- Bookmark
- Share
- CaseIQ
Madho Prasad, Pilibhit v. Commissioner Of Income-Tax, U.P
Judgment Summary — D.M. Chandrashekhar, J.
Factual and Procedural Background
The Income-tax Appellate Tribunal (Delhi Bench 'C'), at the instance of the assessees, referred the following question of law to this Court under section 256(1) of the Income-tax Act, 1961: "Whether, on the facts and in the circumstances of the case, the share income of the minor sons of each of the assessees in the firm of M/s. Arvind Cold Storage was rightly included in the individual assessment of the respective assessee?"
The material facts presented in the opinion are: the assessees (Sahu Madho Prasad and Sahu Govind Prasad) were partners in the firm M/s. Arvind Cold Storage. Each assessee had a minor son who had been admitted to the benefits of partnership in that firm. Each assessee was the karta of his joint family and was a partner of the firm as karta on behalf of his joint family. The share of each minor in the firm's profits was assessed as income of the respective joint family; however, in assessment years 1967–68 to 1969–70 the share of each minor was treated as the income of his father in the father's individual assessment and assessed accordingly.
The assessees appealed against such inclusion to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal; both authorities upheld the inclusion. The Tribunal, at the assessees' instance, referred the stated question of law to this Court.
Legal Issues Presented
- Whether the share income of the minor sons of each assessee in the firm of M/s. Arvind Cold Storage was rightly included in the individual assessment of the respective assessee (as formulated by the Tribunal under section 256(1)).
- How to interpret the words "in which such individual is a partner" in clause (ii) of section 64(1) of the Income-tax Act, 1961 (as it stood during the relevant assessment years) — specifically, whether those words require that the father be a partner in his individual capacity rather than as karta of a joint family.
Arguments of the Parties
Assessees' Arguments
- The assessees (through their counsel) contended that where the father is a partner not in his individual capacity but as the karta of his joint family, the share of a minor admitted to the benefits of partnership cannot be treated as the father's individual income.
- The assessees relied on a literal reading of the unamended clause (ii) of section 64(1), arguing the words "in which such individual is a partner" require the father to be a partner in his individual capacity for the minor's share to be taxed as the father's individual income.
- They further contended that the subsequent 1975 amendment to section 64 was intended to treat such minor-share income as the father's income irrespective of whether the father was a partner in individual capacity or as karta; implying that before amendment the position was different (i.e., no inclusion when father was partner only as karta).
Revenue's Arguments
- The learned standing counsel for the Revenue argued that, even before the 1975 amendment, where the father of the minor was a partner of the relevant firm (whether as an individual or as karta), the minor's share could be treated as the father's individual income.
- He submitted the words "in which such individual is a partner" should be read simply to require that the father be a partner of the firm, without distinguishing between partnership in an individual capacity and partnership as karta; the phrase did not intend to exclude a father who is a partner as karta.
- The revenue further contended the 1975 amendment was aimed at widening the tax-net to bring within the father's income the minor's income even where the father was not a partner of the firm in which the minor was admitted to benefits (i.e., broader coverage), rather than merely clarifying an ambiguity as to the father's capacity as partner.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax, [1956] 29 ITR 521 (SC) | Held that when the karta of a joint Hindu family enters into partnership, the other family members do not ipso facto become partners; the liability of junior members arises by reason of their status as coparceners and not by contract of partnership. | The Court relied on this authority to support the proposition that when a karta enters a partnership he is a partner qua the partnership in his individual capacity; the joint family does not become a partner of the firm by virtue of the karta's partnership. |
| Commissioner of Income-tax v. Bagyalakshmi & Co., [1965] 55 ITR 660 (SC) | Explained that a partnership is a creature of contract; a partner who is a karta may occupy a dual position (personal capacity qua the partnership and representative capacity qua third parties), and assessment provisions must be read in light of relevant law unless a tax provision derogates from other law. | The Court invoked this decision to reinforce that a person who is a partner and also a karta occupies dual positions, but for purposes of the partnership qua other partners he functions in his personal capacity; thus the provision in section 64 should be understood as linking treatment of the minor's share to the father's status as a partner (not turning the joint family into a partner). |
Court's Reasoning and Analysis
The Court began by setting out the relevant statutory provision: section 64(1)(ii) of the Income-tax Act, 1961 (as it stood for the relevant years), which required inclusion in an individual's total income of income "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." The Court also noted that section 64 was later amended (Taxation Laws (Amendment) Act, 1975) to remove the terminal words "in which such individual is a partner" from that clause.
The central interpretive question was the meaning of the phrase "in which such individual is a partner" — whether it required the father to be a partner in his personal (individual) capacity and excluded a father who was a partner only as the karta of a joint family.
To resolve this, the Court examined established Supreme Court authorities on the legal position of a karta who becomes a partner. The Court summarized two precedents which explain that:
- When a karta enters a partnership, the joint family does not automatically become a partner; the karta's relationship to the partnership is, in relation to the firm and fellow partners, a personal (individual) one.
