This article has been written by Akanksha Singh. This article is an exhaustive piece of work on the landmark case of Surjeet Lal Chhabda vs. Commissioner of Income Tax, Bombay (1976)). The article also includes provisions laid down under the personal laws of Hindus. The article also goes on to discuss the implications of the Hindu Personal Law on the property of an individual under the Income Tax Act relevant to the case, along with other relevant case laws under the Hindu Personal Law related to the concept of income tax and income derived from property in Indian jurisprudence. 

Introduction 

The case of Surjeet Lal Chhabda vs. Commissioner of Income Tax, Bombay (1976) (sometimes, also referred to as ‘Surjeet vs. W.T. Commissioner (1976)’ is a landmark judgement that holds great importance in the area of Hindu personal laws and their intersection with the taxation laws of India, specifically dealing with the subject of income derived from property under Hindu personal law. This landmark case offers an important analysis of the legal intricacies involved when Hindu personal laws meet requirements under the Income Tax Act, 1961. In addition to providing important clarification on some features of Hindu Undivided Family property, the decision of the Supreme Court in this case has significant ramifications for the assessment and taxation of income from such property. Hindu personal laws have their roots in ancient traditions and texts and regulate many facets of the personal and family lives of Hindus. These laws cover topics including property rights, joint families, marriage, and inheritance. A keystone of these regulations is the idea of the Hindu Undivided Family, which is a distinct type of joint family that shares property jointly.

Concept of Hindu Undivided Family under Hindu personal law

As per Hindu personal law, a Hindu Undivided Family is a separate legal entity with a separate set of legal rights and obligations. A Hindu Undivided Family can own a property. Such property that is owned by a Hindu Undivided Family is held by all its members collectively. The income derived from such property is considered an income of the Hindu Undivided Family and not an income of any of the individual members. This difference is very essential in order to determine the heads under which the income will be taxed. The present case revolves primarily around the question of whether the income generated from the property of the appellant was to be considered individual income or the income from the Hindu Undivided Family. 

Concepts of Taxation law relevant to the case of Surjeet Lal Chhabda vs. Commissioner of Income Tax, Bombay (1976)

As per the laws of taxation in India, the income derived from the property is a technical topic that frequently calls for nuanced legal interpretations. The Income Tax Act, 1961, which has rules unique to income from property, regulates the taxation of income in India. Whether income is best evaluated in the hands of the Hindu Undivided Family or the individual alone is one of the main factors that tax authorities look into. Regarding tax obligations and exemptions, the way income is classified is of significant impkortance. The Hon’ble Supreme Court had to determine in the case of Surjit Lal Chhabda on the issue that, whether the money from certain assets should be considered a personal income of Surjit Lal Chhabda or an income from Hindu Undivided Family property. The Hon’ble Supreme Court decided the case as per the laws provided under Hindu Personal law and the law of taxation in the country. 

Surjeet Lal Chhabda vs. Commissioner of Income Tax, Bombay (1976)

Name of the case: Surjeet vs. Commissioner of Income Tax, Bombay (1976)

Case number: 1819-1821 of 1970.

Equivalent citations: 1976 AIR 109.

Acts involved: Income Tax Act, 1922; Income Tax Rules, 1962.           

Important provision: Section 2 of the Income Tax Act, 1922

Court: Supreme Court of India

Bench: Justice Y.V. Chandrachud, Justice Sarkaria, Justice Ranjit Singh, and Justice A.C. Gupta. 

Petitioner/Appellant: Surjeet Lal Chhabda

Respondent: Commissioner of Income Tax, Bombay

Date of the Judgement: October 06, 1975

Facts of Surjeet Lal Chhabda vs. Commissioner of Income Tax, Bombay (1976)

The appellant, Surjit Lal Chhabda, owned an immovable property named ‘Kathoke Lodge’. The appellant used to receive income in the form of rent from the aforementioned property. Additionally, he used to derive income under other heads. The appellant, Surjit Lal Chhabda, earned money from three different sources. In addition to receiving interest from bank accounts and rent from an immovable property known as Kathoke Lodge, he also shared in the revenues of two partnership businesses. These were those assets that he had personally purchased, and up to the assessment year 1956–1957, he had been subject to an individual income assessment for them. In front of a Presidency Magistrate in Bombay on January 26, 1956, he swore to declare that he had placed the property Kathoke Lodge in the “family hotchpot” to give it the appearance of shared family property and that he would be keeping it as the Karta of the family consisting of himself, a daughter, and his wife. The daughter of the appellant was an unmarried daughter. 

