Commissioner
of Income Tax, Ludhiana, Vs. Shri Om Prakash [1995] INSC
685 (16 November 1995)
Jeevan
Reddy, B.P. (J) Jeevan Reddy, B.P. (J) Sen, S.C. (J) B.P. Jeevan Reddy, J.
CITATION:
1996 AIR 593 1995 SCC Supl. (4) 737 JT 1995 (8) 245 1995 SCALE (6)487
ACT:
HEAD NOTE:
A
conflict of opinion among the High Courts on the meaning and interpretation or
clauses (i) and (ii) of sub- section (1) of Section 64 (as they stood prior to
1st April, 1976) of the Income Tax Act, 1961 falls for resolution in this batch
of appeals. Prior to April
1, 1976 the said
clauses along with the explanation read thus:
(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;
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 of 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 of parent an opportunity of being heard, that it is necessary so to
do".
We may
make it clear, at the outset, that whatever we say hereinafter is relevant only
to the aforesaid provisions contained in clauses (i) and (ii) of Section 64(1),
i.e., to clauses (i) and (ii) as they obtained prior to April 1, 1976.
The
sub-section opens with the words "in computing the total income of any
individual", and provides for inclusion of the income arising directly or
indirectly to persons specified in the sub-section, in the situation specified
therein, in the total income of such individual. Clause (i) says that where the
spouse of an individual is the member of a firm wherein the individual is a
partner, the income of such spouse shall be included in the income of that
individual. The Explanation contained in sub-section (1) says that among the
spouses, the income of the spouse with lesser income shall be included in the
income of the spouse having larger income. It does not matter whether the
individual in whose income the income of the spouse is included is husband or
wife. Clause (ii) says that if the minor child of such individual is admitted
to the benefits of the partner, the income arising to such minor child shall be
included in the income of such individual. The Explanation clarifies that where
both the mother and father of a minor child are partners in the firm (to
benefits of which such minor child is admitted), the income of the minor child
shall be included in the income of that parent whose total income (excluding
the income referred to in clause (ii) ) is greater.
No
difficulty arises where the individual is a partner in the firm as an
individual. In such a case, the income arising to his/her spouse from the
membership of such partnership will be included in the income of that
individual. Similarly where the parent of a minor child is a partner in his/her
individual capacity, the income arising to the minor from his admission to the
benefits of such partnership will be included in the income of that individual.
Difficulty has arisen in a limited category of cases - and these are such cases
- where the husband/father is a partner in a firm as the karta of an Hindu
Undivided Family (H.U.F.). And this is the only question considered in this
Judgment. In such cases, the plea is that the husband/father is a partner in
the firm not as an individual but as the representative of the H.U.F. and,
therefore, clauses (i) and (ii) have no application. Indeed, three lines of
thought have emerged regarding the meaning and purport of clauses (i) and (ii).
They are: (a) since the husband/father is a partner not as an individual but as
the karta of the H.U.F., i.e., as the representative of the H.U.F., clause (i)
and (ii) of sub-section (1) are not at all attracted; in such a case the income
of the wife or the minor child, as the case may be, cannot be included in the
individual income of the husband/father under the said clauses; (b) clauses (i)
and (ii) of sub-section (1) operate and apply even where the
"individual" happens to be the Karta of the H.U.F. In such a case,
all that the clauses mean is that the income of the wife or the minor child, as
the case may be, has to be included in the income of the H.U.F. (c) even though
the husband/father is a partner in a firm as the karta of H.U.F., be does not
cease to be an individual, which means that the income arising to the wife from
the membership of such partnership firm - or the income arising to his minor
child from being admitted to the benefits of such partnership firm - has to be
included in the individual assessment of such husband/father. In other.
In
other words, though the income of the wife/minor children cannot be included in
the total income of the H.U.F., it has to be included in the individual
assessment of such husband/father. It does not matter that such husband/father
has no separate individual income of his own; even in such a case, a separate
assessment has to be made upon him as an individual, in which assessment the
income of the wife and the child arising on the aforesaid account has to be
included.
We
must immediately say what of the three lines of thought aforesaid, the second
line of thought is foreclosed and is no longer available in views of the
decisions of this Court in L. Hirday Narain v. Income Tax Officer, A.Ward, Bareilly
(78 I.T.R. 26), Commission of Income-tax v. Harbhajanlal (204 I.T.R. 361) and
Commissioner of Income- tax, Gujarat v. Jayanthilal
Premchand Shah (211 I.T.R. 111).