- A partner may occupy a dual position (personal capacity for partnership relations and representative capacity qua third parties); partnership is contractual and distinct from personal/representative obligations arising under family law.
Applying those principles, the Court concluded that the words "in which such individual is a partner" in the unamended section 64(1)(ii) merely indicate that to attract the provision the father of the minor must be a partner of the firm — whether he be a partner in the technical sense while acting as karta of his joint family or as an individual partner. The Court reasoned that since the joint family, as such, cannot be a partner of a firm (only an individual can be a partner), the term "individual" refers to the father himself and serves to indicate that the relevant income is to be treated as the father's individual income (and not as the income of the joint family of which he is karta).
On those bases, because each assessee was a partner of M/s. Arvind Cold Storage (even though as karta), the share of each minor admitted to benefits of partnership was correctly included in the father's individual assessment. The Court thus answered the referred question in favour of the Revenue.
Holding and Implications
Holding: The Court held that, in the facts and circumstances of the case, "the share of the minor son of each of the assessees in the income of the firm of M/s. Arvind Cold Storage, was rightly included in the individual assessments of the respective assessee." The Court expressly answered the referred question in favour of the revenue and against the assessees.
Implications:
- Direct effect on the parties: The share of each minor in the firm's profits was properly assessable as the individual income of his father; the assessment treatment upheld by the Revenue is affirmed.
- Costs: The assessees were ordered to pay the costs of the Revenue (in one set). Advocate's fee of Rs. 200 was specified.
- Broader precedent: The opinion applies and relies on existing Supreme Court authorities regarding the legal character of a karta's partnership status. The judgment does not purport to announce a departure from or a novel principle beyond the application of those authorities; it answers the referred question on the facts before the Court. (The opinion itself does not elaborate broader legislative implications beyond its statutory interpretation and application to the case.)
This summary is prepared exclusively from the provided opinion text and does not add or infer information beyond that text.
D.M Chandrashekhar, J.:— At the instance of the assessees the Income-tax Appellate Tribunal (Delhi Bench ‘C’) has, under section 256(1) of the Income-tax Act, 1961, referred to this court the following question of law:
“Whether, on the facts and in the circumstances of the case, the share income of the minor sons of each of the assessees in the firm of M/s. Arvind Cold Storage was rightly included in the individual assessment of the respective assessee?”
2. The material facts are these. The assessees, Sahu Madho Prasad and Sahu Govind Prasad, are partners of a firm by name Arvind Cold Storage. The minor son of each of them had been admitted to the benefits of partnership in this firm. Each of them was the karta of his joint family and was a partner in the aforesaid firm on behalf of his joint family. The share of each of these partners in the said firm was assessed to tax in the hands of the respective joint family. In the assessment years 1967-68 to 1969-70, the share of each of the minors in the profits of the firm was treated as the income of his father in his (the father's) individual status and was assessed accordingly. Feeling aggrieved by the aforesaid inclusion of the respective incomes of the minors, the assessees appealed to the Appellate Assistant Commissioner who upheld the decision of the Income-tax Officer. Further appeals by the assessees to the Income-tax Appellate Tribunal (shortly called the Tribunal) were also unsuccessful. As stated earlier, at their instance the aforesaid question of law has been referred to this court.
3. Before dealing with the rival contentions of the learned counsel for the assessees and of the learned standing counsel for the income-tax department we shall set out the relevant provision of the Income-tax Act, 1961 (shortly called the Act). The relevant portions of section 64 of the Act, as they stood during the relevant assessment years, read:
“64. Income of individual to include income of spouse, minor child, etc.— In computing the total income of any individual, there shall be included all such income as arises directly or indirectly-……
(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. …….”
4. The aforesaid portions of section 64 of the Act are practically identical with the corresponding portions of sub-section (3) of section 16 of the Indian Income-tax Act, 1922.
5. However, section 64 of the Act has been amended by the Taxation Laws (Amendment) Act, 1975. Clause (ii) of sub-section (1) of section 64 of the Act has been renumbered as clause (iii) and the words “in which such individual is a partner” occurring at the end of clause (ii), as it originally stood, have been deleted. After such amendment clause (iii) of section 64(1) reads:
“(iii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm.”
6. The learned Advocate-General and Shri Ashok Gupta, who appeared for the assessees, contended that the share of each of the minors who had been admitted to the benefits of partnership, in the income of the firm, could not be treated as the income of his father since the latter was a partner not in his individual status, but as the karta of his joint family. In other words, the contention was that it was only where the father of such minor was a partner in his individual status that the share of such minor in the income of the firm, could be treated as the income of the father, but where the father was a partner of the firm not in his individual status but as karta of a joint family, such share income of the minor could not be treated as the income of his father in his individual status. Learned counsel for the assessees submitted that the object of the aforesaid amendment of section 64 was to treat such share income of a minor as the income of his father irrespective of the father being a partner of such firm in his individual status or as karta of his joint family and that before such amendment of section 64 of the Act such share income of a minor could not be treated as the income of his father unless the father was a partner of that firm in his individual capacity and not as karta of his joint family. Learned counsel for the assessees maintained that since, in the present case, each of the assessees was a partner of the firm not in his individual status but as karta of his respective joint family, the share income of such minor could not be treated as the income of his father.
