Important Point
Section 171(9) of the Income Tax Act, 1961 does not suffer from the vice of legislative incompetence and cut off date of 31.12.1978 for recognising partial partition is not violative of Article 14 of the Constitution nor it could be said that Section 171(9) entrenches upon Sections 4 and 5.

Headnote:Income Tax Act, 1961-Section 171(9)-HUF - Partial partition-Bar to - Constitutional validity-Section 171(9) does not suffers from vice of legislative incompetence-Cut off date of 31.12.1978 not violative of Article 14-It does not entrench upon charging provisions in Sections 4 and 5.
       Held : It is difficult to comprehend that the amendment to Section 171 introducing sub-section (9) can be termed as beyond legislative competence. The Parliament has the authority to delete or amend any provision of the Income Tax Act and it cannot be said that it is beyond legislative competence. The legislative competence is to be decided on the basis of the Constitution that empowers the Legislature to levy taxes on income. The relevant item 82 of List I of the Seventh Schedule to the Constitution empowers the Parliament to enact the legislation for imposition of taxes on income other than agricultural income. Further, the concept of partial partition of HUF was not recognised under the Income Tax Act, 1922 and was recognised only under the Income Tax Act, 1961. All that is done by the amendment is to restore the status quo ante that prevailed prior to 1961 Act. It is for the legislature to decide whether the recognition of partial partition introduced in the Income-Tax Act should continue or not. If it considers that it has led to abuses or inconvenience, it is entitled to amend or delete. As per the object and reasons of the Amending Act, it was introduced because multiple Hindu undivided families were created by effecting partial partitions as regards persons constituting the joint family or as regards the properties belonging to the joint family or both, which resulted in tax reduction or evasion and with a view to curbing this creation of multiple Hindu undivided families by making partial partitions, it was proposed to de-recognise partial partitions of HUF effected after 31st December, 1978 for tax purposes. By having multiple partial partitions qua the properties or the members, it is possible to manipulate the affairs of the HUF for reduction of tax liability and to prevent such manipulation, sub-section (9) is added. Hence, it would be difficult to hold that addition of sub-section 171(9) is beyond the legislative competence. (Para 10)
       It is true that two distinct classes are created-one of families having partial partition which has taken place prior to the cut off date and other of partial partition taking place after the cut off date. Benefit which is conferred upon those assessees who have partially partitioned their property prior to the cut off date is not withdrawn and others who partitioned their property after the cut off date would not get the same, but that would hardly be a ground for holding it as violative of Article 14. It is settled law that differentiation is not always discriminatory. If there is a rational nexus on the basis of which differentiation has been made with the object sought to be achieved by particular provision, then such differentiation is not discriminatory and does not violate the principles of Article 14 of the Constitution. This principle is too well-settled now to be reiterated by reference to cases. Further, whether the same result or better result could have been achieved and better basis of differentiation could have been evolved is within the domain of Legislature and must be left to its wisdom. In the present case, there is intelligible basis for differentiation and the classification is having rational nexus of achieving the object of preventing the creation of further multiple Hindu undivided families for reduction of tax liabilities. Further, for the validity of the Section, it is not necessary for the legislature to withdraw the benefit which is already conferred. Secondly, cut off date of 31st December, 1978 cannot be said to be arbitrary. The Amending Bill was introduced in June, 1980 and is given effect to from the assessment year 1980-81. It is settled law that the choice of a date as a basis for classification cannot always be dubbed as arbitrary even if no particular reason is forthcoming for the choice unless it is shown to be capricious or whimsical in the circumstances; while fixing a line, a point is necessary and there is no mathematical or logical way of fixing it; Precisely, the decision of the Legislature or its delegate must be accepted unless it is very wide off the reasonable mark. (Paras 12 & 13)
       Charging Sections 4 & 5 are to be read with the definition of the word ‘person’ given in the Act, that is, the tax is to be charged in respect of the total income of the previous year of every person. Word ‘person’ is given the meaning in Section 2(31) which, inter-alia, includes a Hindu undivided family. It is open to the Legislature to give different meaning to the word ‘person’ for the purpose of the Act which may or may not include HUF or such other legal entities. In such a situation, it is open to the HUF to take the benefit of the Act as available or to partition the HUF as a whole. It is to be stated that even prior to the amendment, all partial partitions were not recognised under the Act. Partial partition which was only in accordance with the Explanation was recognised. Further, prior to Income Tax Act, 1961, there was no question of recognising partial partition and the relevant provision under the Income Tax Act, 1922 was Section 25A. Prior to Income Tax Act, 1961, there was no question of recognising partial partition. Even with regard to total partition, it was required to satisfy all the conditions prescribed in Section 25A and an order was required to be passed for that purpose under Section 25A(1). If the claim of partition was disallowed after inquiry, the HUF was liable to be assessed as such. After the new Act, partial partition wan not recognised unless it satisfied the conditions laid down in the Explanation. Therefore, the contention that sub-section (9) entrenches upon charging provision in Sections 4 & 5 of the Act is without any basis. (Paras 14 & 15)
       It is for the Legislature to recognise or not to recognise partial partition of HUF property for the purpose of levy and collection of tax; it is also for the legislature to decide whether only non bona fide partial partition undertaken for reducing the tax liability should not be recognised or not to recognise all partial partitions of HUF properties. Further, consideration of harship is totally irrelevant for deciding the question of legislative competence. In the case of taxation, it is settled law that hardship or equity has no role to play in determining eligibility to tax and it is for the legislature to determine the same. Lastly, once the partial partition is not recognized, tax is to be calculated as if the assets are held by the HUF. Hence, the question whether the HUF is required to recover tax from the person to whom the properties are allotted, is not required to be considered by the Taxing authority as for the purpose of income tax the properties belong to the HUF. If the HUF finds any hardship, it is for the members of HUF to have the partition of the entire estate and not to have partial partition. (Para 19)