We may
briefly refer to the ratio of each of these three decisions.
In Hirday
Narain, the assessee, Hirday Narain, and his five sons were members of H.U.F.
His accounting year relevant to the Assessment Year 1951-52 was the year
commencing on October
1, 1949 and ending
with September 30,1950. During the said accounting year,
two events occurred. On November
19, 1949 there was a
partition between Hirday Narain and his five sons and on April 8, 1950 another son was born to Hirday Narain.
Over-ruling the objections of the assessee, the Income-tax Officer made an
assessment for the entire year in the status of H.U.F. On appeal, the Appellate
Assistant Commissioner treated the sum of Rs.18,520/- as being the Income of
the former H.U.F. for the period October 1, 1949 to November
18, 1949 and directed
its exclusion from the assessment. Pursuant to the directions of the Appellate
Assistant Commissioner, the Income-tax Officer made two assessments - one
assessing the sum of Rs.18,520/- as the income of the former H.U.F. for the
period October 1, 1949 to November 18, 1949 and the other assessing the income
of Rs. 1,06,156/- for the remaining period as the income of the smaller H.U.F.,
applying, at the same time, Section 16(3) (a) (ii) of the Indian Income Tax
Act, 1922. Hirday Narain then made an application for rectification under
Section 35 of the 1922 Act claiming that in the matter of his assessment in the
status of H.U.F., Section 16(3) (a) (ii) cannot be invoked. The Income-tax
Officer accepted the plea but declined to give relief on another ground. The assessee
thereupon approached the High Court under Article 226 which matter was
ultimately carried to this Court, Shah, J, speaking for the Bench (comprising
himself and Hedge, J.) held that inasmuch as a son was born to Hirday Narain
after the partition on November 19, 1949 and before the end of the accounting
year, be could not have been assessed as an individual for the period November
19, 1949 to September 30, 1950 and that he ought to have been assessed in the
status of H.U.F. Once this is so, the learned Judge held, "Section 16(3)
(a) (ii) plainly did not apply and the income of the minor children of Hirday Narain
could not be included in the income of Hirday Narain assessed as a H.U.F."
It may be mentioned that Section 16(3) (a) (ii) considered in the said judgment
is in pari materia with clause (ii) of Section 64(1) (before it was amended
with effect from April
1, 1976).
In Harbhajanlal,
the question again was whether the income arising to the minor children from
their being admitted to the benefits of a partnership firm could be included in
the income of their father who was a partner in that partnership firm as the karta
of the H.U.F. Following the decision in Hirday Narain, this Court (B.P. Jeevan
Reddy, and S.P. Bharucha, JJ.) held that such inclusion was not permissible. No
further contention was raised of considered in the said decision.
In Jayanthilal
Premchand Shah, a three-Judge Bench comprising S.P. Bharucha, S.C. Sen and K.S.
Paripoornan, JJ. held that the income of the minors arising on account of their
being admitted to the benefits of a partnership firm cannot be included in the
total income of their father who was a partner of the said firm as the karta of
the H.U.F.
The
aforesaid decisions are binding upon us. In this view of the matter, only two
alternatives survive, i.e., (a) and (c) mentioned above, and we have to see
which one is the correct one.
A
majority of the High Courts have adopted the first line of thought aforesaid.
The High Courts taking this view are Andhra Pradesh, Gujarat, Punjab and Haryana, Delhi, Karnataka, Bombay, Madhya Pradesh, Kerala, Guhati and
Rajasthan. It is not necessary to refer to the reasoning of all these
decisions. It would suffice to note the reasoning of two decisions, vis.,
Commissioner of Income-Tax v. Sanka Sankarajan (113 I.T.R.313), a decision of
the Andhra Pradesh High Court, the first one to take this view and that of the
Full Bench of the Karnataka High Court in Arunchalam v. Commissioner of
Income-tax (151 I.T.R.172). In Sanka Sankaraiah. it was held:
"This
Section (64(1)) 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 and both partners could be assessed in the wife's hands or vice versa,
depending upon the fact whose total income is greater. The income of the minor
child admitted to the benefits of the partnership is similarly to be included
in the income of that parent whose total income is greater".