7. On the other hand, the learned standing counsel contended that-even according to section 64, as it stood before the aforesaid amendment, the share of a minor admitted to the benefits of partnership, in the income of such firm, could be treated as the individual income of his father if the latter was a partner of such firm whether as an individual or as karta of his joint family. According to the learned standing counsel, the object of the aforesaid amendment of section 64 was not to remove any ambiguity as to the above legal position but to widen the net of taxation by treating the income of a minor admitted to the benefits of partnership as the income of his father irrespective of the latter being or not being a partner of the firm in which his minor son was admitted to the benefits of partnership.
8. The crux of the controversy between the parties centres on the interpretation of the words “in which such individual is a partner “occurring at the end of clause (ii) of the unamended section 64(1) of the Act. While according to learned counsel for the assessees those words mean that the father of a minor admitted to the benefits of partnership in a firm, should be a partner of that firm in his individual capacity and not as karta of his joint family, according to the revenue those words merely mean it is only where the parent of a minor admitted to the benefits of partnership in a firm, is a partner of such firm, the minor's share income in such partnership can be treated as his father's income and those words have no reference to the father being a partner of such firm as an individual or as karta of his joint family.
9. The legal position of a karta of a Hindu joint family when he becomes a partner of a firm has been explained in the following two decisions of the Supreme Court. In Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax, [1956] 29 ITR 521, 525 (SC), Venkatarama Ayyar J, who spoke for the court, said thus:
“It is well-settled that when the karta of a joint Hindu family enters into a partnership with strangers, the members of the family do not ipso facto become partners in that firm. They have no right to take part in its management or to sue for its dissolution. The creditors of the firm would no doubt be entitled to proceed against the joint family assets including the shares of the non-partner coparceners for realisation of their debts. But that is because under the Hindu law, the karta has the right when properly carrying on business to pledge the credit of the joint family to the extent of its assets, and not because the junior members become partners in the business. In short, the liability of the latter arises by reason of their status as coparceners and not by reason of any contract of partnership by them.”
10. In Commissioner of Income-tax v. Bagyalakshmi & Co., [1965] 55 ITR 660, 664 (SC), Subba Rao J. (as he then was), who spoke for the court, reiterated the position of law thus:
“A partnership is a creature of contract. Under Hindu law a joint family is one of status and right to partition is one of its incidents. The income-tax law gives the Income-tax Officer a power to assess the income of a person in the manner provided by the Act. Except where there is a specific provision of the Income-tax Act which derogates from any other statutory law or personal law, the provision will have to be considered in the light of the relevant branches of law. A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the karta of a joint Hindu family he may be a trustee he may enter into a sub-partnership with others he may, under an agreement, express or implied, be the representative of a group of persons he may be a benamidar for another. In all such cases he occupies a dual position. Qua the partnership, he functions in his personal capacity qua the third parties, in his representative capacity. The third parties, whom one of the partners represents, cannot enforce their rights against the other partners nor the other partners can do so against the said third parties. Their right is only to a share in the profits of their partner-representative in accordance with law or in accordance with the terms of the agreement, as the case may be.”
11. In view of the aforesaid enunciation of law by the Supreme Court, it is clear that even where a karta of a joint family enters into a partnership with others, in relation to the firm and his rights and obligations in regard to the other partners, he is a partner only as an individual though his joint family is entitled to get from him his share in the profits of the firm and the joint family is liable for his share of losses in the firm. But, qua other partners of the firm, he is a partner only in his individual capacity and the joint family, as such, does not become a partner nor will other members of the family become partners of that firm.
12. From the aforesaid legal position it follows that the words “in which such individual is a partner “occurring at the end of clause (ii) of unamended section 64(1), merely indicate that in order to attract the liability under that clause the father of a minor admitted to the benefits of partnership, should be a partner of the firm, whether as individual or as karta of his joint family. Since the joint family, as such, cannot be a partner of a firm, and only an individual can be a partner of a firm, the word “individual’ occurring in section 64 merely refers to the father of the minor and indicates that such share income of the minor will be treated as the individual income of his father not as the income of the joint family of which the father is karta.
13. In the present case, both the assessees were partners of the firm in which their minor sons had been admitted to the benefits of partnership. Hence, the share of each of the minors in the income of the firm was liable to be included in the individual assessment of his father. As a result of the foregoing discussion we answer the above question in favour of the revenue and against the assessees and our answer is as follows:
“In the facts and circumstances of the case, the share of the minor son of each of the assessees in the income of the firm of M/s. Arvind Cold Storage, was rightly included in the individual assessments of the respective assessee.”
14. The assessees will pay the costs of the revenue, but in one set. Advocate's fee Rs. 200.
Alert