CASES REFERRED: 1. (1978) 112 I.T.R 492 - Madho Prasad Pilibhif v. C.I.T (Dissented) 2. (1978) 113 I.T.R 313 - C.I.T v. Sanka Sankaraialh (Followed) 3. 118 I.T.R 122 - Dinubhai Iswarlal Patel v. K.D Dixit, I.T.O -do- 4. (1980) 121 I.T.R 873 - C.I.T v. Anand Sarup (Referred) 5. (1957) 32 I.T.R 615 - C.I.T v. Sodra Devi (Followed) 6. 144 I.T.R 851 - Sahu Govind Prasad v. C.I.T (Dissented) 7. 147 I.T.R 732 - C.I.T v. Balasubramaniam -do- 8. (1857) 6 H.L Case 61 - Grave v. Barrison (Referred) 9. (1965) 55 I.T.R 660 - C.I.T v. Bhagyalakshmi & Co. (Followed) 10. 44 I.T.R 876 - C.I.T v. Manilal Dhanji (Referred) 11. A.I.R 1961 S.C 1549 - Collector of Customs, Baroda v. Digvijayasing Spinning and Weaving Mills Ltd. (Followed) 12. 43 I.T.R 393 - Balaji v. I.T.O -do- 13. (1982) 138 I.T.R 291 - Prayag Das Rajgarhia v. C.I.T (Referred)

BOOKS REFERRED

: 1. Reed Dickerson:— The Interpretation and Application of Statutes page 15. 2. Lord Denning - The Discipline of Law - page 56 3. Lord Denning - The Closing Chapter - page 98

I.T.R.C Nos. 89 and 90 of 1976

Messrs K.R Prasad and G. Sarangan for Messers S. Udayashankar and T.V Natarajan for Petitioner — Messrs K. Srinivasan and H. Raghavendra Rao for Respondent.

I.T.R.C No. 85 of 1978

Messrs K. Srinivasan and H. Raghavendra Rao for Petitioner — Mr. S.P Bhat for Respondent.

ORDER OF REFERENCE

M.K Srinivasa Iyengar and M. Rama Jois, JJ.

27th August 1980

Srinivasa Iyengar, J.:—

These references raise a question of considerable importance and the questions raised are identical in nature. Arguments were addressed for some time by the Learned Counsel for the Petitioner. It is seen that there is divergence of opinion in regard to the question.

The High Court of Allahabad taking one view in the case of Madho Prasad, Pilibhit v. Commissioner of Income Tax, U.P . 112 ITR 492. and the High Court of Andhrapradesh, Gujarat, Punjab and Haryana taking a contrary view in the cases of:

1) Commissioner Of Income-Tax v. Sanka Sankaraiah . 113 ITR 313.

2) Dinubhai Ishvarlal Patel v. K.D Dixit, Income Tax Officer, Ahmedabad . 118 ITR 122.

3) Commissioner of Income-Tax, Patiala v. Anand Sarup . 121 ITR 873.

In our opinion, these are matters which are fit to be disposed off by a larger Bench.

Jagannatha Shetty, J.:—

The questions referred in these I.T.R.Cs relate to the scope of Section 64(1)(i) and (ii) of the I.T Act, 1961 (called shortly the Act).

I.T.R.Cs Nos. 89 and 90 of 1976 are at the instance of the assessee. I.T.R.C No. 85 of 1978 is at the instance of the Revenue.

2. The facts, in brief, are these:

I.T.R.Cs Nos. 89 and 90/1976:

Sri C. Arunachalam - the assessee was a partner in the firm of Sunrise Industries Syndicate representing his HUF. His wife was also a partner in that firm. Sri C. Arunachalam was also a partner in that capacity in another firm called Sunrise Industries. There his minor children had been admitted to the benefits of the partnership. For the assessment year 1971-1972, Sri C. Arunachalam as an individual filed his return of income made of property income and refund of annuity deposit. The I.T.O completed the assessment determining the assessee's total income at Rs. 12,368/- made up of property income of Rs. 10,643/- and refund of annuity deposit (other sources) of Rs. 1,725/- in the status of an individual. For the assessment year 1972-1973, the I.T.O made similar assessment accepting the return of the assessee. In both the said assessments, the share income accruing to the wife and children in the said firms was not brought to tax in the assessee's hands,

I.T.R.C No. 85/1978:

Sri K. Anantha Shenoy - the assessee herein was a partner representing his HUF in the firm of Gajanana Cloth Stores (Wholesale). His three minor children were also admitted in that firm to the benefits of the partnership. The assessee as an individual filed his return of income being the remuneration received from the firm of Gajanana Cloth Stores. The I.T.O accepted the same and completed the assessment in the Status of an individual.

