Category: Laws And Business

INTRODUCTION

The Indian HUF is like the mythical ‘10-headed hydra’, cut off one head of controversy and two new controversies will spring up in its place! The storm over daughters being coparceners in their father’s HUF raged on for a very long time and finally, a three-judge decision of the Supreme Court in Vineeta Sharma’s case settled the issue. Just when one thought that this matter had been resolved, a new, related issue has cropped up – can one be a coparcener in his/her maternal grandfather’s HUF?

To discuss and deliberate on this issue, one would first need to understand the checkered background in relation to this aspect and then move on to the problem at hand.

HINDU SUCCESSION ACT – 2005 AMENDMENT

The Hindu Succession (Amendment) Act, 2005, amended the Hindu Succession Act, 1956 with effect from 9th September 2005. The Hindu Succession Act, 1956, is one of the few codified statutes under the Hindu Law. It applies to all cases of intestate succession by Hindus. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew. Any person who becomes a Hindu by conversion is also covered by the Act. The Act overrides all Hindu customs, traditions and usages and specifies the heirs entitled to property in case of intestate succession and the order or preference among them. The Act also deals with some important aspects pertaining to HUFs.

The 2005 Amendment provides that a daughter of a coparcener shall become, by birth, a coparcener in her own right in the same manner as the son, and further, she shall have the same rights in the co¬parcenary property as she would have had if she had been a son. It also provides that she shall be subject to the same liabilities in respect of the coparcenary property as a son. Accordingly, the amendment equated all daughters with sons, and they would now become a coparcener in their father’s HUF by virtue of being born in that family. She has all the rights and obligations in respect of the coparcenary property, including testamentary disposition. Not only would she become a coparcener in her father’s HUF but she could also make a will for er share in the same.

S.1(2) of the Hindu Succession (Amendment) Act, 2005, stated that it came into force from the date it was notified by the Government in the Gazette, i.e., 9th September 2005. Thus, the amended s.6 was operative from this date. However, did this mean that the amended section applied to:

(a) daughters born after this date;

(b) daughters married after this date; or

(c) all daughters, married or unmarried, but living as of this date.

There was no clarity under the Act on this point.

JUDICIAL MATRIX

Various Supreme Court decisions dealt with these issues. Prominent amongst them were G. Sekar vs. Geetha (2009) 6 SCC 99; Sheela Devi vs. Lal Chand, (2007) 1 MLJ 797 (SC); Prakash vs. Phulavati, (2016) 2 SCC 36; Danamma @ Suman Surpur & Anr. vs. Amar & Ors., (2018) 3 SCC 343, etc. Some of the principles emanating from these decisions were as follows:

(a) The 2005 amendment is not retrospective and its application is prospective;

(b) If the HUF’s partition has taken place before 9th September 2005, then the amendment has no impact;

(c) The rights under the Hindu Succession Act Amendment applied to living daughters of living coparceners (fathers) as on 9th September, 2005, irrespective of when such daughters were born;

(d) The amendment applied to living daughters of living coparceners as of 9th September 2005. It did not matter whether the daughters were married or unmarried. It did not matter when the daughters were born.

VINEETA SHARMA’S DECISION

A three Judge Bench of the Supreme Court in the case of Vineeta Sharma vs. Rakesh Sharma, 2020 (9) SCC 1, considered a bunch of SLPs before it on the issue of the Amendment Act, 2005. The Court, by a very detailed verdict, considered the entire genesis of HUF Law. It held that in the Mitakshara School of Hindu law (applicable in most parts of India), in a coparcenary, there is unobstructed heritage, i.e., right is created by birth. When right is created by birth is called unobstructed heritage. At the same time, the birthright is acquired in the property of the father, grandfather, or great-grandfather. In case a coparcener dies without leaving a son, the right is acquired not by birth, but by virtue of there being no male issue is called obstructed heritage. It is called obstructed because the accrual of the right to it is obstructed by the owner’s existence. It is only on his death that the obstructed heritage takes place. It held that property inherited by a Hindu from his father, father’s father, or father’s grandfather (but not from his maternal grandfather) is unobstructed heritage as regards his own male issues, i.e., his son, grandson, and great-grandson. His male issues acquire an interest in it from the moment of their birth. Their right to it arises from the mere fact of their birth in the family, and they become coparceners with their paternal ancestor in such property immediately on their birth, and in such cases, ancestral property unobstructed heritage. Further, any property, the right to which accrues not by birth but on the death of the last owner without leaving a male issue, is called obstructed heritage. It is called obstructed, because the accrual right to it is obstructed by the existence of the owner. Consequently, property which devolves on parents, brothers, nephews, uncles, etc., upon the death of the last owner, is obstructed heritage. These relations do not take a vested interest in the property by birth. Their right to it arises for the first time on the death of the owner. Until then, they have a mere spes successionis, or a bare chance of succession to the property, contingent upon their surviving the owner. Accordingly, the Apex Court held that unobstructed heritage took place by birth, and the obstructed heritage took place after the death of the owner.

The Apex Court laid down a very vital principle that the coparcenary right, under s.6 (including after Amendment), is given by birth, which is called unobstructed heritage. It is not a case of obstructed heritage depending upon the owner’s death. Thus, the Supreme Court concluded that a coparcener’s father need not be alive on 9th September 2005, i.e., the date of the Amendment.

It held that though the rights could be claimed, w.e.f. 9th September 2005, the provisions were of a retroactive application, i.e., they conferred benefits based on the antecedent event, and the Mitakshara coparcenary law should be deemed to include a reference to a daughter as a coparcener. Under the amended section 6, since the right was given by birth, i.e., an antecedent event, the provisions concerning claiming rights operated on and from the date of the Amendment Act. Thus, it is not at all necessary that the father of the daughter should be living as on the date of the Amendment, as she has not been conferred the rights of a coparcener by the obstructed heritage. The effect of the amendment is that a daughter is made a coparcener, with effect from the date of the amendment, and she can also claim partition, which is a necessary concomitant of the coparcenary. Section 6(1) recognises a joint Hindu family governed by Mitakshara Law. The coparcenary must exist on 9th September 2005 to enable the daughter of a coparcener to enjoy the rights conferred on her. As the right is by birth and not by dint of inheritance, it is irrelevant that a coparcener whose daughter is conferred with the rights is alive or not. Conferral is not based on the death of a father or other coparcener.

