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Commissioner Of Income-Tax v. Sanka Sankaraiah
Structured Summary of the Legal Opinion
Factual and Procedural Background
The reference arose under Section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax. The material facts found by the Income-tax Officer and the Tribunal are:
- One Sanka Sankaraiah, his wife and two minor sons and a daughter constituted a Hindu undivided family (HUF) carrying on a business (pulses, grams, tamarind, etc.) at Parvathipuram.
- On April 9, 1967 there was a partial partition of the family business and, with effect from April 15, 1967, a partnership firm was constituted to carry on the same business. Sankaraiah acted as karta and his wife was made a partner; the two minor sons were admitted to the benefits of the partnership and a partnership deed was executed.
- Sankaraiah transferred Rs. 30,000 from his self-acquired properties by gift to his wife, enabling her to become a partner. The Income-tax Officer accepted recognition of the partial partition on March 31, 1970, and the firm was registered.
- Sankaraiah was assessed separately on his individual income. Separately, the share of the partnership that related to Sankaraiah (as partner) was assessed as income of the Hindu undivided family consisting of Sankaraiah, his wife and his minor daughter — i.e., Sankaraiah acted as karta and the HUF was assessed for that share income.
- For the assessment years including 1968-69, 1969-70 and 1970-71, the Income-tax Officer included in Sankaraiah’s individual income the incomes realised by his wife and his two minor sons under Section 64(1)(ii) and (iii). The Appellate Assistant Commissioner deleted the inclusion of the wife's and minors' share incomes in Sankaraiah's individual assessment, the revenue appealed to the Tribunal, and the Tribunal confirmed the Appellate Assistant Commissioner's decision.
- The Tribunal referred the following question to this Court at the instance of the Commissioner of Income-tax: whether the share incomes derived by the assessed wife and minor children could be considered in the hands of the assessee-individual under Section 64 of the Income-tax Act, 1961.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the share incomes derived by the assessed wife and minor children could be included in the hands of the assessee-individual (Sankaraiah) under Section 64 of the Income-tax Act, 1961?
Arguments of the Parties
Revenue's Arguments
- The learned counsel for the revenue (Mr. Rama Rao) relied principally on the decision of the Allahabad High Court in Madho Prasad v. Commissioner of Income-tax [1978] 112 ITR 492, which had held that even where a karta enters into a partnership, he is a partner only as an individual; the joint family is entitled to get from him his share of profits and is liable for his share of losses.
- On that footing, the revenue argued that the words in Section 64 — income arising to a spouse or to a minor child from membership in a firm in which "such individual" is a partner — should be read to apply even where the partner is the karta of a joint family (i.e., that Sankaraiah as karta would qualify as "such individual" for the purposes of Section 64).
Assessee's / Respondent's Arguments
The opinion does not contain a detailed account of the assessee's legal arguments beyond the factual findings and the procedural history (deletion by the Appellate Assistant Commissioner and confirmation by the Tribunal). The Court's reasoning, however, indicates that the assessee's position was that Sankaraiah was a partner only in his capacity as karta and that the income was rightly assessed to the HUF rather than to Sankaraiah individually under Section 64.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Madho Prasad v. Commissioner of Income-tax, Allahabad High Court [1978] 112 ITR 492 | The view (expressed by that Court) that where a karta of a joint family enters into a partnership, he is a partner only as an individual, though the joint family may be entitled to his share of profits and liable for losses. | The revenue relied on this decision to argue that Section 64 should apply where the partner is a karta. The present Court rejected the applicability of that view to the construction of Section 64 in this case, holding that Section 64 must be strictly construed and does not extend to a karta acting in a representative capacity. |
| Commissioner of Income-tax v. Bagyalakshmi & Co. [1965] 55 ITR 660 (Supreme Court) | Statement of law that a person may occupy a dual position: qua the partnership he may function in an individual capacity; qua third parties he may act in a representative capacity (as trustee, karta, benamidar, etc.). | The Court cited this authority for the proposition that where a person represents others (as trustee or karta), he occupies a representative character and, in such representative cases, Section 64 cannot be invoked to include the spouse's or minor's partnership income in the individual's separate income. |
Court's Reasoning and Analysis
The Court's analysis proceeded in a sequence of focused legal steps drawing only upon the material facts and the statutory text:
- Statutory scope: The Court began by examining the unamended provisions of Section 64 of the Income-tax Act. It noted that the section is concerned with computing the total income of "any individual" and then provides for the inclusion of income arising to the spouse from membership in a firm "in which such individual is a partner" and the income of a minor child admitted to partnership in a firm "in which such individual is a partner." The Explanation identifies whose income is to be included where both parents are members.
- Character of the partner: On the admitted facts, Sankaraiah was a partner of the firm in his capacity as karta of the HUF consisting of himself, his wife and his minor daughter. The share of partnership income attributable to Sankaraiah was assessed as the income of that HUF (i.e., the HUF was separately assessed).