3. The Commissioner of Income-tax in the exercise of his powers under Section 263, revised the assessments in all the above cases and directed that the share income of the wife and minor sons of the assessee should be clubbed with the individual income of the assessee.

4. In the appeals against the orders of the Commissioner the Tribunal took contradictory views. In the appeals preferred by Sri C. Arunachalam, the Tribunal concurred with the view taken by the Commissioner. But in the appeal preferred by Sri K. Anantha Shenoy, the Tribunal reversed the order of the Commissioner by following the decision dated June 7, 1975 of the Delhi Bench of the Appellate Tribunal in the case of Kanhayalal Rajagarhia. The Tribunal held that Section 64(1)(ii) has no application to the case since Sri Anantha Shenoy was a partner in the firm repressenting his HUF.

5. The question for consideration is, when the Kartha of a HUF is a partner in a firm along with his wife, whether the wife's share income from the firm could be assessed in the hands of her husband in his individual capacity. Another question for consideration is, when the Kartha of a HUF is a partner in a firm and when the Kartha's minor childern have been admitted to the benefits of that partnership, whether the minor's share income from the firm could be brought to tax in the hands of the father in his individual status.

The answer to each question turns on the exact connotation of the words “any individual” and “such individual” occurring in Section 64(1)(i) and (ii) of the Act.

6. The original Section 64 of the Act was re-numbered as Section 64(1) by Taxation Laws (Amendment) Act, 1970. By Taxation Laws (Amendment) Act, 1975, sub-section (1) of Section 64 was replaced by a new sub-section (1), but we are concerned only with Section 64(1) as it stood prior to its amendment by the Taxation Laws (Amendment) Act, 1975 (which came into force from April 1, 1975) since the present references pertain to the assessment years prior to 1976.

The relevant portion of that section is as follows:

“Section 64(1): 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 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;”

According to Mr. Srinivasan, Learned Counsel for the Revenue, this section requires that,- (i) there should be a partnership firm carrying on business; (ii) the spouse and/or minor child of an individual should be a partner or admitted to the benefits of the partnership firm; and (iii) such individual should also be a partner of that firm. If these factors co-exist, then Section 64 operates and the share income of the spouse and/or the minors from such firm should be included in the total income of the individual for the purpose of assessment.

Mr. Sarangan and Mr. Prasad characterised the submission of Mr. Srinivasan as purely traditional literal minded approach without due regard to the intention of the Legislature or the purpose for which Section 64(1) was enacted. The Learned Counsel urged that the words “any individual” and “such individual” occurring in Section 64(1) do not cover an individual like the Kartha who becomes a partner in a firm in his representative capacity. The Learned Counsel referred to us the legislative background of the said Section to drive home their point that Section 64(1) was never intended to include such an individual whose share income stands excluded from the assessment in his individual status.

7. To appreciate these rival contentions, it is necessary to refer to the corresponding Section under the Income-tax Act, 1922.

Prior to 1937, there was no provision in the I.T Act, 1922, similar to Section 64(1)(i) and (ii) of the Act. It was only by the Amendment Act, 1937, that for the first time the concept of including the income of wife or minor children with that of the husband/father was introduced by Section 16(3) in the I.T Act of 1922.

That section had a history behind. The Income-tax Enquiry Report, 1936 pointed out that there were innumerable cases of partnerships where the husbands and fathers provided shares for their wives and minor sons for the purpose of evading payment of income tax with regard to their shares in the profits. It was stated that the husbands used to enter into nominal partnerships with their wives and they also admitted their minor children to the benefits of partnerships of which they were members. In order to prevent this evil being practised, the said Report contained the following recommendations:

(a) Wife's income:—

“….We recommend, therefore, that the income of a wife should be deemed to be, for income-tax purposes, the income of her husband, but that where the income of the wife is derived from her personal exertions and is unconnected with any business of her husband, her income from her personal exertions upto a certain limit, say Rs. 500, should not be so included.”

