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Commissioner Of Income-Tax, Patiala v. Anand Sarup.

Punjab & Haryana High Court

Sep 17, 1979

Judgment

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Judgment Summary — J.V. Gupta, J.

Factual and Procedural Background

This opinion disposes of two Income-tax References (No. 91 of 1977 for assessment year 1972–73 and No. 17 of 1978 for assessment year 1973–74). The central factual matrix is:

Shri Anand Sarup was earlier assessed as an individual. He was a partner in M/s. Vinod Trading Co., Ludhiana.
By a declaration dated 10 September 1969 (effective from assessment year 1970–71), the assessee impressed all his capital and rights in the firm with the character of a Hindu Undivided Family (HUF) consisting of his wife and five sons, and therefore ceased to be partner in his individual capacity; he thereafter represented the HUF in the firm.
The Income-tax Officer (ITO) assessed the share income of the assessee and of his wife in the assessee's hands under section 64(1)(i) of the Income-tax Act, 1961 (i.e., clubbing provisions).
On appeal before the Appellate Assistant Commissioner (AAC), the AAC deleted that share income assessed as being the assessee's, accepting that the assessee represented the HUF; however, the AAC held that the income of the assessee's wife was rightly clubbed under section 64 in the assessee's hands.
On second appeal, the Appellate Tribunal accepted the assessee's contention that section 64(1)(i) could not be invoked because the assessee was not a partner in his individual capacity; it held the wife's share income could not be assessed in the assessee's hands.
The revenue referred the question to this Court: whether the Appellate Tribunal was right in holding that the assessee's wife's share income from the firm could not be clubbed with the assessee's income under section 64(1)(i).

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the share income of the assessee's wife from the firm M/s. Vinod Trading Co. could not be clubbed with the assessee's income under section 64(1)(i) of the Income-tax Act, 1961?

Arguments of the Parties

Revenue's Arguments

Under partnership law, a HUF as such cannot be a partner; where the karta joins a partnership, he must shed his representative capacity and become a member in his individual capacity.
If the karta acts as a partner in practice, then income accruing from the firm to his spouse should be clubbed with the karta's income under section 64(1)(i).
The revenue relied on two Supreme Court decisions (Firm Bhagat Ram Mohanlal v. CEPT and CIT v. Bagyalakshmi & Co.) and on judgments of the Allahabad High Court (Madho Prasad v. CIT and CIT v. Yashwant Lal) in support of its position.

Assessee's Arguments

The assessee contended that he ceased to be a partner in his individual capacity and only represented the HUF in the firm; therefore section 64(1)(i) cannot be invoked to club his wife's income with his.
The assessee relied on decisions of the Andhra Pradesh High Court (CIT v. Sanka Sankaraiah) and the Gujarat High Court (Dinubhai Ishwarlal Patel v. K.D. Dixit, ITO) which held that where a person represents a HUF (as karta) or acts as trustee/benamidar, section 64 cannot be invoked against that person in his representative capacity.
The Appellate Tribunal accepted the assessee's submissions and concluded the assessee was not a partner in his individual capacity, so the wife's income could not be assessed to him under section 64.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Firm Bhagat Ram Mohanlal v. CEPT, [1956] 29 ITR 521 (SC)	When the karta of a joint Hindu family enters into a partnership, other family members do not ipso facto become partners; creditors may proceed against joint family assets but the non-partner coparceners do not become partners by contract.	The Court cited this authority to show that the role of the karta when a HUF is a partner is distinct, and to reject an inference that profit of the firm automatically becomes the karta's personal income. The Court noted this authority does not support the revenue's contention that the HUF's share becomes the karta's individual income.
CIT v. Bagyalakshmi & Co., [1965] 55 ITR 660 (SC)	Partnership is a creature of contract; a partner may occupy a dual position (personal qua partnership, representative qua third parties); representative capacity does not convert third parties' rights into partnership rights against other partners.	The Court used this decision to reinforce the distinction between a partner's personal capacity and representative capacity and to support the view that section 64 cannot be applied where the relevant person is acting only in a representative capacity (e.g., karta representing a HUF).
Madho Prasad v. CIT, [1978] 112 ITR 492 (All)	(As relied upon by the revenue) The Allahabad High Court drew certain conclusions from the Supreme Court authorities regarding a karta's status and taxation under section 64.	The Court expressly disagreed with the conclusions of the Allahabad High Court in Madho Prasad, holding that those conclusions were not warranted by the Supreme Court authorities cited.
CIT v. Yashwant Lal, [1979] 119 ITR 18	(Cited by the revenue among authorities) [No specific principle from the case is detailed in the opinion text.]	The opinion records that this judgment was relied upon by the revenue; the Court's analysis does not adopt the Allahabad High Court line and does not otherwise rely on this authority in its reasoning as stated in the text.
CIT v. Sanka Sankaraiah, [1978] 113 ITR 313 (Andhra Pradesh High Court)	Where a person acts as trustee, karta or benamidar (i.e., in a representative capacity), section 64 cannot be invoked; the word 'individual' in section 64 refers to a person in his individual capacity, not to a karta or trustee representing a unit.	The Court expressly approved and followed this reasoning. It adopted the Andhra Pradesh High Court's conclusion that section 64 applies only where the relevant person is a partner in his individual capacity.
Dinubhai Ishwarlal Patel v. K.D. Dixit, ITO, [1979] 118 ITR 122 (Gujarat High Court)	The Gujarat High Court agreed with the Andhra Pradesh High Court's reasoning that a karta or representative does not attract section 64; relied on Supreme Court authorities (including Sodra Devi and Bagyalakshmi).	The Court respectfully agreed with and adopted the Gujarat High Court's view as correct. The judgment played a key role in the Court's conclusion in favour of the assessee.
Sodra Devi's case, [1957] 32 ITR 615	(Cited as a Supreme Court authority relevant to partnership and representative capacities.)	The opinion cites Sodra Devi among Supreme Court decisions that informed the reasoning adopted by the Gujarat High Court, which this Court approved; the Court relied on the line of authority to distinguish representative capacity from individual partnership.