- Interpretation principle—limited/strict construction of artificial liability: Because Section 64 creates an artificial statutory liability (it attributes to an individual income which in substance arises to another person), it must be construed strictly. The Court emphasized that the term "individual" does not, in ordinary meaning, include the karta of a joint family; if the legislature had intended to cover joint families it would have used the word "person" rather than "individual" and would not have framed the Explanation in the way it did (referring to "spouse of such individual", "a minor child of such individual", and "either spouse or parent").
- Dual-capacity considerations: The Court accepted the principle (as explained in Bagyalakshmi & Co.) that a partner may occupy a dual position: in relation to the partnership he functions in an individual capacity; in relation to third parties he may act in a representative capacity (e.g., as trustee, karta, or benamidar). The Court held that where a person is acting as a representative (karta/trustee), Section 64 cannot be invoked.
- Practical absurdities avoided by strict construction: The Court illustrated that extending Section 64 to cover a trustee or karta would produce absurd results — for example, if a trustee-partner's spouse or minor child were a partner, their partnership income would have to be added to the trustee's individual income even though the trustee's partnership position is a representative one. Such outcomes could not have been the legislative intent.
- Application to the present facts: Given that Sankaraiah was a partner solely as karta and the partnership-derived income was assessed to the HUF, the Court concluded that that income could not also be included in Sankaraiah's individual income under Section 64 by reason of the wife's or minors' membership in the partnership.
Holding and Implications
Holding:
The reference question was answered in the negative; the Court ruled against the revenue and in favour of the assessee, with costs.
The opinion expressly orders costs against the revenue (advocate's fee Rs. 250).
Implications / consequences:
- Direct effect: The share incomes derived by the wife and the minor children in respect of membership in the partnership could not be included in the hands of Sankaraiah as an individual under Section 64 on the facts of this case, because Sankaraiah was a partner only in his capacity as karta and the partnership income had been assessed to the Hindu undivided family.
- Statutory interpretation: The decision rests on a strict construction of Section 64 and the limited meaning of the term "individual" in that section, i.e., it does not extend to a karta, trustee or other representative capacity.
- Broader precedent: The Court rejected the application of the Allahabad High Court's approach in Madho Prasad to the construction of Section 64 in these circumstances. The opinion does not purport to lay down a wider rule beyond the statutory interpretation applied to the facts before the Court; the direct legal consequence is the exclusion of the wife's and minors' partnership incomes from Sankaraiah's individual assessment and confirmation of assessment to the HUF.
Ordered costs: Advocate's fee Rs. 250 awarded against the revenue.
1. The facts leading to this reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax are these : One Sanka Sankaraiah, his wife and two minor sons and daughter constituted a Hindu undivided family. This Hindu undivided family was carrying on business at Parvathipuram in pulses, grams, tamarind, etc. On April 9, 1967, there was a partial partition in the family by dividing the family business. With effect from April 15, 1967, a partnership firm was constituted for the purpose of carrying on the same business with Sanka Sankaraiah as the karta and his wife as a partner. His two minor children were admitted to the benefits of the partnership, and a partnership deed was executed for that purpose. Sankaraiah also made a claim for recognition of the partial partition, which was accepted by the Income-tax Officer on March 31, 1970. An application for registration of the firm was also tiled and it was granted registration. Sankaraiah, the karta, has his individual income and he has been assessed separately on that individual income. So far as the interest in the partnership is concerned, his share in the firm which has come into existence after the partial partition, Sankaraiah has been assessed as Hindu undivided family consisting of himself, his wife and his minor daughter inasmuch as the partial partition was effected between Sankaraiah and his two minor sons. It is also an admitted fact that Sankaraiah has transferred from out of his self-acquired properties a sum of Rs. 30,000 by way of gift in favour of his wife and with that amount, his wife became a partner in the firm constituted on April 15, 1967. The Tribunal found on the basis of the undisputed facts that Sankaraiah, apart from being assessed as an individual, was assessed as karta of the family in respect of his share in the partnership firm. That was also the finding recorded by the Income-tax Officer, viz., that so far as the partial partnership was concerned, Sankaraiah was representing the Hindu undivided family consisting of himself, his wife and minor daughter. The income arising from the partnership firm was, therefore, assessed as Hindu undivided family of which Sankaraiah is the karta. The Tribunal also recorded a finding of fact that even after the partial partition of the family business, the smaller Hindu undivided family consisting of his wife and daughter continued and it was being assessed separately in respect of the share income from the partnership realised by Sankaraiah, being a partner of the firm.