The Court also held that the daughter should be living on 9th September 2005. It held that the expression ‘daughter of a living coparcener’ has not been used by Parliament. One corollary to this explanation would mean that if the daughter had died before this date, then her children cannot become coparceners in their maternal grandfather’s HUF. However, if she dies on or after this date, then her children can become coparceners in their maternal grandfather’s HUF.

POSITION OF DAUGHTER’S CHILDREN?

A son’s children automatically become coparceners in their paternal grandfather’s HUF. This is a right that is enjoyed by them by virtue of being born in that family. However, what would be the position of a daughter’s children? Could they also automatically now claim to be coparceners in their maternal grandfather’s HUF? Their mother is a coparcener at par with her brother, their mother can now be the karta of her father’s HUF (see Sujata Sharma vs. Manu Gupta, 2016 (222) DLT 647), then should they not necessarily become coparceners in such an HUF?

A Single Judge of the Aurangabad Bench of the Bombay High Court had an occasion to consider this issue in the case of Vishambhar s/o Namdev Nikam vs. Sunanda w/o Maheshankar Suryawanshi, Civil Revision Application No. 119/2025, Order dated 3rd September 2025.

In this case, a person (Namdev) had 4 daughters and 4 sons. His HUF owned land. One of his daughter’s daughters, Sunanda, filed a suit claiming to be recognised as a coparcener in her maternal grandfather’s HUF. Sunanda claimed that since her mother had a 1/8th share in the HUF of her father, Namdev (by virtue of the 2005 Amendment), she (Sunanda) in turn, had a ½ share (since her mother had 2 children) in this 1/8th share of her mother. She filed this claim when her mother was alive.

The Single Judge negated the claim of the granddaughter. The Court relied heavily on Vineeta Sharma’s decision (supra) to explain the concept of unobstructed and obstructed heritage. It held that the plaintiff has not acquired any right by birth. Thus, there she did not have any unobstructed heritage. She was not the lineal descendant of a paternal ancestor. She had a right of obstructed heritage in her maternal grandfather’s HUF. The Court also relied upon a decision of the Privy Council in the case of Muhammad Husain Khan vs. Kishva Nandan Sahai, AIR 1937 PC 233. In that case, the Privy Council held that an estate inherited by a person from his maternal grandfather cannot be held to be ancestral property. Only property which a man inherits from any of his 3 paternal ancestors, namely, his father, his grandfather and his great-grandfather would be called ancestral property.

Following this decision of the Privy Council, the High Court held that the mother of the plaintiff did not inherit an ancestral property. Further, as long as her mother was alive, she could not claim any interest in her grandfather’s HUF. The Court held that the plaintiff had no locus standi/cause of action till her mother was alive.

By virtue of the Hindu Succession Act, 1956, the plaintiff’s mother would become the absolute owner of the joint property when she is allotted a share in it. After that, she would be at liberty to dispose of this share. In the event that she died without making a valid Will, then the plaintiff could say that she had a ½ share in her estate.

IMPLICATIONS OF THIS JUDGEMENT

This judgment has far-reaching consequences till such time as it is reversed by a Higher Court.

(a) While a daughter and son are at par in their father’s HUF, their children are not.

(b) The son’s children will become coparceners in their paternal grandfather’s HUF, the daughter’s children will not become coparceners in their maternal grandfather’s HUF.

(c) These grandchildren will not be able to claim a partition of their maternal grandfather’s HUF.

(d) Such grandchildren could become entitled to their mother’s share only after her demise, either by her Will or by virtue of intestate succession.

(e) Property inherited from one’s paternal grandfather is ancestral but not if it is inherited from the maternal grandfather.

One other (though not so held) implication, could be that the son-in-law would not become a member in his father-in-law’s HUF. A daughter-in-law on the other hand, would become a member in her father-in-law’s HUF!

EPILOGUE

The Supreme Court in Vineeta Sharma held that “The goal of gender justice as constitutionally envisaged is achieved though belatedly, and the discrimination made is taken care of by substituting the provisions of section 6 by Amendment Act, 2005”. So much for gender parity!!

BCAJ Admin

I. INTRODUCTION

The Board of Directors of a company carries out various roles and responsibilities in relation to a company. Many of these responsibilities are through various Board Committees. Of all the Committees of the Board, the Audit Committee is probably the most vital and is entrusted with the maximum tasks and duties. While an Audit Committee is mandatory for a listed company under the provisions of the Companies Act, 2013 (“the Act”) / the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”), it is also mandatory for certain public limited companies under the provisions of the Act. Let us examine the salient facets of this very important Board Committee. Interestingly, neither the Act nor the LODR defines the meaning of the term Audit Committee. The Corporate Governance Institute defines it as

“An audit committee is a committee of a company‘s board of directors that is responsible for overseeing the financial reporting process, internal controls, and audit activities.”

Let us examine the key duties and powers of the Audit Committee.

II. REQUIREMENTS

2.1 Companies Act, 2013

S.177 of the Act states that every listed public company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee. The class of public limited companies prescribed in this respect are:

(i) Public Companies having paid up share capital of ₹10 crore or more; or

(ii) Public Companies having turnover of ₹100 crore or more; or

(iii) Public Companies that have, in the aggregate, outstanding loans, debentures, and deposits, exceeding ₹50 crore.

Thus, as per the Act, all listed companies and the above-mentioned unlisted public limited companies are required to mandatorily constitute an Audit Committee. Private limited companies and unlisted public companies not covered need not have an Audit Committee. However, they may voluntarily choose to have one.

The following types of public companies are exempted from constituting an Audit Committee:

(a) a joint venture

(b) a wholly owned subsidiary; and

(c) a dormant company as defined under section 455 of the Act.

2.2 LODR

Under the LODR, every Listed Company must constitute a qualified and independent Audit Committee.

III. COMPOSITION

3.1 The composition of the Audit Committee in the case of listed companies is determined by both the Act and the LODR (the higher requirements would prevail) and in the case of other companies by the Act. These are explained below:

IV. ROLE AND DUTIES

4.1 The Companies Act prescribes the following roles and responsibilities for every Audit Committee (whether of a listed / unlisted public company):

(i) the recommendation for appointment, remuneration, and terms of appointment of auditors of the company;

(ii) review and monitor the auditor’s independence and performance, and effectiveness of the audit process;

(iii) examination of the financial statement and the auditors’ report thereon;

(iv) approval or any subsequent modification of transactions of the company with a related party (explained in greater detail below);

(v) scrutiny of inter-corporate loans and investments;

(vi) valuation of undertakings or assets of the company, wherever it is necessary;

(vii) evaluation of internal financial controls and risk management systems;

(viii) monitoring the end use of funds raised through public offers and related matters.

