9911796707
TMI Blog1995 (11) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... all such income as arises directly or indirectly--- (i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner ; (ii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm in which such individual is a partner ; . . . . Explanation. ---For the purpose of clause (i), the individual in computing whose total income the income referred to in that clause is to be included shall be the husband or wife whose total income (excluding the income referred to in that clause) is greater ; and, for the purpose of clause (ii), where both the parents are members of the firm in which the minor child is a partner, the income of the minor child from the partnership shall be included in the income of that parent whose total income (excluding the income referred to in that clause) is greater ; and where any such income is once included in the total income of either spouse or parent, any such income arising in any succeeding year shall not be included in the total income of the other spouse or parent unless the Income-tax Officer is satisfied, after giving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the husband/father is a partner in the firm not as an individual but as the representative of the Hindu undivided family and, therefore, clauses (i) and (ii) have no application. Indeed, three lines of thought have emerged regarding the meaning and purport of clauses (i) and (ii). They are : (a) since the husband/father is a partner not as an individual but as the karta of the Hindu undivided family, i.e., as the representative of the Hindu undivided, family, clauses (i) and (ii) of sub-section (1) are not at all attracted in such a case the income of the wife or the minor child, as the case may be, cannot be included in the individual income of the husband/father under the said clauses ; (b) clauses (i) and (ii) of sub-section (1) operate and, apply even where the " individual " happens to be the karta of the Hindu undivided family. In such a case, all that the clauses mean is that the income of the wife or the minor. child, as the case may be, has to be included in the income of the Hindu undivided family ; (c) even though the husband/father is a partner in a firm as the karta of the Hindu undivided family, he does not cease to be an individual, which means that the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 16(3)(a)(ii) of the Indian Income-tax Act, 1922. Hirday Narain then made an application for rectification under section 35 of the 1922 Act claiming that in the matter of his assessment in the status of a Hindu undivided family, section 16(3)(a)(ii) cannot be invoked. The Income-tax Officer accepted the plea but declined to give relief on another ground. The assessee thereupon approached the High Court under article 226 which matter was ultimately carried to this court, Shah J., speaking for the Bench (comprising himself and Hegde J.) held that inasmuch as a son was born to Hirday Narain after the partition on November 19, 1949, and before the end of the accounting year, he could not have been assessed as an individual for the period November 19, 1949, to September 30, 1950, and that he ought to have been assessed in the status of a Hindu undivided family. Once this is so, the learned judge held : " Section 16(3)(a)(ii) plainly did not apply and the income of the minor children of Hirday Narain could not be included in the income of Hirday Narain assessed as a Hindu undivided family." It may be mentioned that section 16(3)(a)(ii) considered in the said judgment is in pari mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds ' a minor child of such individual in clause (iii) ' or the words ' either spouse or parent ' in the Explanation. This section aims at putting an end to the attempts of an individual to avoid or reduce the incidence of tax by transferring the assets to a spouse or minor child. Under this section, the husband's share of the profits of a firm, where husband and wife are both partners could be assessed in the wife's hands or vice versa, depending upon the fact whose total income is greater. The income of the minor child admitted to the benefits of the partnership is similarly to be included in the income of that parent whose total income is greater." It is not necessary to state all the facts of the case except the following : the assessee, Sanka Sankariah, effected a partition between himself and his two minor sons by way of a partial partition. The Tribunal accepted his plea that even after the said partial partition effected on April 9, 1967, the assessee constituted a smaller Hindu undivided family, comprising himself, his wife and his minor daughter. The assessee and his wife constituted a partnership, to the benefits of which the two minor sons were admitted. The income re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd/father though such income cannot be included in the income of the Hindu undivided family, i.e., in the share income received by the husband/father as the karta of the Hindu undivided family. The ratio of the Full Bench is to be found in the following observations : "A partner, being an individual, has a dual capacity-representative and personal. He may be a representative, i.e., a karta qua others, i.e., other than partners. But with his partners he functions in his personal capacity. The relationship between the partner-karta and the other partners is personal. He does not