2. For the assessment year 1968-69, the income realised by his wife and his two minor sons was included in the income of Sankaraiah in his individual capacity under Section 64(1)(ii) and (iii) of the Act. The same method was adopted for the subsequent assessment year 1969-70 also by the Income-tax Officer and also for the assessment year with which we are concerned, viz., 1970-71. The assessee objected to the inclusion of the income realised by his wife and minor sons in his income before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner deleted the inclusion of the share income of the wife and minors in the individual assessment of Sankaraiah. That led to the revenue preferring an appeal before the Tribunal and the Tribunal confirmed the decision of the Appellate Assistant Commissioner. Hence, the following question was referred for our opinion by the Tribunal at the instance of the Commissioner of Income-tax :
"Whether, on the facts and in the circumstances of the case, the share incomes derived by the assessed wife and minor children could be consi-dered in the hands of the assessee-individual under Section 64 of the Income-tax Act, 1961 ?"
3. The answer to the question depends upon the construction to be placed upon the unamended provisions of Section 64 of the Income-tax Act. These provisions, to the extent relevant, read :
Section 64:
" In computing the total income of any individual, there shall be included 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 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 that spouse, or parent an opportunity of being heard, that it is necessary so to do."
4. From the admitted facts, it is manifest that Sankaraiah was a partner of the firm in his capacity as karta of the Hindu undivided family consisting of himself, his wife and his minor daughter. Sankaraiah was also assessed separately as an individual on his separate income. Even after the partial partition, the department recognised the existence of the Hindu undivided family of the above members and it was being assessed separately in respect of the share income from the partnership derived by Sankaraiah, being the partner of the firm, in his capacity as the karta. Section 64 provides for, the inclusion of all such income as arises directly or indirectly to a spouse of an individual from the membership of that spouse in a firm carrying on business in which such individual is a partner. The income which a minor derives from the minor's admission to the benefits of partnership in a firm in which such individual is a partner is also to be computed in the total income of any individual. The Explanation further provides that in computing the total income, the income of the minor child from the partnership shall be included in the income of that parent whose total income is greater.
5. This section applies only to the computation of total income of an individual. The expression "individual" does not comprehend in its meaning the "karta" of a joint family. If it were the intention of the legislature that the expression "individual" used in Section 64 should also take in a Hindu undivided family, then it would have used the expression "person" so as to include a. Hindu undivided family and not the words "spouse of such individual in Clause (i)" or the words "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.
6. In the instant case, the Hindu undivided family of which Sankaraiah was the karta was being assessed separately in respect of the share income from the partnership derived by him as partner of the firm.
Sankaraiah's position as a partner in the partnership firm was that of karta of the Hindu undivided family consisting of himself, his wife and minor daughter. He was, therefore, not a partner of the firm in his individual capacity.
7. Mr. Rama Rao, the learned counsel for the revenue, placed great reliance on the view expressed by the Allahabad High Court in Madho Prasad v. Commissioner of Income-tax [1978] 112 ITR 492, where, it opined 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. It is so generally ; but here we are concerned with the question of inclusion of the income of a spouse from the membership in a firm of which "such individual" is a partner and also the income of a minor child admitted to the benefits of a partnership in the total income of ''such individual". Since this section creates artificial liability, it has to be construed strictly. Sankaraiah has been found to be a partner of the firm as "karta" of the joint family and the income derived from the firm was included in computing the total income of the Hindu undivided family. How can that income from the firm once again be included "in computing the total income of Sankaraiah as an individual, as if realised in his individual capacity from the membership of the firm of which his wife and minor child Were also partners along with him. It is not the case of the revenue that Sankaraiah was a partner of that firm in his individual capacity. It is true that 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 and it only regulates the rights and liabilities of the partners. A partner could be a trustee. A partner could be the karta of a Hindu joint family or he may under an agreement, express or implied, be the representative of a group of persons or even be a benamidar for another. As stated by the Supreme Court in Commissioner of Income-tax v. Bagyalakshmi & Co. [1965] 55 ITR 660, in all such cases he occupies a dual position. Qua the partnership, he functions in his individual capacity; qua the third parties, in his representative capacity. Where a person represents as trustee or as karta or as a benamidar, Section 64, in our view, cannot be invoked. If we are to agree with the learned counsel for the revenue that Section 64 applies to a karta or a trustee, then it would lead to certain absurd situations. Take for instance the case of a trustee as a partner in a firm. If the trustee's spouse or a minor child are to be a partner of that firm, the income realised by the spouse or the minor child in that firm will have to be added to the income of the trustee earned from sources other than partnership in his individual capacity. Certainly, that could not have been the intention of the legislature. We are unable to share the view of the Allahabad High Court that the words "in which such individual is a partner" take in a karta or trustee or representative of a group of persons. The expression "individual" only takes in a person in his individual capacity and does not take in the karta of a Hindu joint family or a trustee or one who acts as a representative of others. We, therefore, answer the question referred to us in the negative and against the revenue with costs. Advocate's fee Rs. 250.
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