(ix) The Audit Committee may call for the comments of the auditors about internal control systems, the scope of the audit, including the observations of the auditors and review of financial statements before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company.

(x) The Audit Committee shall have the authority to investigate any matter in relation to the items specified above or referred to it by the Board and for this purpose shall have the power to obtain professional advice from external sources and have full access to the information contained in the records of the company.

4.2 In addition, the LODR prescribes that the audit committee of a listed company shall have powers to investigate any activity within its terms of reference, seek information from any employee, obtain outside legal or other professional advice, and secure attendance of outsiders with relevant expertise if it considers necessary.

The LODR lays down the following additional duties for the Audit Committee of a listed company:

(a) oversight of the listed entity’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient, and credible;

(b) recommendation for appointment, remuneration, and terms of appointment of auditors of the listed entity;

(c) approval of payment to statutory auditors for any other services rendered by the statutory auditors;

(d) reviewing, with the management, the annual financial statements and auditor’s report thereon before submission to the board for approval, with particular reference to:

• matters required to be included in the director’s responsibility statement to be included in the Board of Director’s Report;
• changes, if any, in accounting policies and practices and reasons for the same;
• Major accounting entries involving estimates based on the exercise of judgment by management;
• significant adjustments made in the financial statements arising out of audit findings;
• compliance with listing and other legal requirements relating to financial statements;
• disclosure of any related party transactions;
• modified opinion(s) in the draft audit report;

(e) reviewing, with the management, the quarterly financial statements before submission to the board
for approval;

(f) reviewing, with the management, the statement of uses / application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document / prospectus / notice and the report submitted by the monitoring agency monitoring the utilisation of proceeds of a public issue or rights issue or preferential issue or qualified institutions placement, and making appropriate recommendations to the board to take up steps in this matter;

(g) Reviewing and monitoring the auditor’s independence and performance, and effectiveness of the audit process;

(h) approval or any subsequent modification of transactions of the listed entity with related parties;

(i) scrutiny of inter-corporate loans and investments;

(j) valuation of undertakings or assets of the listed entity, wherever it is necessary;

(k) evaluation of internal financial controls and risk management systems;

(l) reviewing, with the management, the performance of statutory and internal auditors, adequacy of the internal control systems;

(m) reviewing the adequacy of the internal audit function, if any, including the structure of the internal audit department, staffing, and seniority of the official heading the department, reporting structure coverage, and frequency of internal audit;

(n) discussion with internal auditors of any significant findings and follow up there on;

(o) Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board;

(p) discussion with statutory auditors before the audit commences, about the nature and scope of the audit as well as post-audit discussion to ascertain any area of concern;

(q) to look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends), and creditors;

(r) approval of the appointment of a chief financial officer after assessing the qualifications, experience, background, etc. of the candidate;

(s) Carrying out any other function as is mentioned in the terms of reference of the audit committee;

(t) reviewing the utilization of loans and/ or advances from/investment by the holding company in the subsidiary exceeding ₹100 crores or 10 per cent of the asset size of the subsidiary, whichever is lower including existing loans / advances / investments existing as of 1st April, 2019;

(u) Consider and comment on the rationale, cost-benefits, and impact of schemes involving merger, demerger, amalgamation etc., on the listed entity and its shareholders.

4.3 Moreover, the LODR provides that the audit committee shall mandatorily review the following information:

(a) Management discussion and analysis of the financial condition and results of operations;

(b) management letters / letters of internal control weaknesses issued by the statutory auditors;

(c) internal audit reports relating to internal control weaknesses; and

(d) the appointment, removal, and terms of remuneration of the chief internal auditor shall be subject to review by the audit committee.

(e) statement of deviations:

• quarterly statement of deviation(s) including the report of the monitoring agency, if applicable, submitted to stock exchanges.
• annual statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice.

V. VIGIL MECHANISM

5.1 The Act also states that every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns. The companies prescribed are the following:

(a) the Companies which accept deposits from the public;

(b) the Companies which have borrowed money from banks and public financial institutions in excess of fifty crore rupees.

5.2 The vigil mechanism shall provide for adequate safeguards against victimisation of persons who use such a mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases. The details of the establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report.

5.3 The companies which are required to constitute an audit committee shall oversee the vigil mechanism through the committee and if any of the members of the committee have a conflict of interest in a given case, they should recuse themselves and the others on the committee would deal with the matter on hand.

5.4 In the case of companies that are not required to mandatorily constitute an Audit Committee, the Board of Directors shall nominate a director to play the role of audit committee for the purpose of vigil mechanism to whom other directors and employees may report their concerns.

5.5 In case of repeated frivolous complaints being filed by a director or an employee, the audit committee or the director nominated to play the role of audit committee may take suitable action against the concerned director or employee including reprimand.

5.7 The LODR also provides that the listed entity shall devise an effective vigil mechanism/whistle-blower policy enabling stakeholders, including individual employees and their representative bodies, to freely communicate their concerns about illegal or unethical practices. The vigil mechanism shall provide for adequate safeguards against the victimization of director(s) employee(s) or any other person who avails the mechanism and also provide for direct access to the chairperson of the audit committee in appropriate or exceptional cases. The details of the establishment of the vigil mechanism / whistle-blower policy shall be disclosed on the website of the listed entity in a separate section. Also one of the functions of the audit committee is to review the functioning of the whistle-blower mechanism.

VI. RELATED PARTY TRANSACTIONS UNDER THE ACT

6.1 One of the most important roles of an audit committee is the review and approval of related party transactions. Related Party Transactions are prescribed under s.188 of the Act.

6.2 Under the Act, the audit committee is required to approve transactions of the company with a related party or any subsequent modification in the same.

6.3 It may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed;

(i) The Audit Committee shall, after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval which shall include the following, namely:-

(a) the maximum value of the transactions, in the aggregate, which can be allowed under the omnibus route in a year;

(b) the maximum value per transaction that can be allowed;

(c) extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus approval;

d) review, at such intervals as the Audit Committee may deem fit, related party transactions entered into by the company pursuant to each of the omnibus approvals made.