(b) Income of minor children:

“We suggest that the income of a minor should be deemed to be the income of the father (i) if it arises from the benefits of partnership in a business in which the father is a partner or (ii) if, being the income of a minor other than a married daughter, it is derived from assets transferred directly or indirectly to the minor by his or her father or mother, (iii) if it is derived from assets apportioned to him in the partition of a Hindu undivided family.”

These recommendations were duly considered by the Central Government and as a result thereof, Act IV of 1937 was enacted introducing Section 16(3) in the I.T Act, 1922. The relevant portion of Section 16(3) read thus:

Section 16(3):

“In computing the total income of any individual for the purpose of assessment, there shall be included-

(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly-

(i) from the membership of the wife in a firm of which her husband is a partner;

(ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner;”

8. The scope of this Section was considered by the Supreme Court in Commissioner of Income-Tax v. Sodra Devi . 1957 32 I.T.R 615.. The question that arose for consideration in that case was whether the word “such individual” in Section 16(3)(a)(ii) included also a female, and the income of minors derived from the partnership firm to which they had been admitted to the benefits was liable to be included in the income of the mother who was a partner in that partnership. Bhagwati, J., speaking for the majority view, pointed out (at page 620):

“The word assessee is wide enough to cover not only an “individual” but also a Hindu undivided family, company and local authority and every firm and other association of persons or the partners of the firm or the members of the association individually. Whereas the word “individual” is narrower in its connotation being one of the units for the purposes of taxation than the word “assessee”. The word “individual” has not been defined in the Act and there is authority for the proposition that the word “individual” does not mean only a human being but is wide enough to include a group of persons forming a unit. It has been held that the word “individual” includes a corporation created by a statute, e.g, a university or a Bar Council, or the trustees of a baronetcy trust incorporated by a Baronetcy Act. It would also include a minor or a person of unsound mind. If this is the connotation of the word “individual” it follows that when Section 16(3) talks of an “individual” it is only in a restricted sense that the word has been used. The Section only talks of “individual” capable of having a wife or minor child or both. It therefore necessarily excludes from its purview a group of persons forming a unit or a corporation created by a statute and is confined only to human beings who in the context would be comprised within that category.”

The Learned Judge continued (at page 628):

“…. …. …. Having regard to the circumstances which prevailed at the time when the Enquiry Committee made its report, the only mischief which they sought to remedy by their recommendations was the one resulting from the male assessees indulging in such tactics for the evasion of income-tax by creating nominal partnerships betweeo themselves and their wives on the one hand and themselves and their minor children on the other.”

And at page 629:

“It is clear from the above extracts that the evil which was sought to be remedied was the one resulting from the widespread practice of husbands entering into nominal partnerships with their wives and fathers admitting their minor children to the benefits of the partnerships of which they were members. This evil was sought to be remedied by the enactment of Section 16(3) in the Act. If this background of the enactment of Section 16(3) is borne in mind, there is no room for any doubt that howsoever that mischief was sought to be remedied by the amending Act, the only intention of the legislature in doing so was to include the income derived by the wife or a minor child in the computation of the total income of the male assessee, the husband or the father, as the case may be, for the purpose of assessment…………”

Sodra Devi's case has thus laid down the following three principles: (i) Section 16(3) aimed at foiling husbands' attempt to avoid or reduce the incidence of tax by entering into nominal partnerships with their wives. It was also to prevent tax avoidance by fathers admitting their minor children to the benefits of partnerships of which they were members; (ii) that the word “any individual” and “such individual” occurring in Section 16(3) were restricted in their connotation and necessarily excluded from its purview a group of persons forming a unit of assessment; and (iii) the words “any individual” and “such individual” were intended to cover the male of the species and did not include the female of the species.

