Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX, LUDHIANA
Vs.
RESPONDENT:
SHRI OM PRAKASH
DATE OF JUDGMENT: 27/07/1999
BENCH:
B.N.Kirpal,S.R Babu,Syed S Mohammed Quadri,M.B.Shah,S.P.Bharucha
JUDGMENT:
S.S.M.QUADRI,J.
Leave is granted in S.L.P.(C) No.1608/80.
The common question posed in these cases relates to
interpretation of the term "individual" in Section
64(1)(i)(ii) of the Income Tax Act, 1961 (as it stood prior
to April 1, 1976). The conflict of judicial opinion of
various High Courts with regard to connotation of that term
gave rise to these cases, which needs to be resolved by this
Court.
For appreciating the question involved in these cases,
it will suffice to refer to the facts in Civil Appeal
No.4234 of 1983 which pertains to the assessment year
1973-74. The respondent was a partner in the partnership
firm, M/s.Rockman Cycle Industries, Ludhiana in his capacity
as Karta of the Hindu Undivided Family. Two minor children
of the respondent, a daughter, Miss Neeru, and a son,
Pankaj, were admitted to the benefits of the partnership.
Similarly, they were also partners in another partnership
firm, M/s. Munjal Gases, Ludhiana. The income arising in
the hands of minor children was sought to be included in his
total income. That was objected to by him on the ground
that he was a partner in the firms in the capacity of Karta
of the Hindu Undivided Family, so Section 64 of the Income
Tax Act did not apply. The Income Tax Officer rejected that
contention, included the share income of the minors in his
total income and assessed him accordingly. The Appellate
Assistant Commissioner upheld the order of the assessing
authority, in appeal. On further appeal, the Income Tax
Appellate Tribunal, Amritsar set aside the order of the
Appellate Authority taking a contrary view and thus allowed
the appeal of the respondent. Out of that order, at the
instance of the Revenue, the following question was referred
to the High Court under Section 256(1) of the Income Tax
Act, 1961 :
"Whether on the facts and in the circumstances of the
case the Appellate Tribunal was right in law in holding that
the income of the minor children of the assessee from the
two firms was not includible in his individual assessment
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under Section 64(1)(i)(ii) of the Income Tax Act, 1961."
A Division Bench of the High Court of Punjab & Haryana
answered the question in the affirmative, in favour of the
respondent-assessee and against the Revenue in Income Tax
Reference No.153 of 1979 by its order dated October 29,
1979. Against the said order and judgment of the High
Court, the Revenue is in appeal before this Court.
Initially, a two-Judge Bench of this Court in Commissioner
of Income-Tax & Ors. vs. Shri Om Prakash & Ors. [(1996)
217 ITR 785] confirmed the judgment of the High Court and
dismissed the appeal. But, on review, that judgment was set
aside. However, in the meanwhile, a three-Judge Bench of
this Court approved it in Commissioner of Income- Tax,
Madurai vs. Shri S.S.Krishnamoorthy, Dingigul [TRC Nos.6 to
10 of 1982]. Thereafter, this case came up for hearing
before a bench of three learned Judges who referred it and
other connected cases to a larger Bench and thus all the
cases have come up before us.
On the question whether a Karta of the Hindu Undivided
Family falls in the term "individual" in Section
64(1)(i)(ii) of the Income-tax Act, 1961 (hereinafter
referred to as ’the 1961 Act’), there is divergence of
opinion in various High Courts. The High Courts of Andhra
Pradesh, Gujarat, Punjab & Haryana, Delhi, Karnataka,
Kerala, and Rajasthan took the view that the Karta of the
Hindu Undivided Family did not fall within the meaning of
the expression "individual" in Section 64(1)(i)(ii) of the
1961 Act. The High Courts of Allahabad, Madras, Madhya
Pradesh and Orissa took the contrary view.
We have heard learned counsel appearing for the
Revenue and assessees.
Here, it is useful to refer to Section 64(1) of the
1961 Act, as it stood prior to 1.4.1976. It 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 or parent, any such income
arising in any succeeding year shall not be included in the
total income of the other spouse or parent unless the
Income-tax Officer is satisfied, after giving that spouse or
parent an opportunity of being heard, that it is necessary
so to do."