(e) transactions that cannot be subject to omnibus approval by the Audit Committee.

(ii) The Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval, namely: –

(a) repetitiveness of the transactions (in the past or in the future);

(b) justification for the need for omnibus approval.

(iii) The Audit Committee shall satisfy itself for transactions of a repetitive nature and that
the company.

(iv) The omnibus approval shall contain or indicate
the following: –

(a) name of the related parties:

(b) nature and duration of the transaction;

(c) maximum amount of transactions that can be entered into;

(d) the indicative base price or current contracted price and the formula for variation in the price, if any; and

(e) any other information relevant or important for the Audit Committee to make a decision on the proposed transaction. Provided that where the need for related party transaction cannot be foreseen and aforesaid details are not available, the audit committee may make omnibus approval for such transactions subject to their value not exceeding Rs. 1 crore per transaction.

(5) Omnibus approval shall be valid for a period not exceeding 1 financial year and shall require fresh approval after the expiry of such financial year.

(6) Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

(7) Any other conditions as the Audit Committee may deem fit.

6.4 In case of transaction, other than related
party transactions referred to in section 188 of the
Act, where the Audit Committee does not approve
such transaction, it shall make its recommendations to the Board.

6.5 In case any transaction involving any amount not exceeding Rs. 1 crore is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within 3 months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorized by any other director, the director concerned shall indemnify the company against any loss incurred by it:

6.6 The Act also provides that this clause shall not apply to a transaction, other than a related party transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.

VII. RELATED PARTY TRANSACTIONS UNDER LODR

7.1 In addition to the above provisions under the Act, the LODR lays down certain additional duties for the audit committee in relation to related party transactions.

7.2 All related party transactions and subsequent material modifications shall require prior approval of the audit committee of the listed entity. Only those members of the audit committee, who are independent directors, shall approve related party transactions. The audit committee of a listed entity shall define “material modifications” and disclose it as part of the policy on the materiality of related party transactions and on dealing with related party transactions.

7.3 As regards omnibus approvals for related party transactions, the LODR, in addition to the Act, provides that the audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given. Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of
one year.

7.4 A related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party, shall require prior approval of the audit committee of the listed entity if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year exceeds 10% of the annual consolidated turnover, as per the last audited financial statements of the listed entity. Thus, even if the listed entity is not directly a party to such transaction, its audit committee would need to approve the transactions of the subsidiary.

7.5 With effect from 1st April, 2023, a related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party, shall require prior approval of the audit committee of the listed entity if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year, exceeds 10% of the annual standalone turnover, as per the last audited financial statements of the subsidiary.

7.6 However, for related party transactions of unlisted subsidiaries of a listed subsidiary, the prior approval of the audit committee of the listed subsidiary shall suffice. Thus, these would not require prior approval of the Audit Committee (if any) of the unlisted subsidiary.

7.7 The LODR also provides an exemption from the approval provisions for related party transactions in the following cases:

(a) transactions entered into between two government companies;

(b) transactions entered into between a holding company and its wholly-owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval;

(c) transactions entered into between two wholly-owned subsidiaries of the listed holding company, whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

VIII. SEBI’S ORDERS

8.1 SEBI has passed some Adjudication Orders which have dealt with the issue of the role of the Audit Committee and its members. Some of the important ones have been highlighted below.

8.2 SEBI in its Adjudication Order in the case of Kwality Ltd, [ADJUDICATION ORDER No. Order/BS/SL/2024-25/30612-30613] has held that a member of Audit Committee it is the responsibility of the Audit Committee member to ascertain that there is proper internal risk control prevailing in the system. Before forwarding the audit report to the Board of directors in the Board Meeting, the Audit Committe should have raised concerns regarding net-off entries, writing off-trade receivables recovery process followed by the company for substantial over dues, granting capital advances, transactions entered in the nature of sales and purchases with customers and vendors, related parties, the internal control system for capital expenditure bills, material scheduling, credit assessment of entities, etc. The role of audit committee members is to exercise oversight of the listed entity’s financial reporting and the disclosure of its financial information to ensure that the financial statement is correct, sufficient, and credible as well as to the adequacy of internal control systems, etc.

8.3 In the case of Fortis Healthcare Limited [ADJUDICATION ORDER NO. Order/GR/KG/2022-23/16420-16458], the Adjudication Officer of SEBI has held that the formation and constitution of an audit committee is not a discretionary affair for a listed company, but rather a statutorily mandated formation. The said committee has statutorily mandated and therefore, inescapable obligations to perform. The obligation cast upon an audit committee is not merely towards the immediate company and its shareholders, but to the public and the economy at large. It is supposed to act as an objective and dispassionate internal oversight over the financial affairs of the company. In that sense, it can be considered as the first-level overseer of the financial health of a company. Further, if such a company is a listed company, then the role of an audit company is all the more significant since a listed company is entitled to raise capital from the public at large and the work of an audit committee is directly related to the capacity of a listed company to raise the said capital. The said capacity of a listed company to raise capital is largely dependent on the show of its performance and the audit committee’s primary mandate is certification of such performance. It is in this context, that the statutory role of an audit committee is premised. Therefore, the position of a member of an audit committee (especially in the case of a listed company) is not similar to that of other Directors in the same company. A member of an audit committee must possess the wherewithal to discharge various functions. An Audit Committee has been given significant powers under the successive Companies Acts/Listing Agreements to perform its role. The Audit Committee can ask the head of the finance function, head of an internal audit, and representative of the statutory auditors, to seek information from any employee, and obtain outside legal or other professional advice if it is considered necessary. If a member of the audit committee lacked the competence to understand the nuances of high-value financial transactions, the same ought to have been brought on record by the concerned member at the time of his/her induction into the audit committee or even better, the concerned individual ought to have desisted from being a part of the audit committee. Similarly, placing blind reliance on other officials of the company in the matters of its financial affairs, defeats the very purpose of the formation of an audit committee, as is evident from the submissions of the aforesaid three notices in this case. The Order held that the board of directors of the company has entrusted the audit committee with an onerous duty to see that the financial statements are correct and complete in every respect. In this background, the members of the audit committee cannot take shelter under the verifications made by the internal auditor and other professionals.

