Understanding The Case Of S.N.R. Sundara Rao And Sons V. Commissioner Of Income Tax

S.N.R. Sundara Rao and Sons v. Commissioner of Income Tax, AIR 1957 Mad 451 (https://indiankanoon.org/doc/622718/)

Parties

S.N.R Sundara Rao, Petitioner

Commissioner of Income Tax, Respondent

Facts

In this case, the question raised by this reference is whether a Hindu undivided family, which is the assessee, was the owner of certain house property, making it liable to be assessed on the income thereof under Section 9 of the Income-tax Act, and a subsidiary question that is raised was its propriety or legality of reopening the assessment under Section 34 of the Act.

The assessee, a Hindu undivided family, had substantial property, which included, among other things, several residences, the revenue from which is the subject of the current dispute. Furthermore, it was running a money loan company, sharing the profits from two businesses in which it was a partner.

Sundara Rao and his minor sons made up the family. Sundara Rao, the father, and manager issued a registered trust deed settling several of the residences for the benefit of various public charities, naming himself as trustee and manager. These were four deeds that were completed between 1942 and 1947, and The Karta, as trustee, took ownership of the trust properties on the day the deeds were executed.

During the accounting year 1942-1946, the assessee, as the Karta of the family, brought the presence of these trust deeds to the attention of the income-tax authorities and contended that, because the properties had been set aside for charitable purposes, they had ceased to be the assessor's properties and were thus not subject to income-tax evaluation. Because there was nothing 'ex facie' in the deeds to cast doubt on their legality, the department accepted the assessor’s claim and removed the revenue from these goods from the calculation of the family's assessable income. During this time, one of Sundara Rao's sons filed an original suit in the court of the Subordinate Judge of Madurai, seeking a declaration that the settlement deeds issued by Karta Sundara Rao were null and invalid, and profit-oriented Sundara Rao and his other sons.

During these procedures, it was recognized that the properties at issue were ancestral properties belonging to the joint family. Sundara Rao, on the other hand, defended the claim because the deeds were done "in the expectation that the other members of the family would consent to the performance of the charity set out in each." 

The suit was decreed on 4-11-1949 by the Subordinate Judge of Madurai, who held that the deeds implemented by the first defendant, Karta, were null and void and not obligatory on the family properties and that the plaintiff properties belonged to the joint family of the plaintiff and the defendants in that suit. When the Income-tax officer was informed of the proceedings and their outcome, he took action under Section 34 by issuing a notice on 10-2-1951.

After hearing the assessor’s arguments, he progressed to complete the re-assessment by giving effect to the Sub Court's ruling and including in the family's assessable income that related to the residences that were the subject matter of the settlement documents that had been set aside.

Before the Income-tax Officer, the assessee claimed that, in addition to challenging the validity of the action under Section 34, the alienations performed by the Karta were only legitimate at the instance of the other coparceners, and they remained valid until the claim in the action was rejected in 1949, and this inevitably meant that the alienee continued to be the owner until that date, negating the family's ownership before that date. This claim was denied by the income-tax officer and, on appeal, by the Assistant Commissioner. In a subsequent appeal, the Tribunal likewise ruled against the assessee.

ISSUES

1. Whether the processes under Section 34 of the Income Tax Act properly begun and concluded for the four assessment years in the issue?
2. If the trust deeds are voidable or null and void, and whether the assessee can be assessed in respect of the properties under Section 9 of the Income-tax Act for any period prior to the date of the Judgment in the Original Suit on the file of the Subordinate Judge, Madurai?

Rule of Law

Section 9 of the Income Tax Act - The tax shall be payable by an assessee under the head's income from property in respect of the 'bona fide' annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax subject to the following allowances, namely ...."

Judgement

According to the Court, the first problem did not warrant serious examination. There was no question that the original evaluation was based on the trust documents being enforceable and operational. Though family members could have the deeds set aside, it was a right that belonged only to them, and the Income-tax officer could not presume that they would utilize their right to avoid the tax.

However, when the original suit of 1949 was brought and decided, a new condition of affairs developed. The deeds were no longer binding at that point, which was undeniably conclusive evidence that the assessee had been under-assessed. As a result, the proceedings under Section 34 of the Act were lawful, and the response to the first issue was positive and against the assessee.

Regarding the second issue, Mr. Gopalaswami Aiyangar, learned counsel for the assessee, argued that alienation of the family property by a father was only voidable and not void and that this necessarily meant that until the persons authorized to evade the transaction did so, a good title inhered in the alienee, and that even when the transaction was repudiated, the alienee's title stood until the transaction was repudiated.

The court, however, rejected this argument, stating that, first and foremost, the alienations at issue in the current instance were not for monetary value, but rather as a gift. The court further held that when a voidable transaction is avoided, the avoidance is effective from that date rather than the date of the original transaction. And in their judgment, it stems from a misunderstanding of the legal concept involved in the avoidance of voidable transactions. When a person who is entitled to dissent from the alienation does so, his disagreement is in respect to the transaction as a whole, not only the alienee's possession on the day of dissent.

As a result, the impact of the avoidance is to get rid of the transaction, with the result that in law, it is as if the transaction never happened. The family's title was restored when the trust deeds were avoided, and it had to be considered as the owner all along.

And there was no question that the trustee had received rentals and profits from these homes during the interim period while the deeds were deemed to be active, but it is not the receipt of rent that is the requirement for taxation under Section 9, but rather ownership. In these circumstances, the assessee became obligated to include in its income the 'bona fide' yearly worth of the homes that were the subject of the trust deeds that were put aside on the various dates, and the second question was resolved in favour of the commissioner.

Conclusion

Because the plaintiff's arguments were rejected, they were required to pay the expenses of the reference, as well as the counsel's fee of Rs. 250.