Partial partition amount to a “transfer” under Income Tax law?
Partial partition doesn’t amount to a “transfer” in law but it can still create tax consequences because of a deeming fiction under the Act.
The distinction is subtle but extremely important.
1. Nature of partial partition-still no transfer in substance
From a pure legal standpoint, a partial partition-whether partial as to persons or partial as to properties-operates on the same principle as a total partition. Each coparcener receives property in satisfaction of a pre-existing and antecedent right. There is no conveyance, no consideration, and no passing of title from one person to another. The joint ownership is merely adjusted. Therefore, even a partial partition does not involve a “transfer” as understood in section 2(47) of the Income-tax Act.
2. Why the Income-tax Act treats partial partition differently
The difference arises not because partial partition is a transfer, but because the legislature has chosen to ignore partial partitions altogether for tax purposes. Section 171(9) provides that any partial partition effected after 31-12-1978 shall be ignored and the HUF shall be continued to be assessed as if no such partial partition had taken place.
This provision does not say that a partial partition is a transfer. Instead, it creates a legal fiction: for income-tax purposes, the partition is treated as if it never happened.
3. Impact on capital gains taxation
Because the partial partition is ignored:
The HUF continues to be the owner of the assets in the eyes of the Income-tax Act.
The assets are deemed to remain with the HUF, even if they are actually enjoyed by individual members.
If such assets are later sold, capital gains tax is levied in the hands of the HUF, not the members.
The tax arises not because the partial partition is treated as a transfer, but because the law refuses to recognise the partition itself.
4. Contrast with total partition
This is where Section 47(i) becomes decisive. In a total partition:
The Act expressly declares that distribution of assets shall not be regarded as a transfer.
The HUF ceases to exist for tax purposes.
Assets move to members tax-free at the stage of partition.
In partial partition:
The Act does not recognise the partition at all.
The HUF survives as a taxable entity.
The question of “transfer” is rendered irrelevant by statutory fiction.
5. Final position in one line
A partial partition is not a transfer in law, but it is ignored for tax purposes, with the result that the HUF continues to be treated as the owner of the assets and remains liable to tax on future income or capital gains arising therefrom.
This distinction-not a transfer, but not recognised either-is the key to understanding why partial partitions do not enjoy the tax neutrality expressly granted to total partitions under the Income-tax Act.