8.4 In the case of Southern Ispat and Energy Ltd. (ADJUDICATION ORDER NO: Order/GR/PU/2022-23/16559-16566) the Adjudication Officer held that the Chairman of the Audit Committee had an added responsibility to monitor the end-use of the funds that were raised by the issue of the GDRs and also ensuring their transfer to the accounts of the company in India.

IX. CONCLUSION

The Audit Committee is a very vital cog in the corporate governance wheel. A great deal of responsibility and power is cast upon this committee and members of the audit committee would be well advised to handle their role with more accountability.

BCAJ Admin

INTRODUCTION

One of the issues which has gained prominence under the Under the Insolvency & Bankruptcy Code, 2016 (“the Code”) is that in case of a company undergoing a Corporate Insolvency Resolution Process (“CIRP”), do the tax dues have priority over the secured lenders / creditors? In other words, would the direct and indirect tax claims get paid off before the secured creditors?

The general legal principle (prior to the enactment of the Code) in this respect has been laid down by various Supreme Court decisions, such as, Union of India vs. SICOM Ltd, [2009] 233 ELT 433 (SC) which was in the context of priority of Central Excise dues over those of a financial creditor. It held that the rights of the Crown to recover its debt would prevail over the right of a subject. Crown debt meant the debts due to the State which entitled the Crown to claim priority before all other creditors. Such creditors, however, were held to mean only unsecured creditors.

This issue has gained more prominence because of a Supreme Court decision delivered in 2022. The Supreme Court recently had an occasion to revisit its earlier decision and it upheld the earlier decision.The answer to the above question would depend upon the manner in which the tax Statute in question is worded. Let us understand the position in this respect.

WATERFALL MECHANISM AND THE CODE

At the outset, it must be understood that section 53 of the Code provides for a waterfall mechanism for the mode and manner of distribution of the proceeds of the sale of the assets of a Corporate Debtor. It starts with a non-obstante clause which overrides anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force. The mechanism is as follows:

(a)    the insolvency resolution process costs and the liquidation costs paid in full;

(b)    the following debts which shall rank equally between and among the following-

(i)    workmen’s dues for the period of 24 months preceding the liquidation commencement date; and

(ii)    debts owed to a secured creditor in the event such secured creditor has relinquished security;

(c)    wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date;

(d)    financial debts owed to unsecured creditors;

(e)    the following dues which shall rank equally between:

(i)    any amount due to the Central Government and the State Government in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii)    debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f)    any remaining debts and dues;

(g)    preference shareholders, if any; and

(h)    equity shareholders or partners, as the case may be.

Thus, as is evident from the above section, secured creditors have a priority in being repaid as compared to unsecured creditors.

Secured creditor is defined to mean a creditor in favour of whom security interest is created. Security interest is defined in an exhaustive manner to mean right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person.

In this respect it should be noted that section 238 of the Code contains a non-obstante clause which states that the provisions of the Code shall have an effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. The Supreme Court in PCIT vs. Monnet Ispat & Energy Ltd., [2019] 107 taxmann.com 481 (SC) has categorically held that:

“Given Section 238 of the Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income-Tax Act.”

SC’S DECISION IN RAINBOW PAPERS

InState Tax Officer vs. Rainbow Papers Ltd, [2022] 142 taxmann.com 157 (SC),a two-Judge Bench of the Supreme Court was faced with the question whether VAT / CST dues under the Gujarat Value Added Tax Act, 2003 could be treated as dues of a secured creditor? Section 48 of this Act reads as follows:

“48. Tax to be first charge on property— Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person.”

Based on the above statutory charge in terms of section 48 of the Gujarat VAT Act, the Apex Court concluded that the claim of the Tax Department of the State, squarely fell within the definition of “Security Interest” under the Code and the State became a secured creditor under the Code. Such security interest could be created by the operation of law. The definition of a secured creditor in the IBC did not exclude any Government or Governmental Authority. It held that it was not the case that section 48 of the Act prevailed over section 53 of the Code. Rather, it was the case that the State fell within the purview of “Secured Creditor”. Section 48 of the Act was not contrary to or inconsistent with any provisions of the Code. Under s.53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, were to rank equally with other specified debts including debts on account of the workman’s dues for a period of 24 months preceding the liquidation commencement date.

SUBSEQUENT CONTRARY SC VERDICT IN PASCHIMANCHAL

A two-Judge Bench of the Supreme Court in Paschimanchal Vidyut Vitran Nigam Limited vs. Raman Ispat Private Limited, n C.A. No. 7976 of 2019, Order dated 17th July, 2023 observed that the decision in Rainbow Papers (supra) did not notice the ‘waterfall mechanism’ under section 53 of the Code and the provision had not been adverted to or extracted in the judgment. Furthermore, Rainbow Papers (supra) was in the context of a resolution process and not during liquidation. It observed that the dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors. This design was either not brought to the notice of the court in Rainbow Papers (supra) or was missed altogether. In any event, the judgment had not taken note of the provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to the Central or State Government.

SC’S REVIEW PETITION DECISION

The above decision of Rainbow Papers (supra)has created several hurdles for secured creditors of companies undergoing resolution. Many secured lenders are afraid that there would not be anything left for them if the Government also ranks as a secured creditor along with them. Accordingly, many petitioners, strengthened by the above-mentioned verdict inPaschmianchal (supra), filed a Review Petition before the Supreme Court. The judgment in the same was delivered by a two-Judge Bench of the Apex Court in the case of Sanjay Kumar Agarwal vs. State Tax Officer, RP(Civil) No. 1620 /2023 Order dated 31st October, 2023. The Court refused to review the Petitions since it was a co-ordinate bench and even otherwise a well-considered judgment could not fall within the ambit of a Review Petition.

PRINCIPLES OF REVIEW

To refresh, a review petition could be filed before the Supreme Court since the power to review its own judgment has been enshrined on the Court under Article 137 of the Constitution. The Supreme Court in Sanjay Kumar (supra) laid down the following important principles which would govern a review of an earlier decision:

(i)    A judgment is open to review inter alia if there is a mistake or an error apparent on the face of the record – Parsion Devi and Others vs. Sumitri Devi and Others, (1997) 8 SCC 715.