Court's Reasoning and Analysis

The Court's reasoning proceeds by statutory interpretation of section 64 and by applying the law on the character of persons and representative capacity:

Statutory scope: Section 64(1)(i) requires that the income to be clubbed arise "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." The Court emphasised that the section addresses the income of an "individual" (a person capable of having a wife or minor children) and does not generically cover collective entities like a HUF.
Distinction between 'individual' and 'HUF': The Court noted the definitions in the Income-tax Act: "assessee" is wide, but the expression "individual" in section 64 contemplates a person in his individual capacity. A HUF is a distinct taxable entity and the income which accrues to the HUF by virtue of the karta representing it in a partnership is income of the HUF (as found by the AAC and accepted by the Tribunal).
Role of prior authorities: The Court analysed Supreme Court authorities (Firm Bhagat Ram Mohanlal and Bagyalakshmi) to show that when a karta enters into a partnership, other family members do not become partners automatically and the karta may have dual roles — personal qua partnership and representative qua third parties. From these authorities the Court concluded that the fact that creditors can reach joint family assets does not mean the karta's individual income includes the HUF's share of partnership profits.
Rejection of contrary reading: The Court found the Allahabad High Court's conclusions (in Madho Prasad) to be an incorrect extension of the Supreme Court dicta and therefore declined to follow them.
Adoption of High Court views favourable to the assessee: The Court agreed with the Andhra Pradesh High Court in Sanka Sankaraiah and the Gujarat High Court in Dinubhai Ishwarlal Patel, both of which held that where a person represents a HUF (or acts as trustee/benamidar), section 64 cannot be invoked against that person in his representative capacity because the expression "individual" in section 64 refers to a person in his individual capacity.
Application to facts: Given the factual findings accepted by the AAC and Tribunal — that the assessee ceased to be partner in his individual capacity and only represented the HUF in the firm — the Court concluded that section 64(1)(i) was not rightly invoked by the lower authorities in respect of the income of the assessee's wife.

Holding and Implications

Core Ruling: Answered in the affirmative: the Appellate Tribunal's view was correct — the share income of the assessee's wife from the firm cannot be clubbed with the assessee's income under section 64(1)(i).

Direct consequences:

The income of the assessee's wife from M/s. Vinod Trading Co. cannot be assessed in the hands of the assessee under section 64(1)(i) because the assessee was not a partner in his individual capacity but was representing the HUF.
The Court expressly disagreed with the view of the Allahabad High Court in Madho Prasad on this point and adopted the reasoning of the Andhra Pradesh and Gujarat High Courts.
There will be no order as to costs.

The opinion confines its decision to the legal and factual matrix before the Court and its reasoning is grounded on the interpretations of section 64 and the cited authorities; no further broader consequences are addressed in the text beyond the direct effect on these parties.