It is
not necessary to state all the facts of the case except the following: the assessee,
Sanka Sankariah, effected a partition between himself and his two minor sons by
way of a partial partition. The Tribunal accepted his plea that even after the
said partial partition effected on April 9, 19967, the assessee constituted a
smaller H.U.F., comprising himself, his wife and his minor daughter. The assessee
and his wife constituted a partnership, to the benefits of which the two minor
sons were admitted. The income received by the wife and the income received by
the minor sons from the partnership firm was sought to be included in the
individual income of the assessee which was objected to by him, whereupon the
following question was referred for the opinion of the High Court:
"Whether,
on the facts and in the circumstances of the case, the share incomes derived by
the assessee's wife and minor children could be considered in the hands of the assessee-individual
under Section 64 of the Income-Tax Act, 1961?" It is on those facts that
the observations aforesaid were made by the High Court.
In Arunachalam,
K.Jagannatha Shetty, J. (as he then was), speaking for the Full Bench of the
Karnataka High Court pointed out, in the first instance, what, in his opinion,
is the essential difference in tax liability between the Karta-partner and
other partners of a firm and then proceeded to hold that the income accruing to
wife/minor child cannot be included in the individual assessment of the
husband/father in such a situation. This decision considers cases of two
different assessees. In the case of one assessee, his minor sons were admitted
to the benefits of partnership of which he was a member as the karta of his
H.U.F. The other was a case where the Commissioner directed, under Section 263
of the Income Tax Act, 1961, that the share income of the wife and the minor
sons of the assessee be included in the total income of the assessee who was a
partner in that firm as the karta of H.U.F. The Full Bench held that the share
income of the wife/minor children cannot be included in the individual
assessment of the husband/father, for the reason that he is a partner not in
his individual capacity but as the karta of the H.U.F., i.e., in a
representative capacity.
The
High Courts which have adopted the third line of thought are Allahabad, Madras, Madhya Pradesh and Orissa. We may refer to the reasoning
of the Full Bench of the Allahabad High Court in Sahu Govind Prasad v.
Commissioner of Income-tax (144 I.T.R. 851). The Full Bench holds that where
the Karta of a H.U.F. is a partner in the firm wherein his wife is also a
partner and/or to the benefits of which his minor children are admitted, the
income accruing to wife/minor children has to be included in the individual
assessment of the husband/father though such income cannot be included in the income
of the H.U.F., i.e., in the share income received by the husband/father as the karta
of the H.U.F. The ratio of the Full Bench is to be found in the following
observations:
"A
partner, being an individual, has a dual capacity - representative and personal.
He may be a representative i.e., a karta qua others i.e., other than partners.
But with his partners he functions in his personal capacity. The relationship
between the partner-karta and the other partners is personal. He does not act
with the other partners in his representative capacity. This position does not,
and cannot change when the other partner is related to his as his wife or minor
children. To repeat, Section 64 requires an individual and his wife and/or
minor children to be partners of each other.
That
is enough. Their other relationships inter se are not relevant.
The
fact that he is also the karta, quardian or trustee of benamidar, etc., is
immaterial.
An HUF
is itself an assessable entity or unit. The income earned by the karta 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 status. It is thus clear that the share income of the karta 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.
This
is what was held by this court in Madho Prasad's case ( (1978) 112 ITR 492).
With respect we agree with that decision".
In
Commissioner of Income-tax v. Shri Manakram (183 I.T.R. 382), the Madhya
Pradesh High Court has pointed out that for including the income of the
wife/minor children in the individual assessment of the husband/father under
Section 64(1), it is not necessary that the husband/father should have separate
individual income of his own. Even if he has no separate individual income,
still the income of the wife/minor children has to be included by making a
separate assessment on the husband/father in his individual capacity.
While
the learned counsel for the Revenue commends to us the view taken by Allahabad
High Court at (what may be called the third line of thought), the learned
counsel for the assessees espouse the first line of thought accepted by the
Andhra Pradesh, Karnataka and other High Courts mentioned above.
In the
Indian Income Tax Act, 1922, as originally enacted, there was no provision like
the one concerned herein. Section 16(3) providing for the same was introduced
only in the year 1937. The constitutional validity of this provision was
questioned in Balaji v. Income-Tax Officer, Special Investigation Circle (1962 (2) S.C.R. 983). It would be appropriate to
refer to some of the reasons given by the Constitution Bench while upholding
the validity. Subba Rao, J., speaking for the Court, observed, in the first
instance, that the beneficial provision made in the Income-tax for distributing
the profit made by the partnership firm among its partners also provided an
effective device to evade taxation. "A husband or a father could nominally
take his wife or his minor sons in partnership with him so that tax burden be
lightened,..........This device enables an assessee to secure the entire income
of the business but at the same time to evade income-tax which he would have
otherwise been liable to pay." The learned Judge pointed out that said
provision was made pursuant to the recommendations made by the Income-tax
Inquiry Commission, 1936 as a measure of plugging the loopholes in the Act.
