1978 (4) TMI 129 - AT - Income Tax

Issues Involved:
1. Inclusion of minor children's share income in the individual income of their father under Section 64(1)(ii) of the Income Tax Act, 1961.
2. Interpretation of the term "individual" in Section 64(1)(ii) with respect to a Karta of a Hindu Undivided Family (HUF).
3. Applicability of the Explanation to Section 64(1) in determining the inclusion of minor children's income.

Issue-wise Detailed Analysis:

1. Inclusion of Minor Children's Share Income:
The primary issue is whether the share income of the minor children of Shri S. Thiagarajan Chettiar in the firm M/s A.N.S. Thiagarajan Chettiar should be included in his individual income under Section 64(1)(ii) of the Income Tax Act, 1961, for the assessment years 1972-73 to 1975-76. The CIT directed the Income-tax Officer to include the share income of the minors in the individual assessment of the assessee and exclude it from the HUF assessment, asserting that the HUF could not be a partner in the firm under the Partnership Act.

2. Interpretation of "Individual" in Section 64(1)(ii):
The Judicial Member found that the term "individual" in Section 64(1)(ii) refers to the person who derives share income from the firm. Since Shri Thiagarajan Chettiar was a partner in the firm in his capacity as Karta of the HUF, the share income derived by him belonged to the HUF, not to him individually. Consequently, the share income of the minors should not be included in his individual assessment. The Judicial Member emphasized that the rule of strict construction applies to provisions creating artificial or vicarious liability to tax.

3. Applicability of the Explanation to Section 64(1):
The Judicial Member examined the Explanation to Section 64(1) before and after its amendment by the Taxation Laws (Amendment) Act, 1975. Before the amendment, the law required that the individual referred to in Section 64(1) should be a partner in the firm in which the minor was admitted to the benefits of the partnership. Since Shri Thiagarajan Chettiar was not a partner in his individual capacity, the Judicial Member concluded that the minors' share income should not be included in his individual assessment.

The Accountant Member disagreed, asserting that the Karta is a partner in his individual capacity because a partnership recognizes only the person who is a contracting party. He argued that Section 64 should be strictly construed, and the minors' share income should be included in the individual assessment of the Karta, even if his share income was assessed in the HUF's hands.

Judgment and Conclusion:
The Tribunal, after considering the rival submissions and examining Section 64, agreed with the Judicial Member's view. The Tribunal emphasized that the Explanation to Section 64, as it stood at the relevant time, indicated that the individual referred to in Section 64(1) should have share income from the firm. Since Shri Thiagarajan Chettiar did not have share income in his individual capacity, the minors' share income should not be included in his individual assessment.

The Tribunal also referred to the Andhra Pradesh High Court's decision in CIT vs. Sanka Sankariah, which supported the view that the inclusion of minors' income in the individual assessment of the Karta is not warranted if the Karta's share income is assessed in the HUF's hands.

Separate Judgment by S.P. Subramaniam, J.M.:
S.P. Subramaniam, J.M., dissented, arguing that the deceased was a partner in the firm in his individual capacity, even though he invested HUF funds. He contended that Section 64(1)(ii) requires the inclusion of minors' share income in the individual assessment of the Karta, regardless of whether the Karta's share income is assessed in the HUF's hands. He supported the CIT's view and referenced the Allahabad High Court's decision in Madho Prasad, Pillibhit vs. CIT, which held that the share income of the minor child should be assessed in the hands of the parent.

Final Decision:
The majority of the Tribunal members agreed with the Judicial Member's view, concluding that the minors' share income should not be included in the individual assessment of Shri S. Thiagarajan Chettiar.

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