(ii)    A judgment pronounced by the Court is final, and departure from that principle is justified only when circumstances of a substantial and compelling character make it necessary to do so – Sajjan Singh and Ors. vs. State of Rajasthan and Ors., AIR 1965 SC 845.

(iii)    An error which is not self-evident and has to be detected by a process of reasoning, can hardly be said to be an error apparent on the face of record justifying the court to exercise its power of review – Shanti Conductors Private Limited vs. Assam State Electricity Board and Others, (2020) 2 SCC 677.

(iv)    In exercise of the jurisdiction under Order 47 Rule 1 CPC, it is not permissible for an erroneous decision to be “reheard and corrected” – Shri Ram Sahu (Dead) Through Legal Representatives and Others vs. Vinod Kumar Rawat and Others, (2021) 13 SCC 1.

(v)    A review petition has a limited purpose and cannot be allowed to be “an appeal in disguise” – Parison Devi (supra).

(vi)    Under the guise of review, the petitioner cannot be permitted to reagitate and reargue the questions which have already been addressed and decided – Shanti Conductors (supra).

(vii)    An error on the face of record must be such an error which, mere looking at the record should strike and it should not require any long-drawn process of reasoning on the points where there may conceivably be two opinions – Arun Dev Upadhyaya vs. Integrated Sales Service Limited & Another, 2023 (8) SCC 11.

(viii)    Even the change in law or subsequent decision/ judgment of a co-ordinate or larger Bench by itself cannot be regarded as a ground for review – Beghar Foundation vs. Justice K.S. Puttaswamy (Retired) and Others, (2021) 3 SCC 1.

The above principles governing a review petition have been explained very succinctly and precisely by the Supreme Court. They would be useful in all cases for deciding whether or not a review could be filed.

PRINCIPLES OF JUDICIAL PROPRIETY

The Supreme Court inSanjay Kumar (supra)refused to entertain the review petition on grounds of judicial propriety which demands respect for the order passed by a Bench of coordinate strength. It referred to important cases on this point, such as, Jai Sri Sahu vs. Rajdewan Dubey and Others, AIR 1962 SC 83; Mamleshwar Prasad and Another vs. Kanhaiya Lal (Dead) Through L. Rs, (1975) 2 SCC 232; Sant Lal Gupta and Others vs. Modern Cooperative Group Housing Society Limited and Others, (2010) 13 SCC 336and held as follows:

a)    One co-ordinate Bench could not comment upon the discretion exercised or judgment rendered by another co-ordinate Bench of the same strength.

b)    If a Bench did not accept as correct the decision on a question of law of another Bench of equal strength, the only proper course to adopt would be to refer the matter to the larger Bench, for authoritative decision, otherwise the law would be thrown into the state of uncertainty by reason of conflicting decisions.

c)    Certainty of the law, consistency of rulings and comity of courts all flowered from this principle.

d)    The rule of precedent was binding for the reason that there was a desire to secure uniformity and certainty in law. Thus, in judicial administration precedents which enunciated the rules of law formed the foundation of the administration of justice under our system. Therefore, it was always insisted that the decision of a coordinate Bench must be followed.

RAINBOW PAPERS CORRECT ON MERITS

The Supreme Court further held that even on merits, the decision inRainbow Papers (supra)was correct. The plea that the court in the impugned decision had failed to consider the waterfall mechanism as contained in section 53 and failed to consider other provisions of the Code, were factually incorrect. The Court in the impugned judgment had categorically reproduced and referred to section 53 and other provisions of the Code. After considering the Waterfall mechanism as contemplated in section 53 and other provisions of the Code for the purpose of deciding as to whether section 53 IBC would override section 48 of the GVAT Act, it decided in favour of the State Government. Thus, the Court in Sanjay Kumar (supra) dismissed the review petitions.

POSITION BASED ON THE ABOVE VERDICTS

To apply the ratio laid down in Rainbow Papers, one would have to ascertain the exact nature of the wordings in the impugned tax statute. If they are of the type found in section 48 of the GVAT Act, then the Government would be treated as a secured creditor, and would rank pari passu with other secured lenders / creditors. Wordings similar to wordings of section 48 of the GVAT Act are found in the Maharashtra Value Added Tax Act, 2002.

However, what happens when the wordings of the tax statute are not so explicit? In that event, it is submitted that the Government would not be considered as a secured creditor. The decision in Rainbow Papers was based upon specific wordings found in section 48 of the GVAT Act which provided that the tax dues “shall be a first charge on the property” of such dealer. It is not a blanket verdict which holds that for all tax dues, the government is a secured creditor. Prior to the introduction of the Code, this was also the position as laid down by the Supreme Court in Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co., (2000) 5 SCC 694, wherein it held that the Crown’s preferential right to recovery of debts over other creditors was confined to ordinary or unsecured creditors. The common law of England or the principles of equity and good conscience (as applicable to India) did not accord the Crown a preferential right for recovery of its debts over a mortgagee or pledgee of goods or a secured creditor.

A very old decision in M/s. Builders Supply Corporation vs. Union of India, AIR 1965 SC 1061, rendered under the Income-tax Act, 1922 is also relevant. Section 46(2) of that Act enabled the Income Tax Officer to forward to the Collector a certificate specifying the amount of arrears due from an assessee and requiring the Collector, on receipt of such certificate, to proceed to recover from the assessee in question the amount specified as if it were an arrear of land revenue. The Supreme Court held that merely on the basis of this provision it could not be construed that section 46 dealt with or provided for the principal of priority of tax dues. The provision could not be said to convert arrears of tax into arrears of land revenue either; all that it purported to do was to indicate that after receiving the certificate from the Income-tax Officer, the Collector had to proceed to recover the arrears in question as if the said arrears were arrears of land revenue.

Let us examine the position under some important tax statutes:

(a)    Income-tax dues– The Income-tax Act, does not contain any such wordings of the nature found under section 48 of the GVAT Act. Hence, it is submitted that the income-tax officer would not be a secured creditor of the corporate debtor. He would rank much lower as per the waterfall mechanism. The decisions in the case of TRO vs. Punjab and Sing Bank, 161 ITR 220 (Del) / Suraj Prasad Gupta vs. Chartered Bank, 83 ITR 494 (All)support the principle that in the absence of any specific statutory provision, income-tax dues cannot defeat the rights of any secured creditor. In fact, section 178(6) of the Income-tax Act, was specifically amended to provide that the provisions pertaining to the liability of a company in liquidation would override all laws other than the provisions of the Code.

