K.Y. Patel v. CIT 1995 Tax Pub(DT) 0834 (Bom-HC)
Date of Judgment: December 5, 1994
Facts of the case: The assessee held certain foreign shares in his own name. On March 28 1970 he transferred these shares into his Hindu Undivided Family which consisted of himself his father and his mother as joint family property. During the assessment years 1975/76 and 1976/77 Income Tax Officer taxed the foreign dividend income arising on shares in the hands of the assessee under Section 64(2) of the Income Tax Act 1961. The assessee appealed stating that the foreign dividends were now HUF property.
Submission of the Assessee :
1. Declaration of shares as HUF Property: The assessee took a stand that foreign shares, previously his personal property had been transferred to the HUF through a declaration dated March 28 1970 converting them into a joint family property. Hence the said income from that share foreign dividends cannot be included on his personal income for taxation.
2. Section 64(2): The assessee further urged that Section 64(2) could be applied only when any individual property is converted into HUF property and the assessee is the karta of that HUF. In this case HUF consisted his father, mother and himself, he urged that he was not the karta and hence Section 64(2) could not apply to the transfer of shares into the joint family pool.
3. Income Not Received: Additionally Assessee argued that foreign dividend were not taxable in hands of assessee since foreign dividends has not been remitted during the said period.
Observations by the income tax officer:
Levy of Tax on Dividends:
The ITO held that foreign dividends in hands of the assessee were taxable under Section 64(2). He contended that only because the property has been converted into joint family property it was not exempted from being taxed in hands of the individual who originally owned the property.
Accrual of Income:
Assessing officer has held that foreign dividends accrued to assessee irrespective of it whether it was remitted to India or not. Thus, income was held to be taxable in hands of assessee on accrual basis rather than on a receipt basis.
Observation by the Commissioner of Income Tax :
1. Validity of the Transfer :
on the issue of declaration of the shares as joint family property is found to have held the view that even ITO was not wrong in applying the provisions of Section 64(2) since income from the converted property though now it formed part of HUF was still taxable in the hands of the individual based upon his interest in the joint family property.
2. Application of Section 64(2) :
The CIT rejected the assessee’s submission that Section 64(2) would attract only when the individual was the karta of the HUF, holding that the provision applied to all HUFs, regardless of whether the individual was the karta.
Tribunal’s view
The ITAT dismissed appeal of the assessee as it didn’t accept appeal filed by him. The Tribunal interpreted that Section 64(2) applies to all conversions of individual properties into HUF properties and does not only apply when the individual is karta. The Tribunal found no doubt in the language of the section and rejected the assessee’s contention that the expression HUF should be restricted to families where the individual is the karta.
Judicial Judgment:
The Bombay HC ruled in the revenue favor and held that Section 64(2) applied to all Hindu Undivided Families and not limited to those in which the individual was karta.
The court held that the term HUF used in Section 64(2) of the Income Tax Act must be applied in its general sense which includes all HUFs recognized under Hindu law, and does not limit the HUF consisting only of the individual, his spouse, and minor children.
The Court held that language of Section 64(2) is clear and clear-cut and there was no reason to understand it in a narrow sense. accordingly the income derived from the converted property (foreign shares) was taxable in the hands of the assessee irrespective of his status as karta.
The Court answered the question referred to it in the positive holding that the Tribunal was justified in applying Section 64(2) to case of the assessee.
Key Takeaways:
1. Broad scope of section 64(2): It applies to all HUFs be it karta or a member and there is no limitation as to what nature of HUF the converted property may belong to.
2. Income Clubbing: The income that arose from the property declared as HUF property continued to be taxable in the hands of the individual when it was transferred if the individual had an interest in the joint family property.
3. Accrual vs Receipt Basis: The share income in the foreign was accrued on and not receipt basis even when the dividends were not received in India.
4. No need for Restricted Interpretation: While dismissing the case for a restrictive interpretation of the term “HUF” under Section 64(2) the High Court declared that it applies to all families recognized under Hindu law.
5. Purpose of Section 64: The section disallows the transferor to evade tax by transferring his separated property to joint family property so that such income continues to remain taxable in the hands of the transferor.
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