Inasmuch as the validity of the provision was questioned on the ground of
violation of Article 14, the learned Judge examined the principles underlying
the said Article and held that the provision which included the income derived
by wife and/or minor children alone in the income of the husband/father while
not including the income of others does not suffer from discrimination. The
learned Judge observed that the argument based upon violation of Article 14
ignores the object of the Legislation, viz., to prevent evasion of tax.
Learned
Judge observed: "A similar device would not ordinarily be resorted to by
individuals by entering into partnership with persons other than those
mentioned in the sub-section, as it would involve a risk of the third-party
turning round and asserting his own rights. The Legislature, therefore,
selected for the purpose of classification only that group of persons who in
fact are used as a cloak to perpetrate fraud on taxation." The learned
Judge then dealt with the argument that there might be a genuine partnership
between an individual and his wife and that such a situation is not saved by the
said provision. He held: "In demarcating a group, the net was cast a
little wider, but it was necessary, as any further sub-classification as
genuine and non-genuine partnerships might defeat the purpose of the
Act......There is a greater scope for fraudulent evasion by constituting
fictitious partnership along with one's wife and minor children than in a case
of separate income of the spouses derived from different sources......... When
the Legislature of the country, which is assumed to know the conditions of the
people and their requirements, with the awareness of this particular widespread
fraudulent device in the matter of evasion of taxes, made a law to prevent the
said fraud, it is difficult for this Court in the absence of any
counter-balancing circumstances to hold, on the analogy drawn from American
decisions, that the need for such a law is not in existence." The learned
Judge also rejected the attack upon the constitutionality of the said provision
based on Article 19(1) (g) holding that it constituted a reasonable restriction
which was found necessary "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 learned Judge added finally,
"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 flow there from 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 of the minor children will ultimately be borne by them in the final
accounting between them." While enacting Section 64 of the Income-tax Act,
1961 the Parliament kept in view the decision of this Court in Commissioner of
Income-Tax v. Sodra Devi (32 I.T.R. 615) and the report of the Direct Taxes
Administration Committee 1958-59. Section 64 basically carried forward the idea
in sub-section 3 of Section 16 of the Indian Income-Tax Act, 1922, no doubt,
with certain modifications. One constant, however, remained, viz., the
provisions contained in clauses (i) and ii) of Section 64(1) were confined only
to the partnership income. Now, what are the ingredients of the sections? The
opening words are "in computing the total income of any individual".
Then it proceeds to say that in the total income of such individual shall be
included the income of his spouse arising from the membership of such spouse in
the partnership firm in which such individual is the partner. It proceeds
further and says that the income arising to the minor children of such
individual who are admitted to the benefits of partnership wherein such
individual is a partner shall also be included in the total income of such
individual. Now an individual can be a partner in a partnership firm in is
individual capacity or in the capacity of the karta of a H.U.F. or, for that
matter, in any other capacity, e.g., as a trustee. There may be a firm
comprising an individual and his wife, to which their minor children are
admitted. There can also be a firm comprising two or more individuals wherein
the wife/wives of one or more of the partners are also partners. The minor
children of one or more of the partners may also have been admitted to the
benefits of the partnership firm. In fact, there can be any number of
situations where the wife is also a partner along with her husband in a
partnership firm or where the minor children of an individual are admitted to
the benefits of a partnership firm wherein that individual is a partner. So far
as other partners in the partnership firm are concerned, they are not really
concerned in what capacity a particular person is a partner, e.e., whether as
an individual, as a karta, as a trustee or otherwise. To them, he is an
individual, a person. This aspect however becomes relevant as between the
partner and those whom he represents in the partnership firm. To wit, where a
person is a partner as the karta of a H.U.F., the capacity in which he is a
partner in the partnership firm in relevant as between him and the other
members of the H.U.F. For, the income the karta receives as a partner is not
his individual income; it is the income of the H.U.F. and he receives it on
behalf of the H.U.F. It is for this reason that the income of the wife and
minor children arising from their membership/admission to the benefits of
partnership firm, is held not includible in the income of the H.U.F. since the
total income of H.U.F. is not the total income of the individual (husband or
father, as the case may be). For Section 64(1) to get attracted, it is
necessary that the husband/father should be a partner in a partnership firm as
an individual, i.e., in his individual capacity. It is not attracted where he
is a partner as the karta of H.U.F. to which such wife and/or minor children
belong. This is the holding of the decisions of this Court in Hirday Narain, Harbhajanlal
and Jayantilal Premchand Shah. It may not be quite apt to say that vis-a-vis
the members of the h H.U.F., the karta is still an individual and, therefore,
such income of wife and minor children should be included in the income of the karta
derived as karta. Nor are we satisfied that such income of the wife and/or
minor children should be included in the individual assessment of the karta.