Show all summary ...

J.V Gupta, J.:— This order will dispose of Income-tax Reference No. 91 of 1977 relating to the assessment year 1972–73 and Income-tax Reference No. 17 of 1978, relating to the assessment year 1973–74, in which the question referred to this court at the instance of the revenue is the same as in the earlier reference. The question referred in Income-tax Reference No. 91 of 1977 is as under:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the share income of the assessee's wife from the firm, M/s. Vinod Trading Co., could not be clubbed with his income under section 64(1)(i) of the Income-tax Act, 1961?”

2. Briefly stated the facts are that Shri Anand Sarup was assessed in the status of an individual prior to the assessment year 1970–71. The assessee was a partner in the firm, M/s. Vinod Trading Co., Ludhiana. During the assessment year 1970–71, the assessee, vide declaration dated 10th September, 1969, had impressed all his capital in the aforesaid firm together with all rights, title and interest in the aforesaid firm, with the character of a HUF, consisting of his wife and five sons. Thus, be ceased to be the partner of M/s. Vinod Trading Co. from the assessment year 1970–71. He simply represented the HUF in the firm from that year onwards. In respect of the share in the firm, M/s. Vinod Trading Co., the ITO took the status of the assessee as that of an individual and in view of s. 64(1)(i), he ???bbed the share income of the assessee and of his wife in the former's hands. When the matter was challenged before the AAC by the assessee, the AAC accepted his plea that he represented the HUF in the said firm and, accordingly, ordered the deletion of the share income which was assessed in the hands of the assessee. The AAC accepted the status of the HUF in that respect but on the question of clubbing the income of the assessee's wife in the hands of the assessee, he took the view that that was rightly clubbed under s. 64 in his hands. However, on second appeal by the assessee before the Appellate Tribunal, the assessee's contention was accepted and the Tribunal found as under:

“The limited question for consideration is whether or not section 64 has been rightly invoked by the lower authorities, as respects the income which accrued to the assessee's wife from the firm, M/s. Vinod Trading Co. Clause (i) of section 64, sub-section (1), can be invoked only when the income arises to the spouse of the individual member in a firm carrying on business in which such, individual is also a partner. The contention of the assessee is that he is not a partner of the firm, M/s. Vinod Trading Co., and, therefore, any income accruing to his wife from the said firm cannot be assessed in his hands. We agree with the contention of the assessee. It is clear from Clause (i) of section 64, sub-section (1), that both the individual as well as the spouse, whose income is to be clubbed with the individual's income, should be the partners of the firm. The assessee ceased to be the partner of M/s. Vinod Trading Co. after he impressed his entire capital and other interest in the said firm with the character of HUF during the assessment year 1970–71. This fact has been accepted by the AAC, inasmuch as he deleted the share income which was considered to be the income of the assessee by the Income-tax Officer. In respect of the share income which was included in the hands of the assesssee, the Appellate Assistant Commissioner held that that belonged to the HUF and not to the assessee. This finding clearly shows that the assessee ceased to be the partner in his individual capacity. He is only representing the HUF in the firm, M/s. Vinod Trading Co., at present. In these circumstances, the income accruing to assessee's wife from the said firm cannot be assessed in the hands of the assessee, because he is not a partner in the firm, M/s. Vinod Trading Co. We, therefore, think that section 64, sub-section (1), clause (i), has not been rightly invoked by the lower authorities, so far as the income of the assessee's wife is concerned.”

3. Before us, the main contention of the learned counsel for the revenue is that under the law of partnership, HUF, as such, could not become a partner of the firm. The karta who wants to join the partnership firm as its member may do so after shedding his representative capacity. Any income accruing to such partner will be treated as his individual income. In support of his contention, he relied upon two Supreme Court judgments Firm Bhagat Ram Mohanlal v. CEPT, [1956] 29 ITR 521 and CIT v. Bagyalakshmi & Co., [1965] 55 ITR 660 and the judgments of the Allahabad High Court in Madho Prasad v. CIT, [1978] 112 ITR 492 and AMI. CIT v. Yashwant Lal, [1979] 119 ITR 18. On behalf of the assessee, the learned counsel has relied upon a judgment of the Andhra Pradesh High Court in CIT v. Sanka Sankaraiah, [1978] 113 ITR 313 and that of the Gujarat High Court in Dinubhai Ishwarlal Patel v. K.D Dixit, ITO, [1979] 118 ITR 122. After hearing the learned counsel for the parties and considering the various contentions raised by the learned counsel for the revenue, we agree with the view taken, by the Gujarat High Court in Dinubhai's case, [1979] 118 ITR 122 and the Andhra Pradesh High Court in Sanka Sankaraiah's case, [1978] 113 ITR 313. In Firm Bhagat Ram Mohanlal's case, [1956] 29 ITR 521 (SC), what was stated by the Supreme Court is this (p. 525):

“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.”

