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1995 (11) TMI 4 - SC - Income TaxHeld that where a person is a partner in a partnership firm not in his individual capacity but as the karta of the HUF, neither the income accruing to his wife on account of her being a partner in the same partnership firm nor the income accruing to his minor children on account of their being admitted to the benefits of such partnership firm, can be included in the total income of such person---neither in his individual assessment nor in the assessment of the HUF
Issues Involved:
1. Interpretation of clauses (i) and (ii) of sub-section (1) of section 64 of the Income-tax Act, 1961. 2. Applicability of these clauses when the husband/father is a partner in a firm as the karta of a Hindu undivided family (HUF). Issue-Wise Detailed Analysis: 1. Interpretation of Clauses (i) and (ii) of Sub-section (1) of Section 64 of the Income-tax Act, 1961: The judgment addresses the conflict among High Courts regarding the interpretation of clauses (i) and (ii) of sub-section (1) of section 64 of the Income-tax Act, 1961, as they stood prior to April 1, 1976. These clauses mandated the inclusion of income arising to the spouse or minor child of an individual from a partnership firm in which the individual is a partner, into the individual's total income. The Explanation provided that the income should be included in the income of the spouse or parent with the greater total income. 2. Applicability When the Husband/Father is a Partner as the Karta of a Hindu Undivided Family (HUF): The primary issue was whether these clauses apply when the husband/father is a partner in a firm as the karta of an HUF. Three lines of thought emerged: - First Line of Thought: Clauses (i) and (ii) do not apply if the husband/father is a partner as the karta of an HUF. Hence, the income of the wife or minor child cannot be included in the individual income of the husband/father. - Second Line of Thought: The clauses apply even if the husband/father is a partner as the karta of an HUF, meaning the income of the wife or minor child should be included in the income of the HUF. - Third Line of Thought: Even though the husband/father is a partner as the karta of an HUF, the income of the wife or minor child should be included in the individual assessment of the husband/father. The court ruled out the second line of thought based on previous Supreme Court decisions in L. Hirday Narain v. ITO [1970] 78 ITR 26, CIT v. Harbhajan Lal [1993] 204 ITR 361, and CIT v. Jayantilal Prem Chand Shah [1995] 211 ITR 111. These decisions established that the income of the minor children or spouse cannot be included in the income of the HUF. Analysis of High Court Decisions: - Majority View (First Line of Thought): Adopted by Andhra Pradesh, Karnataka, and other High Courts, it held that the income of the wife or minor children cannot be included in the individual income of the husband/father if he is a partner as the karta of an HUF. This view was supported by the reasoning that the term "individual" in section 64 does not include the karta of an HUF. - Minority View (Third Line of Thought): Adopted by Allahabad, Madras, Madhya Pradesh, and Orissa High Courts, it held that the income of the wife or minor children should be included in the individual assessment of the husband/father, even if he is a partner as the karta of an HUF. This view was based on the premise that the karta acts in a personal capacity with his partners and the income should be included in his individual assessment. Supreme Court's Conclusion: The Supreme Court endorsed the majority view, holding that where a person is a partner in a partnership firm as the karta of an HUF, neither the income accruing to his wife nor the income accruing to his minor children can be included in his individual income or the income of the HUF. The court emphasized that the capacity in which the husband/father is a partner (i.e., as the karta) is crucial and cannot be ignored. The judgment clarified that the provisions of clauses (i) and (ii) of section 64(1) are not applicable in such cases. Final Judgment: The appeals were disposed of with the enunciation that the income of the wife or minor children cannot be included in the individual assessment of the husband/father if he is a partner as the karta of an HUF. The Income-tax Tribunal or other concerned authorities were directed to pass orders in accordance with this legal position. No costs were awarded.
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