act with the other partners in his representative capacity. This position does not, and cannot change when the other partner is related to him as his wife or minor children. To repeat, section 64 requires an individual and his wife and/or minor children to be partners of each other. That is enough. Their other relationships inter se are not relevant. The fact that he is also the karta, guardian or trustee or benamidar, etc., is immaterial. A Hindu undivided family is itself an assessable entity or unit. The income earned by the karta is taxed in the hands of the Hindu undivided family. No part of such inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided an effective device to evade taxation : " A husband or a father could nominally take his wife or his minor sons in partnership with him so that the tax burden be lightened,. . . . This device enables an assessee to secure the entire income of the business but at the same time to evade income-tax which he would have otherwise been liable to pay." The learned judge pointed out that the said provision was made pursuant to the recommendations made by the Income-tax Inquiry Commission, 1936, as a measure of plugging the loopholes in the Act. Inasmuch as the validity of the provision was questioned on the ground of violation of article 14, the learned judge examined the principles underlying the said article and held that the provision which included the income derived by wife and/or minor children alone in the income of the husband/father while not including the income of others does not suffer from discrimination. The learned judge observed that the argument based upon violation of article 14 ignores the object of the legislation, viz., to prevent evasion of tax. The learned judge observed : "A similar device would not ordinarily be resorted to by individuals by entering into pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the report of the Direct Taxes Administration Committee 1958-59. Section 64 basically carried forward the idea in sub-section (3) of section 16 of the Indian Income-tax Act, 1922, no doubt, with certain modifications. One constant, however, remained, viz., the provisions contained in clauses (i) and (ii) of section 64(1) were confined only to the partnership income. Now, what are the ingredients of the section ? The opening words are " In computing the total income of any individual ". Then it proceeds to say that in the total income of such individual shall be included the income of his spouse arising from the membership of such spouse in the partner ship firm in which such individual is the partner. It proceeds further and says that the income arising to the minor children of such individual who are admitted to the benefits of partnership wherein such individual is a partner shall also be included in the total income of such individual. Now, an individual can be a partner in a partnership firm in his individual capacity or in the capacity of the karta of a Hindu undivided family or, for that matter, in any other capacity, e.g., as a trustee. There may be a firm comprising an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded in the income of the karta derived as karta. Nor are we satisfied that such income of the wife and/or minor children should be included in the individual assessment of the karta. Indeed, the argument is that even if the karta has no individual income of his own, even then the said income of the wife and children should be included in the husband/father's individual assessment by making such a separate assessment. This argument ignores the fact that the husband/father is a partner in the partnership firm not in his individual capacity but as the karta. It also ignores the clear language employed in clauses (i) and (ii). In each of these two clauses, the expression " such individual " occurs twice. Firstly, the " individual " must be a partner in a firm and the wife and/or minor children of such individual must also be deriving income from such partnership firm (either on account of her membership or on account of being admitted to the benefits of partnership, as the case may be). For the purposes of clauses (i) and (ii), it is not his capacity vis-a-vis other partners of the firm that is relevant but his capacity vis-a-vis his wife and/or minor children. If this basic fact is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed herein. Suffice it to say that on the language employed in the sub-section and the clauses concerned herein, the view taken by us may possibly be the only view possible. The majority of the High Courts too have accepted this view. It cannot also be said that the view taken by us militates in any manner against the ratio of Balaji's case [1961] 43 ITR 393 (SC), nor does it tend to defeat the object of the provisions as explained in the said decision. We must make it clear that we have merely interpreted clauses (i) and (ii) of sub-section (1) of section 64, as they stood before April 1, 1976. We have not gone into the facts of the individual cases before us. That is a matter for the authorities under the Act to enquire into and pronounce upon. For the above reasons, we hold that where a person is a partner in a partnership firm not in his individual capacity but as the karta of the Hindu undivided family, 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 perso ..... X X X X Extracts X X X X X X X X Extracts X X X X
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