9. Section 64(1) of the I.T Act, 1961 has been modelled upon Section 16(3) of the I.T Act, 1922. It may not be inappropriate also to state that Section 64(1) of the Act is a successor to Section 16(3) of the I.T Act, 1922 with the substitution of the word “spouse” for the word “wife” occurring in Section 16(3). The word “spouse” was substituted since the Legislature did not accept the view of the Supreme Court in Sodra Devi's case that the word “individual” meant only the male of the human species. According to the Legislature, it was meant a parent which may be either a male or a female and so it has since been made clear beyond doubt. That, however, does not mean that the other observations in Sodra Devi's case are not relevant for considering the scope of Section 64(1). Those observations are, indeed, very much relevant and must become the real focus to consider the scope of Section 64(1)(i) and (ii) of the Act against the back drop of the legislative history.

10. But Mr. Srinivasan urged that the intention of the Legislature should be primarily gathered from the words which are used and the Court should not depart from this normal rule of construction in this case. According to him, Section 64(1) refers to an individual and a partnership firm. An individual alone could become a partner in a firm and the individual is an assessable entity under the Act. We need not, therefore, consider whether that individual is a partner in his personal capacity or in his representative capacity. The section is automatically attracted when the individual and the spouse of such individual; the individual and the minor child of such individual as the case may be, are members in one and the same firm. The learned counsel in support of these contentions relied upon the Full Bench decision of the Allahabad High Court in Sahu Govind Prasad v. C.I.T . 144 I.T.R 85. and the decision of the Madras High Court in C.I.T v. S. Balasubramaniam . 147 I.T.R 732..

11. We shall presently consider these decisions, but before we do so, it will help the exposition which follows, if we explain the Court's functions with respect to statutes lumping under the single term “interpretation”. We know of no statute which merely declares a rule, with no purpose or objective behind. Every statute whether addressed to individuals or institutions has an aim and purpose. That could be gathered only by a rational study of the law. The rational study of law is to a large extent, the study of its history or the path of the law. History must be a part of the study because without it, we cannot know the precise scope of rules we cannot find out why a rule of law has taken its particular shape. Such a study should be the first step towards an enlightened scepticism.

In every country and more so in a developing country the old laws yield place to new and so too the creative powers of Courts in the art of interpretation of statutes. The strict constructions which go by the letter of law dominated the legal scene in the 19th Century. The strict constructionists stood by the “golden rule” laid down in Grave v. Barrison . 1857 6. H.L case 61.. The Lord Chancellor said there, that Courts should ‘adhere as rigidly as possible to the express words that are found and to give those words their natural and ordinary meaning.’ But the modern trend has been not all that way. The art of interpretation has undergone modification. The Courts now look to the purpose or intent; scheme or design of the legislation and add its own contribution by filling in gaps.

Professor Reed Dickerson in his Book “The interpretation and Application of Statutes” (at p. 15):—

“….Whether the statute is clear or obscure, whether or not it adequately resolves the current issue, and whether it can be applied as it came from the legislative oven or must be remoulded, the Court should first examine it in its proper context to discover, if possible, what it most probably means. Then, after measuring the legislative contribution, the Court, where necessary, may add its own contribution.”

“A judge should not be a servant of the words” says Lord Denning (The Discipline of Law, page 56) and he went on to add “The Judges should not be a mere mechanic in the power house of Semantics. He should be a man in charge of it”. In his recent book “The Closing Chapter,” Lord Denning has something more to state (at p. 98):

“Look at the spirit:

During the last 50 years the ‘golden rule’ has been abandoned. The Judges always say that they look for the ‘Intention’ of the Legislature. That is the same thing as looking for its ‘purpose.’ They do it in this way; they go by the words of the Section. If they are clear and cover the situation in hand, there is no need to go further. But, if they are unclear or ambiguous or doubtful, the Judges do not stop at the words of the Section. They call for help in every direction open to them. They look at the statute as a whole. They look at the social conditions which gave rise to it. They look at the mischief which it was passed to remedy. They look at the ‘factual matrix’. They use every legitimate aid. By this means they clear up many things which would be unclear or ambiguous or doubtful.”