The decision of the Delhi ITAT in ACIT vs. ABW Infrastructure Ltd, I.T.A. No. 2861/DEL/2018 (A.Y 2008-09)also states that it is well settled now that the Code has an overriding effect on all Acts including Income Tax Act which has been specifically provided under section 178(6). The Delhi High Court in Tata Steel Ltd vs. DCIT, WP(C) 13188/2018 Order dated 31st October, 2023, has also held that the Code overrides the provisions of the Income-tax Act to the extent that the latter is inconsistent with the provisions of the former. Section 238 of the Code, contains a non-obstante clause which makes this abundantly clear. It concluded that the Code was a special enactment, dealing with aspects concerning insolvency and, therefore, it would prevail over the provisions of the Income-tax Act 1961.

The NCLAT in Om Prakash Agrawal vs. CCIT, [2021] 124 taxmann.com 305 (NCL-AT) held that the priority was different for Government dues under s.53(1)(e) of the Code and under section 178 of the Income-tax Act. Both section 178(6) of the Act and section 53 of the Code start with non-obstante clause, and therefore, the legislature in its wisdom to give effect to the scheme of the Code, amended section 178(6). By virtue of the amendment the whole of section 178 had no application to the liquidation proceedings initiated under the Code. The matter pertained to the recovery of TDS (under section 194-IA) dues from a company in liquidation. The NCLAT held that as per section 194-IA of the Income-tax Act, 1% TDS was recovered on priority to other creditors of the transferor, whereas s.53(1)(e) in its waterfall mechanism provided that the Government dues came 5th in order of priority. Thus, with regard to recovery of the Government dues (including income tax) from a company-in-liquidation under IBC, there was an inconsistency between section 194-IA and section 53(1)(e). Therefore, by virtue of section 238, section 53(1)(e) had an overriding effect on the provisions of section 194-IA. Even otherwise section 53 started with a  non-obstante clause, whereas section 194-IA, did not start with a non-obstante clause, and it would necessarily be subject to the overriding effect of the Code.

(b)    GST dues – The Central Goods and Services Tax Act contains an express provision to the contrary of the type found in the VAT Acts referred to above. It contains a non-obstante clause which states that any amount payable by a taxable person on account of GST would be a first charge on the property of such person. This provision would apply notwithstanding anything to the contrary in any other law except as otherwise provided in the Insolvency & Bankruptcy Code, 2016. Thus, the GST dues would not override the IBC Code.

CONCLUSION

One feels that the provisions of the Code are explicitly clear in as much as it overrides all other Statutes. In the absence of specific wordings of the type found in the State VAT Acts, it would be very difficult to consider the Revenue Department as a secured creditor along with other secured lenders. In spite of that, there have been several cases where the Revenue Department, relying on the decision in Rainbow Papers, is petitioning to be treated as a secured creditor. This is only increasing the cases of litigation and causing more problemsin the corporate resolution process. Some recent press reports indicate that the Government is considering a Notification which would clarify that the Revenuedoes not ipso facto become a secured creditor in all insolvency cases before the NCLT under the Code. It would depend upon the wordings of the statute in each and every case!

BCAJ Admin

INTRODUCTION

Hindu Law has always been a
very fascinating subject. The fact that it is both codified in some respects
and uncodified in others makes it all the more interesting. The Supreme Court
in the case of M. Arumugam vs. Ammaniammal, CA No. 8642/2009 order dated
8^th January, 2020 had occasion to consider a mixed bag of
issues under Hindu Law. Some of the observations made by the Court are very
interesting and have a profound impact on the interpretation of Hindu Law. Let
us understand this decision in more detail and also analyse its implications.

FACTUAL MATRIX

The facts of this case are
quite detailed but are relevant to better appreciate the decision. There was a
Hindu male, his wife, two sons and three daughters. He also had an HUF in which
he (the karta) and his two sons were coparceners. The HUF had certain
property. This was prior to the 2005 amendment to the Hindu Succession Act,
1956 (the Act) and hence the daughters were not coparceners. The karta
died intestate. Accordingly, by virtue of the Act, his share in the HUF was to
be succeeded to by his legal heirs in accordance with the Act, i.e., equally
amongst the six surviving family members. On his death, a Release Deed was
executed in respect of the HUF amongst the two sons, the mother and the
daughters in which the mother and the daughters relinquished all their rights
in the father’s HUF to the two sons. As one of the daughters (the respondent in
this case) was a minor, her mother executed the deed as her natural guardian
for and on her behalf. Similarly, as one of the sons was a minor, the elder son
(the appellant in this case) executed this deed as his guardian.

After
nine years, a Deed of HUF Partition was executed between the two sons in which
the husband of the respondent (who was now a major) acted as a witness.
Thereafter, the two sons were in possession of the erstwhile HUF property in
their own individual, independent capacities. When they sought to sell this
property, the respondent objected to the sale on the grounds that when the
release deed was executed she was a minor and her mother had no authority to
sign it on her behalf. She also contended that she was, in fact, not even aware
of the release deed. Hence, the same was void ab initio and all
subsequent transactions and agreements were also void. Accordingly, she
filed a suit to set aside the transactions.

The trial court dismissed
the suit holding that the mother acted as the natural guardian of the minor
daughter and no steps were taken by the respondent on attaining majority to get
the release deed set aside within the period of limitation of three years. She
then filed an appeal before the Madras High Court which came to the conclusion
that the property in the hands of the legal heirs of the father after his death
was Joint HUF property and the mother could not have acted as the guardian of
the minor. It held that the eldest son on demise of the father became the karta
of the HUF and also the guardian for the share of the minors within the family.
Hence, he could not have executed such a release deed in his favour. It was,
therefore, held that the release deed was void ab initio. Consequently,
the eldest son filed an appeal before the Supreme Court.

It is in the background of
these facts that we can understand the ratio of the Apex Court on
various issues.

WHO CAN BE THE NATURAL GUARDIAN?