Judgment

Shah, J.-These appeals by special leave are filed against the judgments and orders passed by the High Court of Madras dated 13.1.1988 in Writ Petition Nos. 992 and 993 of 1981, 162 & 6036 of 1983, 904-905, 994, 995, 5430, 6162 and 9283 of 1984, by the High Court of Karnataka dated 9.11.1993 in Writ Petition Nos. 12312 to 12317 of 1987 and dated 25.11.1992 in W.P. No. 23708 of 1992, and by the High Court of Gujarat dated 29.6.1993 in Income Tax Application Nos. 164 and 165 of 1993.

2. By a common judgment and order passed in various writ petitions filed before the Madras High Court (M.V. Valliappan & Ors. v. Income-Tax Officer & Others1), the High Court struck down the provisions of Section 171(9) of the Income Tax Act, 1961 as violative of Article 14 of the Constitution of India and that it suffers from the vice of legislative in competence. In the High Court, number of writ petitions were filed involving questions relating to the validity, scope and interpretation of the provisions of Section 171(9). For our purpose, it would suffice to mention facts of Writ Petition No. 994 of 1984 for deciding the question involved in these appeals. In the said petition, it was the case of the petitioner that he was a Karta of a Hindu undivided family consisting of himself, his wife, his minor son and minor daughter. It was his contention that the Hindu undivided family was a partner in a partnership firm in which its funds were invested. On 13th April, 1979, a partial partition of certain assets belonging to the Hindu undivided family was effected with effect from that date by executing a deed of partition. An application under Section 171(2) of the Income Tax Act, 1961 for recognition of the said partial partition came to be filed before the Income Tax Officer. The Income Tax Officer passed an order dated 28th December, 1979 recognizing the partial partition. Thereafter for the assessment year 1980-81, a return was submitted on behalf of the Hindu undivided family on April 12, 1980 which did not include the income from the property which was the subject matter of partial partition. The income derived from the assets that were the subject matter of partial partition were declared by the respective individuals in their respective returns. In accordance with the said return, assessment was finalised. Similarly, wealth tax return for the assessment year 1980-81 was also filed and accepted by the Income Tax Officer. Thereafter, a notice dated March 4, 1983 under Section 148 of the Act was received by the petitioner stating that income of the petitioner had escaped assessment and the Income Tax Officer proposed to reopen the completed assessment for the year 1980-81. The assessee objected to the reopening of the assessment on the ground that order under Section 171 of the Act recognising the partition not having been cancelled or revoked, continued to be effective and, thereafter, no income from the partitioned properties could be assessed in the hands of the Hindu undivided family. These objections were rejected by the I.T.O. by order dated 30th November, 1983. Fresh assessment order for H.U.F. was made by including the income relating to the assets which were partially partitioned and allotted to the individual members of the Hindu undivided family. That re-assessment order was challenged by filing writ petition. Facts in the other writ petitions were also similar to the facts as stated above.

3. The High Court after considering the various contentions and decisions relied upon by the parties arrived at and summarised its conclusion as under :

“(1) Section 171(9) of the Income-Tax Act, 1951, cannot be sustained on the ground that it is a measure to counteract the tendency to tax avoidance and it suffers from the vice of legislative incompetence.

(2) Section 171(9) of the Income-Tax Act, 1961, is also void on the ground of violation of Article 14 of the Constitution of India.

(3)

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1999 Supreme(SC) 769

Cases Referred (6)