This is how the Courts with their creative powers have recently responded to what we may call it a ground clearing exercise where the words of a statute are not so plain and unambiguous. To put it shortly, the Judges should not follow a blinkered way to lay down the law. They should use their hindsight as well.

So far as the fiscal statutes are concerned, we must remember one more principle. The provisions in a fiscal statute are not to be so construed as to furnish a chance of escape and a means of evasion. In case of doubt, the fiscal statute should be construed in favor of and beneficial to the subject.

12. Now, we may revert back to the question for consideration. The crux of the question is whether the words “any individual” and “such individual” occurring in Section 64(1) include the Kartha of a HUF. At the heart of the question is the difference between an individual becoming a partner in his personal capacity and an individual becoming a partner in his representative capacity.

The legal position of the Kartha when he becomes a partner in a firm has been explained by Subba Rao, J., as he then was, in C.I.T v. Bagyalakshmi & Co. . 1965 55 I.T.R 660 at 664.

“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 Kartha of HUF unlike other individuals has thus a two fold capacity. Qua the partnership, he functions in his personal capacity, because the rights of partnership are governed by the Partnership Act, 1932. The relation of partners arises from contract and not from status. The partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The HUF may be a person or unit of assessment under the Act, but it cannot become a partner in a firm. Qua, the third parties, the Kartha who becomes a partner retains his representative capacity. He is liable to account for assets of the family or income received by him for and on behalf of the family. Therefore, the share income accrued to him in the partnership firm can be brought to tax only in the assessment of the HUF and not in his individual status.

This is the essential difference in tax liability between the Kartha - partner and other partner under the Act. But Mr. Srinivasan urged that this difference has no material bearing on the tax treatment contemplated under Section 64(1) of the Act. According to him, Section 64(1) does not catch the income assessable in the hands of the HUF. It only seeks to add the income of the spouse or minor children in the computation of the individual's assessment. Since Kartha is also an individual and necessarily so as a partner, the operation of Section 64(1) cannot be excluded to the cases in question.

13. It is true that this reasoning has been adopted by the High Courts of Allahabad and Madras.

In Sahu Govind Prasad v. C.I.T Satish Chandra, C.J, speaking for the Full Bench of the Allahabad High Court, has observed “that Section 64 requires an individual and his wife and/or minor children to be partners of each other. That is enough, and their other relationships inter se are not relevant. The fact that he is also the karta, guardian or trustee or benamidar, etc., is immaterial.” The Learned Chief Justice went on to state (at page 862):

“An HUF is itself an assessable entity or unit. The income earned by the kartha is taxed in the hands of the HUF. No part of such income is computed in his individual assessment. When Section 64 speaks of “computation of the total income of any individual”, it ex hypothesi excludes from such computation, income which is assessable in the hands of the HUF. Section 64 does not deal with the share income of the karta from the firm. It is confined to the clubbing together of the share income of the spouse or minor children of the individual from the firm, with such other income of that individual which is assessable in his individual status. It is thus clear that the share income of the kartha from the partnership firm is not exigible to tax a second time under Section 64.

In our opinion, the phrase “in which such individual is a partner” occurring in Section 64 includes a human being who may be the karta of an HUF…………”.

While disagreeing with the view taken by the other High Courts, there then the Learned Chief Justice concluded (at page 864):

As mentioned above, Section 64 does not catch the income which is assessable in the hands of the HUF. It confines itself to the case of an individual assessee. It seeks to add the income of the spouse or minor child in the computation of the individual's assessment. It is not necessarily confined to the share income of the individual from the partnership firm. If the share income of the individual from the partnership firm is liable to be included while computing such individual's total income, it may be so included. That will be when the individual is a partner in his personal capacity. But if he is a partner in a representative capacity, with the result that the entire income that he gets as his share from the firm is assessed in the hands of the entity which he represents, then that share income is outside the purview of Section 64. None the less, the share income of the spouse or the minor children from that firm is liable to be included while computing the total income of such individual in his assessment in the status of an individual.”