After the matter went through several authorities under the Income Tax Department and the Hon’ble High Court of Bombay, the matter was referred to the Hon’ble Supreme Court by the Income Tax Appellate Tribunal on the question of law in this matter. The appellant put forth the contention before the Hon’ble Supreme Court that the appellant was allowed, as per the law, to convert his self-occupied separate property into a joint family property by giving it into the common family hotchpotch. Further, the appellant contended that there is no necessity for the existence of an ancestral nucleus or more than one male member in the joint family. However, the Income Tax Department contended against this argument of the appellant. The Income Tax Department said that the argument put forth by the appellant is against the basic concept of a Hindu Undivided Family. The concept that a single male along with females of the family can form a joint Hindu family is contrary to Hindu law. For the formation of a joint family, there needs to be more than one male member of the family who shall be entitled to claim partition of the joint family property. Meanwhile, the Hon’ble Supreme Court restricted the scope of the question by assuming that a family with only one male member forming a joint Hindu family can be a taxable unit. The Hon’ble Supreme Court further went on to say that there was no undivided family as there was no son of the assessee. Further, the Hon’ble Supreme Court mentioned that the case of the appellant fell under the decision laid down in the case of Kalyanji Vithaldas vs. the Commissioner of Income (1936) by the Hon’ble Privy Council. The Hon’ble Supreme Court further held that the income from the concerned property under this case, named ‘Kathoke Lodge’, was liable to be assessed as a separate individual property of the appellant and the income derived from such property in the form of rent shall be considered as an individual income from the property. 

Issues raised 

There were multiple issues raised in this case before the High Court of Bombay. However, the Hon’ble Supreme Court clarified that although there were several authorities that were referred to on either side in support of their respective contentions, the Supreme Court did not propose to decide this reference to go into the larger question as to whether the property of the assessee, which was originally self-acquired property, assumed the character of a Hindu Undivided Family property, as to what are the incidents of a Hindu Undivided Family property and under what circumstances can separate property become Hindu Undivided Family property? The Hon’ble Supreme Court decided to give an order on the following issue raised before it:

“Whether, on the facts and in the circumstances of the case, the income from property known as ‘Kathoke Lodge’ was to be assessed separately as the income of the Hindu Undivided Family of which the assessee was karta?” 

Arguments of the parties

Arguments by appellant/petitioner

• The contention put forth by the appellant before the Income Tax Officer was that the rent received from the said property should be assessed in the category of a Hindu Undivided Family. 
• On this contention, the Income Tax Officer held that the aforementioned property of the appellant is his separate property and since there is no nucleus of a joint family property, the appellant cannot mingle his separate property. 
• Thus, the said property cannot be considered to be assessed under the head of Hindu Undivided Family. Further, the Income Tax Officer also said that for the presence of a Hindu Undivided Family, there has to be Hindu undivided property in the family. 
• After this decision, the appellant further took the matter to the Income Tax Appellate Tribunal. The decision of the Income Tax Appellate Tribunal differed from the decision of the Appellate Assistant Commissioner. 
• The Income Tax Appellate Tribunal held the declaration made by the appellant with regards to his property as good and genuine. However, the Income Tax Appellate Tribunal also held that even if the appellant had treated the concerned separate property as a joint family property, the fact remained the same that the appellant was the sole surviving coparcener of the property. 
• Thus, he continued to have the same unrestricted and absolute interest in the said property as before, and therefore, according to the laws, the property should be treated as the separate property of the appellant. 

Arguments by respondent

• The appellant filed an appeal against this decision of the Appellate Assistant Commissioner. The Appellate Assistant Commissioner dismissed the appeal on the ground that even though the appellant made a declaration with regards to giving the property in the family hotchpotch, he dealt with the said property in the same way as he used to deal before.
• Thus, there was no reason to believe that the declaration was acted upon. Additionally, even if it was assumed that the declaration was acted upon and indeed, the property was given in the family common hotchpotch, and thus it becomes joint family property, the income derived from such property can still be taxed in the hands of the appellant as the appellant is the sole male member of the Hindu Undivided Family. 

Judgement in Surjeet Lal Chhabda vs. Commissioner of Income Tax, Bombay (1976)

After considering all the arguments of the parties, the court came to the following decisions:

The Hon’ble Supreme Court held that the appellant can constitute a joint Hindu family with his unmarried daughter and his wife. However, it did not turn into a coparcenary, that is, a joint Hindu family with his wife and unmarried daughter in it. At the same time, it is important to note that a Hindu Undivided Family is a taxable unit even if it is not a coparcenary. The argument put forth before the Income Tax Department that the concerned property cannot be treated as a joint family property because the family property in hotchpotch in the present case was empty at the time when the declaration was made and there was no blending of income at that time and thus, such a declaration was ineffective to change the concerned property into a joint family property was not put before the Appellate Tribunal and subsequently, the same was not put forth before the High Court. Thus, it was not open to the Income Tax Department to take the aforementioned contention before the High Court because such contention did not arise out of the reference made to the High Court. However, the counsel for the Income Tax Department did raise this contention but did not press it. 