Indeed, the argument is that even if the karta has no individual income of his
own, even then the said income of the wife and children should be included in
the husband/father's individual assessment by making such a separate assessement.
This argument ignores the fact that the husband/father is a partner in the
partnership firm not in his individual capacity but as the karta. It also
ignores the clear language employed in clauses (i) and (ii). In each of these
two clauses, the expression "such individual" occurs twice. Firstly,
the "individual" must be a partner in a firm and the wife and/or
minor children of such individual must also be deriving income from such
partnership firm (either on account of her membership or on account of being
admitted to the benefits of partnership, as the case may be). For the purposes
of clauses (i) and (ii) it is not his capacity vis-a-vis other partners of the
firm that is relevant but his capacity vis-a-vis his wife and/or minor
children. If this basic fact is ignored, anomalous results may follow as
indicated by the Andhra Pradesh High Court in Sanka Sankaraiah.
The
learned counsel for the Revenue says that if the above view is taken by this
Court, the very objective underlying the said clauses - and emphasized in
eloquent terms in Balaji - would be defeated. The result would be, learned
counsel says, the income of, say the minor children arising from their being
admitted to the benefits of a partnership firm can neither be included in the H.U.F's
income nor can it be included in the individual assessment of the father in a
case where the father is partner in the firm as the karta of that H.U.F. This
confers an undue - and an unfair - advantage to Hindus among whom alone the
concept or Hindu undivided family obtains. While members of other communities,
among whom the concept of H.U.F. does not obtain, would be directly in the path
of the said provisions, the Hindus would be escaping the rigour of the said
provisions through the device of H.U.F., says the learned counsel. There is
certainly a fair amount of force in this submission but this is an argument
really against the very concept, and the permissibility of such concept, in the
Income Tax Act. We are not unaware of the criticism that very often H.U.F. is
being used to deny the State the tax legitimately due to it. But that is a
larger question which does not arise in these case. As a matter of fact,
wherever the Parliament has thought it fit, it has intervened to checkmate the
evil, e.g., sub-section (2) of Section 4 of the Gift Tax Act inserted by
Finance (No.2) Act, 1971 and sub-section (1A) of Section 4 of Wealth Tax Act
inserted by the very same Finance Act. Similarly, sub-section (2) was
introduced in Section 64 by the Finance Act, 1979 with effect from April 1, 1980. Then Explanation 3 was added by
the Taxation Laws (Amendment) Act, 1975 with effect from April 1, 1976, but
clauses (i) and (ii) in sub-section (1) remained untouched [except for the
deletion of the words "of which such individual is a partner" in
clause (iii) corresponding to clause (ii)] until they were deleted by Finance
Act, 1992 w.e.f. April 1, 1993 and insertion of sub- section (1A) - with which
aspects we are not concerned herein. Suffice it to say that on the language
employed in the sub-section and the clauses concerned herein, the view taken by
it may possibly be the only view possible. Majority of High Courts too have
accepted this view. It cannot also be said that the view taken by us militates
in any manner against the ratio of Balaji nor does it tend to defeat the object
of the provisions as explained in the said decision.
We
must make it clear that we have merely interpreted clauses (i) and (ii) of
sub-section (1) of Section 64, as they stood before April 1, 1976, We have not
gone into the facts of the individual cases before us. That is a matter for the
authorities under the Act to enquire into and pronounce upon.
For
the above reasons, we hold that where a person is a partner in a partnership
firm not in his individual capacity but as the karta of the H.U.F., neither the
income accruing to his wife on account of her being a partner in the same
partnership firm nor the income accruing to his minor children on account of
their being admitted to the benefits of such partnership firm, can be included
in the total income of such person - neither in his individual assessment nor
in the assessment of the H.U.F. Our holding is confined to the above situation
alone.
All
the appeals are disposed of with the aforesaid enunciation of legal position.
The Income-tax Tribunal or the other concerned authorities under the Act, as
the case may be, shall pass orders in each of these individual cases in
accordance with the above legal position.
No
costs.
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