14. We cannot, with respect, accept the soundness of this reasoning. On the contrary, we find ourselves, unhesitatingly, driven to the opposite conclusion when we seek to discern the legislative purpose. The statement of objects and reasons which led to the passing of Act IV of 1937 was in the following terms:

“Reference is made in Sections 1 and 4 of Chapter III of the income-tax Enquiry Report, 1936, to the practice of avoiding taxation by means of nominal partnerships between husband and wife or parent and minor child or by the nominal transfer of assets to a wife or minor child (or to an “association” consisting of husband and wife) when there is no substantial separation of the interests of the assessee and the wife or child. These practices are reported to have become very widespread already, with considerable detriment to the revenue, and there is little doubt that if they are not checked there will be progressive deterioration. The proposals in the report regarding the aggregation of the incomes of husband and wife go beyond the immediate necessities of the case and to that extent their adoption would involve the admission of a new principles which the Government of India do not desire to establish in advance of the general public discussion of the report which has been so drafted as to deal only with the abuses to which I have referred”

We may also hark back to the recommendation No. (iii) made in the Income-tax Enquiry Report, 1936 which we have extracted earlier. While dealing with the minor's income, the report said thus: “the income of a minor derived from assets apportioned to him in the partition of a Hindu Undivided Family” should be deemed to be the income of the father. But this recommendation was not accepted by the Government while enacting Section 16(3) of the I.T Act, 1922. There is no dispute on this aspect. Section 16(3) of the I.T Act, 1922, as we have already observed, was primarly designed to strike at the evil resulting from the wide-spread practice of husbands entering into nominal partnerships with their wives and fathers admitting their children to the benefits of the partnerships. It was solely aimed at foiling an individual's attempt to avoid or reduce the incidence of tax by admitting the spouse as a partner, or getting a minor child admitted to the benefits of partnership in a firm or adopting any other modes covered by the section (See: C.I.T v. Manilal Dhanji . 44 J.T.R 876.. The Legislature in enacting the provisions of Section 16(3) obviously had no intention whatsoever to disturb the prudent management of the family affairs by the Kartha of a HUF. It would be, therefore, illogical to extend the operation of Section 64(1) to such a person.

15. Let us take an illustration, which can be stated in a few words, to show how the social end which was aimed at by the Section is obscured by the construction suggested by Mr. Srinivasan and supported by the decision in Sahu Govind Prasad's case. Suppose the Kartha is a partner in a firm with contribution of 50 per cent capital. Obviously, according to the reasoning in the Sahu Govind Prasad's case, the 50 per cent share income stands excluded from the scope of Section 64(1) of the Act, since it is liable to be included in the assessment of the HUF. If the same Kartha instead of contributing 50 per cent capital, invests only 25 per cent in his name and 10 per cent in the name of his wife and gives 15 per cent to his two minor sons, then that 25 per cent of the Kartha's share income would be brought to tax in the HUF assessment. The remaining 25 per cent of the share income of the wife and minor children would be aggregated with the separate income of the Kartha and taxed in his assessment in the status of an individual. This would be the anomalous position and a manifest contradiction of the apparent purpose of the Section. Not merely that, it would immeasurably impair the rights of the Kartha and HUF which the Parliament, in our opinion, never intended.

If Section 64(1) ex hypothesi excludes income assessable in the hands of the HUF, there is every reason not to club the share income of the wife and minor child of the Kartha - partner with his personal income. That could be achieved by adopting the alternate construction, that is by reading down the scope of the word “individual” in Section 64(1)(i) and (ii) and confining the same to the one whose share income is liable to be taxed in his hands. It is a well known principle that, if two constructions are equally possible and reasonable, the construction most favourable to the subject must be preferred.

In Collector of Customs, Baroda v. Digvijayasing Spinning and Weaving Mills Ltd.,11 the Supreme Court observed:

“It is equally well settled principle of construction that “where alternate constructions are equally open, that alternation construction is to be chosen which will be consistent with the smooth working of the system which the statute purports to be regulating; and that alternation is to be rejected which will introduce uncertainty, friction or confusion into the working of the system.”

16. There is yet another reason why we should not accept the construction suggested by Mr. Srinivasan. The constitutional validity of Section 16(3)(a)(i) of the I.T Act, 1922 was upheld by the Supreme Court by confining the same to a few of the intimate members of a family who ordinarily are under the protection of the assessee and are dependants upon him. This is what the Supreme Court observed in Balaji v. ITO . 43 ITR 393 @ 404..

