HUF – Partition – Scope of section 171 – Section 171 applicable only where Hindu Family is already assessed as HUF – Deceased father of assessees not assessed as karta of HUF when alive – Inherited property shared under orally recorded memorandum by legal heirs – Proportionate consideration out of sale thereof declared in returns filed by legal heirs in individual capacity and exemption u/s 54F allowed by A.O. – Reassessment to tax capital gains in hands of karta – Unsustainable

HUF – Partition – Scope of section 171 – Section 171 applicable only where Hindu Family is already assessed as HUF – Deceased father of assessees not assessed as karta of HUF when alive – Inherited property shared under orally recorded memorandum by legal heirs – Proportionate consideration out of sale thereof declared in returns filed by legal heirs in individual capacity and exemption u/s 54F allowed by A.O. – Reassessment to tax capital gains in hands of karta – Unsustainable

The assessee was one of the four legal heirs of the deceased ARP. Part of the inherited agricultural land was sold without physical division. The share of each heir was orally divided between them under a memorandum of oral recording and the sale proceeds were distributed in proportion with their respective shares in the land and the balance portion of the land continued to remain in their names without physical division. For the A.Y. 2008-09, they filed their returns of income as individuals and claimed exemption from levy of tax on capital gains u/s 54F which was allowed by the A.O. On the ground that there was no physical division of the property, that the memorandum recording oral partition did not amount to partition u/s 171, and that therefore the capital gains was to be assessed in the hands of the estate of the deceased ARP (HUF) and the exemption allowed u/s 54F was contrary to section 171, notice was issued u/s 148 to the estate of ARP (HUF) and a consequential order was passed in the name of the assessee as karta.

The assessee filed a writ petition and challenged the notice u/s 148 and the order. The Madras High Court allowed the writ petition and held as under:

‘i) Section 171 makes it clear that it is applicable only where a Hindu family is already assessed as a Hindu undivided family. Otherwise, there is no meaning to the expression “hitherto” in section 171(1).

ii) During the lifetime of ARP, the deceased father of the assessees, the family was not assessed as a Hindu undivided family. It was only where there was a prior assessment as a Hindu undivided family and during the course of assessment u/s 143 or section 144 it was claimed by or on behalf of a member of such family which was assessed as a Hindu undivided family that there was a partition whether total or partial among the members of such family, that the A.O. should make an Inquiry after giving notice of inquiry to all the members. Where no such claim was made, the question of making inquiry by an A.O. did not arise and only in such circumstances would the definition of “partition” in Explanation to section 171 be attracted. The definition could not be read in isolation. Where a Hindu family was never assessed as a Hindu undivided family, section 171 would not apply even when there was a division or partition of property which did not fall within the definition.

iii) The notice issued u/s 148 to the estate of ARP (HUF) coparceners and the consequential order issued in the name of the assessee as the karta were unsustainable.’