The Hindu Minority and
Guardianship Act, 1956 lays down the law relating to minority and guardianship
of Hindus and the powers and duties of the guardians. It overrides any
uncodified Hindu custom, tradition or usage in respect of the minority and
guardianship of Hindus. Under this Act, a guardian means a person who has the
care of the minor or of his property, or both. Further, the term also includes
a natural guardian. The term ‘Natural Guardian’ is of great significance since
most of the provisions of this Act deal with the rights and duties of a natural
guardian and hence it becomes necessary to understand the meaning of this term.
If the minor is a boy or an unmarried girl, then the father and after him the
mother automatically becomes the natural guardian. The natural guardian of a
Hindu minor has the power to do all acts which are necessary or reasonable and
proper for the minor’s benefit or for the realisation, protection or the
benefit of the minor’s estate. The most important restriction placed by the Act
on the natural guardian relates to his immovable property. A natural guardian
cannot without the prior permission of a Court enter into any disposal /
mortgage / lease exceeding five years of his immovable property.

This Act also has a caveat.
It states that a guardian cannot be appointed for the minor’s undivided
interest in a joint HUF property if the property is under the management of an
adult member of the family. Since the interest in an HUF property is not
separate or divisible from the rest of the shares, it is not possible to
segregate the interest of one member from another. The Supreme Court set aside
this provision in Arumugam’s case (Supra) stating that in that
case they were dealing with a situation where all the family members decided to
dissolve the Hindu Undivided Family assuming there was one in existence. Hence,
the exemption had no application.

As regards the plea that
the mother cannot act as the natural guardian and the karta of the HUF
would play both roles, the Apex Court observed that a karta is the
manager of the joint family property. He was not the guardian of the minor
members of the joint family. What the Hindu Minority and Guardianship Act
provided was that the natural guardian of a minor Hindu shall be his guardian
for all intents and purposes except so far as the undivided interest of the
minor in the joint family property was concerned. This meant that the natural
guardian could not dispose of the share of the minor in the joint family
property. The reason for this was that the karta of the joint family
property was the manager of the property. However, this principle would not
apply when a family settlement was taking place between the members of the
joint family. When such a dissolution took place and some of the members
relinquished their share in favour of the karta, it was obvious that the
karta could not also act as the guardian of that minor whose share was
being relinquished in his own (i.e., the karta’s) favour. There would be
an apparent conflict of interest. In such an eventuality, it would be
the mother alone who would be the natural guardian. Accordingly, there was
nothing wrong in the mother acting as the natural guardian of the minor
daughter.

CHALLENGE BY MINOR ON ATTAINING MAJORITY

Section 8 of the Hindu
Minority and Guardianship Act further provides that any disposal and / or
alienation of a minor’s immovable property by her natural guardian in
contravention of the Act is voidable at the instance of the minor. The Supreme
Court held that this meant that the release deed at best became a voidable
document which in terms of section 8 of the Act should have been challenged
within three years of the daughter attaining majority. Since she had failed to
do so, she could not now challenge the same. Thus, the period of limitation of
three years to challenge the document had expired.

Whether
property is joint or self-acquired

The next issue to be
decided by the Supreme Court was that in respect of the interest in the
coparcenary property which was succeeded by the legal heirs, whether it
continued to be HUF property or did it become the self-acquired property of
each heir? The Supreme Court referred to several decisions such as Guruprasad
Khandappa Magdum vs. Hirabai Khandappa Magdum, (1978) 3 SCC 383; CWT vs.
Chander Sen (1986) 3 SCC 567; Appropriate Authority IT vs. M.
Arifulla (2002) 10 SCC 342, etc. to hold that property devolving upon
legal heirs under intestate succession from a Hindu male is the individual
property of the person who inherits the same. It is not HUF property in the
recipient’s hands.

The Court also considered
section 30 of the Hindu Succession Act which clearly lays down that any Hindu
can dispose of his share in an HUF by means of a Will. It held that the
Explanation to section 30 clearly provided that the interest of a male Hindu in
a Mitakshara coparcenary is property capable of being disposed of by him
by a Will. This meant that the law-makers intended that for all purposes the
interest of a male Hindu in Mitakshara coparcenary was to be virtually
like his self-acquired property.

Manner of
owning the property

In this case, on the death
of the father and execution of the subsequent release deed, the two sons ended
up owning the property jointly. The Court referred to section 19 of the Act
which provides that when two or more heirs succeed together to the property of
an intestate, they shall take the property per capita and as tenants in common
and not as joint tenants.

It may be useful to explain
the meaning of these two terms. Although both may appear similar, but in law
there is a vast difference between the two. Succession to property would be
determined depending upon how a property has been acquired. A Joint Tenancy has
certain distinguishing features, such as unity of title, interest and
possession. Each co-owner has an undefined right and interest in property
acquired as joint tenants. Thus, no co-owner can say what is his or her share.
One other important feature of a joint tenancy is that after the death of one
of the joint tenants, the property passes by survivorship to the other joint
tenant and not by succession to the heirs of the deceased co-owner. For
example, X, Y and Z own a building as joint tenants. Z dies. His undivided
share passes on to X and Y. Tenancy in common is the opposite of joint tenancy
since the shares are specified and each co-owner in a tenancy in common can
state what share he owns in a property. On the death of a co-owner, his share
passes by succession to his heirs / beneficiaries under the Will and not to the
surviving co-owners. If a Will bequeaths a property to two beneficiaries in the
ratio of 60:40, then they are treated as tenants in common.

The Supreme Court concluded
that section 19 clearly indicated that the property was not to be treated as a
joint family property though it may be held jointly by the legal heirs as
tenants in common till the property is divided, apportioned or dealt with in a
family settlement.

Notional
partition on demise of coparcener

The Supreme Court held that
under the Act, on the death of a coparcener a notional partition of the HUF
takes place. This proposition may be elaborated for the benefit of all that
when a coparcener dies, there would be a notional partition of his HUF just
before his death to determine his share in the HUF which is bequeathed by his
Will. Accordingly, on the date prior to the coparcener’s demise, one needs to
work out the number of coparceners and determine each one’s share on that date.
Thus, if there are ten coparceners just before his death, then each would have
a notional 1/10^th share.

CONCLUSION

The
Supreme Court overruled the decision of the Madras High Court and upheld the
validity of the release deed. It also held that a mother would be the natural
guardian of the minor. This decision has elaborated on various important issues
relating to Hindu Law. It is an extremely unfortunate situation where for every
key feature of Hindu Law the Supreme Court needs to intervene. Should not the
entire Hindu Law be overhauled and codified in greater detail till such time as
India has a Uniform Civil Code?  

shailesh.kwebmaker