4. From these observations of the Supreme Court, it is clear that when the karta of a joint Hindu family enters into a partnership, the other members of the family do not become its partners automatically, and, therefore, they have no right to take part in its management or to sue for its dissolution. At the same time, 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. This authority only highlights the role of karta of a HUF in case a HUF is a partner of the firm. This nowhere lays down that the profit/loss falling to the share of the HUF from the firm will be the income/loss of the karta in his individual capacity. On the other hand, the creditors of the firm have been held to be entitled to proceed against the property of the junior members of the HUF.

5. Similarly, in Bagyalakshmi's case, [1965] 55 ITR 660 (SC), the position of law was enunciated as under (p. 664):

“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 partner 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 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.”

6. From these observations also, it is clear that it only relates to the manner in which the karta, as a member of the partnership, functions. Using the words of their Lordships, qua the partnership, he functions in his personal capacity; qua the third party in his representative capacity.

7. The Allahabad High Court in Madho Prasad's case, [1978] 112 ITR 492 (All), has placed reliance upon these two judgments of the Supreme Court, but the conclusions arrived at by the hon'ble judges, with respect, from the aforesaid enunciation of law by the Supreme Court is wrong as the same is not warranted therefrom, and, therefore, we do not agree with the view taken by the Allahabad High Court.

8. It is well known that what is being taxed under the I.T Act is the income of a person, which includes an individual, a HUF, a company, a ??? and an association of persons or a body of individuals, whether incor- ??? or not, a local authority and other artificial juristic persons not ???within the preceding categories. Section 64 of the Income-tax Act, 1961 (hereinafter called “the Act”), provides that 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. The word “assessee”, as defined in s. 2(7) of the Act, means a person by whom any tax or any other sum of money is payable under this Act and includes every person who is deemed to be an assessee under any provisions of this Act. From these provisions, it is apparent that the question is of the income of an individual and the concept of an individual has a different connotation from a HUF and other categories which are included in the definition of “person” under s. 2(31) of the Act. The word “assessee” is wide enough not only to cover an individual but also a HUF, a company or a local authority and every firm and other association of persons or the partners of the firm or the members of the association individually. The section talks of only income of any individual capable of having a wife or minor children or both. It, therefore, necessarily excludes from its purview a group of persons forming a unit or a corporation created by a statute. The Andhra Pradesh High Court in Sanka Sankaraiah's case, [1978] 113 ITR 313 differed from the view taken by the Allahabad High Court and it was pointed out at page 318, after relying upon the decision of the Supreme Court in Bagyalakshmi's case, [1965] 55 ITR 660, thus (at p. 318 of 113 ITR):

“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……………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.”

9. This view of the Andhra Pradesh High Court was followed by the Gujarat High Court in Dinubhai's case, [1979] 118 ITR 122, 133, with the following observations:

“We respectfully agree with these observations of the learned judges of the Andhra Pradesh High Court because that is the conclusion that we have independently arrived at on our own reasoning 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.”

10. We are in respectful agreement with the view taken by the Gujarat High Court in Dinubhai Ishvarlal Patel's case, [1979] 118 ITR 122 and the Andhra Pradesh High Court in Sanka Sankaraiah's case, [1978] 113 ITR 313. In cases under s. 64(1)(i) and (ii), the income of the spouse or a minor child of, such individual is to be clubbed with the income of the assessee only if he is a partner as an individual in a firm. If such an ‘individual’ represents a HUF as its karta and the income in his hands goes to the HUF then for the purposes of s. 64(1)(i) and (ii), it cannot be held that it is the income of an individual. If the contention of the revenue is correct, then there can be no income from the partnership to the HUF whose karta as such is the partner thereof. This position, as such, is not tenable and cannot be accepted. In the present case it has been found as a fact that the assessee is only representing the HUF in the firm, M/s. Vinod Trading Co., at present. In this view of the matter, we find that the view taken by the Appellate Tribunal is correct and the answer to the question is in the affirmative, i.e, against the revenue and in favour of the assessee. However, there will be no order as to costs.