“………… The object sought to be achieved was to prevent the prevalent abuse, namely, evasion of tax by an individual doing business under a partnership nominally entered with his wife or minor children the scope of the provisions is limited only to a few of the intimate members of a family who ordinarily are under the protection of the assessee and are dependants of him. The persons selected by the provisions, namely, wife and minor children, cannot also be ordinarily expected to carry on their business independently with their own funds, when the husband or the father is alive and when they are under his protection Doubtless some of the said partnerships may be genuine and the wife or minor children may have contributed capital to the business; but the provisions do not in any way affect their rights and even the liability inter se between the husband and the wife or the minor children, as the case may be, in respect of the tax paid. This mode of taxation may be a little hard on a husband or a father in the case of genuine partnership with wife or minor children, but that is offset, to a large extent, by the beneficient results that flows therefrom to the public, namely, the prevention of evasion of income tax, and also by the fact that, by and large, the additional payment of tax made on the income of the wife or the minor children will ultimately be borne by them in the final accounting between them. In these circumstances, we cannot say that the provisions of Section 16(3) of the Act impose an unreasonable restriction on the fundamental rights of the Petitioner under Article 19(1)(f) and (g) of the Constitution”.

This is also the reason with which the validity of Section 64(1)(i) and (ii) could be sustained. The wife and children envisaged under Section 64(1)(i) and (ii) of the Act are those that are dependants upon the individual. They are dependants upon his personal earnings and not those who have a right to be maintained out of the family funds by being the members of the HUF. If we ignore this principle and widen the scope of the word “individual” by including a partner in his representative capacity, we would be driving the Section perilously close to the realm of arbitrariness and unconstitutionality. It is well settled that a statute should be so construed as to avoid grave doubt as to its constitutional validity. It should not be given a broad construction, if its validity could be saved by a narrow one.

17. The decision of the Madras High Court in C.I.T v. S. Balasubramaniam proceeded solely on the literal meaning of the word “individual” in Section 64(1)(ii) ignoring altogether the purpose for which the Section was enacted. V. Balasubrahmanyan, J., who spoke for the Bench of the Madras High Court, observed:

“…. We prefer to rest our decision on a simple understanding of the simple words of Section 64(1)(ii). The Section's only requirement is that the minor child and its father must both be in the same firm; the Section does not require that the father's share income must find a place in the father's total income as an individual.”

The Learned Judge further observed:

“Mr. Srinivasamurthy is recorded as telling the Tribunal that it would be exceedingly ‘strange’ that the minor children's share income from a firm must get taxed in the father's individual assessment when his own share income from the same firm is not so included. Before us learned counsel used a harsher epithet. He said that it was ‘atrocious’. We must dismiss these remarks as tax-planning rhetoric. The father's share income may get included in his total income or (to use a Goldwynism) it may get included out of his total income depending upon whether he represents himself or his joint family in the firm. That has nothing whatever to do With the tax treatment under Section 64(1)(ii) of his minor children's Share income from the partnerships.”

We do not think, that the provisions of Section 64(1) are so clear as to avoid even a reference to the legislative intent. The very fact that it is a debated point and the Courts have taken different views itself indicate that the issues involved are complex and the meaning of the words are not free from difficulty. Even otherwise, it is our experience that the truth is generally not on the surface. It lies somewhere under the surface. It is, therefore, proper to search for the legislative intent before coming to any conclusion.

18. In C.I.T v. Sanka Sankaraiah the Andhra Pradesh High Court differed from the view taken by the Bench decision of the Allahabad High Court in Madho Prasad v. C.I.T. S. Obul Reddy, C.J, speaking for the Bench observed:

“….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….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 respectfully agree with these observations of the Learned Chief Justice of the Andhra Pradesh High Court.