Thus, the Hindu personal law regards the appellant as the owner of the property named Kathoke Lodge and therefore, the income derived from such property would be taxed as an individual income and not that of a family income, even after the property was given into the family estate by the appellant.  

Rationale behind the judgement

The concept of a Hindu joint family is much wider than the concept of a Hindu coparcenary. A joint Hindu family cannot be created by the act of the parties as a general rule, except when there is a stranger who may have been affiliated with the family by means of adoption, even if a joint family, with all its incidents, has been a creature of law. Further, the Court said that, however, the appellant was not legally trying to attempt to bring outsiders into his family who were not related to him by a sapinda relationship. It is a well-established fact that one male member of the family is sufficient to form a combined Hindu household with females.  

The Hon’ble Supreme Court drew a parallel between the case of Surjeet Lal Chhabda vs. Commissioner of Income Tax, Bombay (1976) and the case of Kalyanji Vithaldas vs. the Commissioner of Income (1936) Kalyanji in order to give an explanation for the decision given by the court. The Court said that, as in the case of Kalyanji Vithaldas vs. the Commissioner of Income (1936), the income that came to Kanji and Sewdas in the aforementioned case was considered to be separate property as there was no son of the party who could inherit the ancestral property by birth. The same analogy should be applied to the property named ‘Kathoke Lodge’ in the present case. The Court said even if the concerned property was considered ancestral property, the income from such property would still be treated as the separate property of the appellant, as he has no son who would have an interest in the share of the property by birth. Thus, the court said that in the present case, Kalyanji case was suitable to apply. 

Further, the Hon’ble Supreme Court went on to explain its decision by showing the difference between the present case and the case of Sh. Ashok Sharma vs. Sh. Laxmi Narain (2011). The Hon’ble Supreme Court said that in the case of Sh. Ashok Sharma vs. Sh. Laxmi Narain (2011), the property of Lakshmi Narain was an ancestral property in the hands of his father. Thus, the son had acquired a rightful interest in the share of the ancestral property by the time of his birth. Thus, there existed a Hindu Undivided Family during the lifetime of the father. Moreover, the Hindu Undivided Family did not come to an end even after the death of the father and thus, the Hon’ble Supreme Court rightly gave the decision that the income derived from such ancestral property in a Hindu Undivided Family is an income of the joint Hindu family. Thus, such income from Hindu Undivided Family property shall be taxed as such. The Hon’ble Supreme Court also made a remark in this case and said that merely because a family to which a given property belongs has been represented by a single coparcener who possesses such rights as the owner of a property might have possessed does not imply that such property ceases to belong to the family.  

Thus, the Hon’ble Supreme Court held that there shall be two kinds of approaches that are required to be applied in most of the cases having similar circumstances. When property is owned by an existing, Hindu Undivided Family, it retains its identity even if the family consists only of widows of deceased coparceners. This should be true even in situations where the family is represented by a single surviving coparcener who has rights that any property owner might enjoy. The composition of the family determines whether any property in the possession of an assessee has taken on the characteristics of joint family property in situations where the property does not belong to an existing undivided family.

Analysis of the case of Surjeet Lal Chhabda vs. Commissioner of Income Tax, Bombay (1976)

An analysis of the case and its judgement tells us about the fact that an individual, his spouse, and their daughter can form a joint Hindu family; nevertheless, the mere presence of a wife or daughter does not warrant the assessment of income from the joint family property in the role of the head as manager of the joint family. The apparent conflicts between the tests that arose as guidelines for determining the two classes of situations would not be difficult to grasp if it were realised that there are two separate classes of cases that demand different approaches. The property known as Kathoke Lodge did not belong to a previous joint family.  When the appellant gave what was his separate property to the family hotchpotch, it became an item of joint family property for the first time. The appellant did not have a son. While Kathoke Lodge was his independent property, he was entitled to maintenance from its earnings for his wife and unmarried daughter. 

The right of the appellant to the property did not increase for the reason that such property was given by the appellant to the family hotchpotch or family estate. The appellant did not have any coparceners and thus, by that reason, the daughter and wife of the appellant  lacked the right by birth to inherit the property. Moreover, they did not have the right to seek for partition or even stop the appellant from selling the property for any kind of profit. As per the development of the case and the legal position of Hindu law at the time of this case, it could also be seen that the property of the appellant that he had contributed to the family hotchpotch could have been treated differently if the appellant had a son. However, in accordance with Hindu law, the appellant shall have ownership of the said property.  

