the parties, to arrange a partition of the parties, and to provide for jewellery, maintenance and marriage for the fourth party, invoking his powers as a Hindu father to ensure peaceful enjoyment and friendly relations, while keeping his future earnings separate and reserving the right to deal with them as he chose. The counsel for the Revenue argued that, because the recital in the first clause was found to be false, there was no antecedent blending of self‑acquired property with ancestral property before the partition among the parties. The counsel further asserted that all the clauses became effective only upon the signing of the deed and that no time elapsed between the alleged blending and the partition. The Court rejected this contention, holding that the wording of the first clause expressly indicated a continuous course of conduct that continued up to the date of execution. The Court observed that the deed appeared to be carefully drafted and that the assessee must have instructed its contents. When the assessee instructed that his self‑acquired property be treated as joint family property, the Court held that at that moment the property assumed the character of joint family property. Upon execution, the deed served as evidence of a pre‑existing fact, namely that the self‑acquired property had been thrown into the common pool. The phrase “till this date” was considered significant and was to be given effect. Accordingly, the Court agreed with the High Court’s observation that the partition proceeded on the basis that the self‑acquired properties had been made available as joint family property.

The Court found that the contention that the provisions of the deed became operative only at the moment of signing, with no interval between the alleged mixing of properties and the subsequent partition, could not be accepted. The first clause of the deed expressly stated that the assessee had been mixing his own money with inherited assets up to the date of execution, thereby indicating a continuous course of conduct that culminated on the day the deed was signed. The Court observed that the deed appeared to have been drafted with great care and that the assessee must have provided the instructions governing its content. When an instruction directs that self‑acquired property shall be treated as joint‑family property, the Court held that, at that very moment, the property assumes the character of joint‑family property. Consequently, upon execution, the deed serves as evidence of a fact that already existed – namely, the inclusion of the self‑acquired property into the joint‑family mass. The phrase “till this date” in the clause was regarded as significant and was given effect.

The Court agreed with the High Court’s observation that the partition was conducted on the basis that the self‑acquired properties were made available for partition together with the sole item of joint‑family property. This, the Court said, demonstrated that even if the interval between blending and partition was brief, there had been a blending of the assessee’s self‑acquired property with his ancestral joint‑family property before the partition took place. The Court further concurred that, irrespective of whether the claim about the past was supported by additional evidence, it was unequivocal that the properties dealt with at the partition were, by the assessee’s own volition, considered as assets available for division among the members of the joint family. It was an unequivocal declaration that all the properties involved in the partition had been impressed with the character of joint‑family property belonging to the assessee and his sons. The genuineness of the transaction itself was never put in question.

Accordingly, the Court concluded that on 19 December 1952, prior to the partition, the properties had acquired the status of joint‑family property. A partition was indeed effected on that date, after which the portions allotted to the assessee and his divided sons were held by them individually. Having recently pronounced judgment in The Commissioner of Income Tax, Gujarat v. Keshavlal Lallubhal, the Court applied the reasoning of that decision and held that the third point raised by Mr Sastri possessed no merit. Aligning with the High Court, the Court found no direct or indirect transfer of assets to the minor children by the assessee within the provisions of section 16(3)(a)(iv). Consequently, the appeal was dismissed with costs.