The Gujarat High Court in Dinubhai Ishvarlal Patel v. K.D Dixit, I.T.O has concurred with the view of the Andhra Pradesh High Court. B.J Divan C.J, who spoke for the Bench, also gave some more reasons in the following terms (at p. 130):

“….It can be said that it is just by a chance that the karta was a person whose spouse is also a partner in the dartnership firm in which he represents the HUF in the partnershid happens to be admitted to the benefits of the partnership or the spouse happens to be a partner. In neither case, qua the wife or qua the minor child, is he any one else than a representative. It is clear that so far as the HUF is concerned, as was pointed out by the Supreme Court, if a trust is represented in the partnership or if there is a sub-partnership or even a benami partner in any one of these capacities, he is there in no capacity other than as a representative. And it is just by chance that he happens to be the very individual whose spouse is also a partner in the same firm or whose minor child has been admitted to the benefits of that partnership firm but the word “individual” occuring in Section 64(1)(ii) must be given the meaning, as pointed out in Sodra Devi's case (1957) 32 ITR 615 (SC) to mean a person who is capable of having a spouse or who is capable of having a minor child. HUF, trust or a sub-partnership do not fall within either of these categories and, therefore, it is obvious that the provisions mean the word “individual” as a person who is being assessed merely in his individual capacity because only then can the concept of a “person who is capable of having a spouse or of having a minor child” will have any applicability. It is, therefore, clear on a consideration of Section 64(1)(ii) read in the light of the decisions of the Supreme Court in Sodra Devi's case (1957) 32 ITR 615 and in Bagyalakshmi's case (1965) 55 ITR 660, that there can be no other meaning except this that the word “individual” and the words “such individual” must be confined to a person who is being assessed in his individual capacity and in none else.”

Mr. Srinivasan pointed out that the above reasoning is not correct since the Supreme Court in Sodra Devi's case, has not held that the word “individual” and the words “such individual” must be confined to a person who is being assessed in his ‘individual capacity’ and none else. It seems to us that Mr. Srinivasan is right to that extent. The Supreme Court has not expressly stated so in Sodra Devi's case. But if we look at the ratio of the decision of the Supreme Court in Sodra Devi's case, in the light of the Income Tax Enquiry Report, 1936, and the decision of the Central Government for the purpose of enacting Section 16(3) in the I.T Act, 1922, it would be clear that the words “such individual is a partner” occurring in Section 64(1) cannot include an individual who may be the Kartha of HUF or any other person in his representative capacity. At the risk of repetition, we may again point out that the provisions of the Section were intended to ensure that the assessee-individual does not escape his personal liability to income-tax by different types of arrangements. The Explanation (1) to Section 64(1) introduced by Finance Act, 1979, also supports our view.

The Punjab and Haryana High Court in C.I.T v. Anand Sarup and Delhi High Court in Prayag Das Rajgarhia v. CIT . 1982 138 I.T.R 291. also agreed with the view taken by the Andhra Pradesh High Court and the Gujarat High Court.

The question of law referred by the Tribunal for the opinion of this Court have been referred to this Full Bench.

The question of law referred in I.T.R.C No. 89/76 is:

“Whether the Tribunal was correct in holding that Section 66(1)(i) and (ii) of the Income-Tax Act, 1961, was applicable on the facts of the case and, therefore, the income of wife and the minor children from the share in the firms of Messers Sunrise Industries Syndicate and Sunrise Industries had to be included in the assessee's individual assessment?”

The question of law referred in I.T.R.C No. 90/76 is:

“Whether the Tribunal was correct in holding that Section 64(1)(ii) of the Income-tax Act, 1961, was applicable on the facts of the case and, therefore, the income of the minor children from the share in the firm of Sunrise Industries had to be Included in the assessee's individual assessment?”

The question of law referred in I.T.R.C No. 85/78 is:

“Whether the Appellate Tribunal was justified in holding that Section 64(i)(ii) of the Income-tax Act, 1961, is not applicable to the facts of the case and, therefore, the income of the minor children from the share in the firm of Gajanana Cloth Stores had to be excluded from the assessee's individual assessment?”

Our answer to the question referred in I.T.R.C No. 89/76 is in the negative and in favour of the assessee.

Our answer to the question referred in I.T.R.C No. 90/76 is in the negative and in favour of the assessee.

Our answer to the question referred in I.T.R.C No. 85/78 is in the affirmative and against the Revenue.