Relevant case laws 

Kalyanji Vithaldas vs. the Commissioner Of Income (1936)

In the case of Kalyanji Vithaldas vs. the Commissioner of Income (1936), the income that came to Kanji and Sewdas was considered to be separate property as there was no son of the party who could inherit the ancestral property by birth. This case was used to draw an analogy for the case of Surjeet Lal Chhabda vs. W.T. Commissioner (1976) by the Supreme Court of India. 

Gowli Buddanna vs. Commissioner Of Income-Tax, Mysore (1966)

The main issue in the case of Gowli Buddanna v. Commissioner of Income-Tax, Mysore (1966) was how much income a Hindu Undivided Family was subject to taxes. As the last living coparcener of a Hindu Undivided Family, Gowli Buddanna benefited financially from the holdings of the Hindu Undivided Family. The primary question was whether this revenue should be taxed as the income from Hindu Undivided Family or as an individual’s income. The Hon’ble Supreme Court ruled that the disputed income ought to be subject to income taxes of a Hindu Undivided Family property. The Court reasoned that the fact that there was only one living coparcener does not alter the status of the property as a joint family property. It was held by the Hon’ble Supreme Court in this case that there can be the rightful existence of a joint Hindu family that comprises a single coparcener and the widows of the deceased coparceners. 

Conclusion 

The ruling in Surjeet Lal Chhabda vs. Commissioner of Income Tax, Bombay (1976) has significant ramifications for Hindu tax law as well as personal law. It emphasises how converting an individual property into Hindu Undivided Family property requires precise and unambiguous steps, which has an impact on how the revenue from that property is taxed. Moreover, this decision also emphasised how important it is to understand how personal laws and tax laws interact, as property and income classifications have a big impact on tax obligations. This case is an important resource for legal academics and practitioners when discussing matters pertaining to Hindu Undivided Family property and income assessment. It also offers insightful information on how judges handle discrepancies between statutory tax requirements and personal laws. Both taxpayers and the judicial system have gained a significant amount of clarity from the decisions given by all the courts at different levels, such as the High Court of Bombay and the Supreme Court of India. This decision of the Hon’ble Supreme Court has ensured a better, more uniform and more predictable approach towards cases having similar applications.  The Surjeet Lal Chhabda vs. Commissioner of Income Tax, Bombay (1976) case is a seminal ruling that unifies Hindu personal law and tax law, offering lucidity on the handling of Hindu Undivided Family property and the evaluation of revenue originated from it. The importance of this judgement goes beyond the parties directly involved, providing direction for similar cases in the future and aiding in the formation of legal principles in this intricate field.

Frequently Asked Questions (FAQs)

Who is able to make a Hindu Undivided Family?

A family can form a Hindu Undivided Family if they are Buddhist, Sikh, Hindu, or Jain. Hindus naturally create it at the time of marriage, and Hindu law recognises it.

What kinds of earnings are possible for a Hindu Undivided Family?

A Hindu Undivided Family may receive revenue from a variety of sources, such as rent, interest, and dividends, as well as income from real estate, businesses, investments, and agriculture.

Who is a Karta of the Family as per Hindu Personal Law? 

The senior-most male member of the Hindu Undivided Family, the Karta, is in charge of running its operations. With the amendment of the year 2005 to the Hindu Succession Act 1956, women are now eligible to hold the position of Karta within a Hindu Undivided Family.

What taxes apply to income from a Hindu Undivided Family?

Income from a Hindu Undivided Family is subject to taxation under the “Hindu Undivided Family” heading as a distinct entity. Revenue is subject to taxation based on the appropriate income tax slabs for Hindu Undivided Family, and the Hindu Undivided Family is required to file its own tax return.

In the event of a partition of a Hindu Undivided Family, what happens to the tax liability?

In the case of a division, asset distribution cannot occur until the Hindu Undivided Family’s tax obligations have been satisfied. It is important to think about the tax ramifications of the split, and each member needs to record their portion of the income and capital gains.

Do Hindu Undivided Families have a different tax rate?

The income tax slabs that apply to individual taxpayers also apply to Hindu Undivided Family. Based on the tax base, the rates are progressive.

References

• https://indiankanoon.org/doc/1719225/ 
• https://indiankanoon.org/doc/789969/ 
• https://indiankanoon.org/doc/210798/ 
• https://indiankanoon.org/doc/166015046/