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This provision occurs in Chapter V of the Act which
deals with income of other persons included in assessee’s
total income. It provides that in computing the total
income of any individual all such income arising directly or
indirectly (i) to the spouse of such individual from the
membership of the spouse in a firm; and (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, shall be included in computing the
total income of such individual. The Explanation directs
that for purposes of clause (i) partnership income of the
spouse shall be included in the income of the spouse of such
individual (husband or wife) whose total income, excluding
the income in question, is greater. So also for purpose of
clause (ii) it provides that where both such individual and
the spouse are members of the partnership in which the minor
child is also a partner, the income in question has to be
included in the income of that parent whose total income
excluding the income in question, is greater. The same
position will apply to the succeeding year also unless the
Income Tax Officer holds otherwise after due notice to the
spouse or parents.
The precursor of this provision was Section
16(3)(a)(i) and (ii) of the Income Tax Act, 1922
(hereinafter referred to as ’the 1922 Act’) as amended by
Act IV of 1937. While upholding the constitutional validity
of the said provision of the 1922 Act, a Constitution Bench
of this Court in Balaji vs. Income-Tax Officer, Special
Investigation Circle, Akola & Ors. [(1961) 43 ITR 393]
observed :
"But it (the relevant provision of the Income- Tax Act
which enabled the share of each partner of a registered firm
to add to his other income for being charged as part of his
total income) gave an effective handle to evade taxation in
another direction. A husband or a father could nominally
take his wife or his minor sons in partnership with him so
that the tax burden might be lightened, for, if the income
was divided between a number of people, the income derived
by an individual therefrom might fall under the limits of
taxable income or under a less onerous slab. 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."
Section 16(3)(a)(i)(ii) was enacted to prevent evasion
of tax by an individual doing business under a partnership
entered with his wife and/or minor children. It may be
noticed here that in that case the appellant did not base
his challenge to the said provision as Karta of the Hindu
Undivided Family.
The import of the expression ’any individual’ in
Section 16(3)(a) of the 1922 Act fell for consideration of
this Court in Commissioner of Income-Tax, Madhya Pradesh and
Bhopal vs. Sodra Devi [(1957) 32 ITR 615]. There Sodra
Devi and her major children formed a partnership firm to
which her minor children were admitted to the benefits of
the partnership. Under the said provision, share income of
the minor children in the partnership was sought to be added
in the income of Sodra Devi. It was contended that the
expression ‘any individual’ did not include ’the female’ so
the said income of the minor children was not includible in
the total income of their mother. By a majority, that
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contention was accepted holding that the words ‘any
individual’ and ‘such individual’ occurring in Section 16(3)
are restricted in their connotation to mean only the male
but not the female of the species.
The said provision of the 1922 Act is embodied in
Section 64(1) of the 1961 Act with the changes that the word
‘wife’ is replaced by the word ‘spouse’ in clause (i) of
Section 64(1) and the explanation is added thereto. Now,
both the male and the female are covered by the expressions
‘any individual’ and ‘such individual’ in Section 64(1)(i)
and (ii) of the 1961 Act.
Here again interpretation of the same expression
arises, albeit in a different context. We have to discern
the true meaning of the term ’individual’ to resolve the
conflict and to decide whether the High Court is right in
answering the question, extracted above, the way it did.
It has been noticed above that to attract the
provisions of Section 64(1)(i) and (ii), the spouse/minor
child should be a partner in the partnership firm carrying
on a business in which ’any individual’ is a partner. It is
only then the share income of the spouse/minor child from
that firm can be included in the computation of the total
income of such individual. The income arising to such
individual need not necessarily be from the partnership firm
alone. If such individual has nil income from the
partnership firm but has income from other sources then the
income of the spouse/minor child from the partnership firm
in which such individual is a partner will be added to that
other income of such individual. There is no controversy on
this aspect. What is put in issue is that when a Karta of
the Hindu Undivided Family is a partner in the firm, he
cannot be regarded as an individual for purposes of Section
64(1)(i) and (ii) of the 1961 Act.
Now, what does the term ‘individual’ mean? It is not
defined in the Act. It is not a term of art. The meaning
of term ‘individual’ given in the Concise Oxford Dictionary
is : "single, particular, special; not general, having a
distinct character, characteristic of a particular person,
designed for use by one person, a single member of a class,
a single human being as distinct from a family or group, a
person (a most unpleasant individual)".
In contradiction to a class or a family, the term is
used to denote a single person, may be a male or female of
the species. In a wider sense, a Karta, a trustee, or any
one acting in a representative capacity will also be within
the ambit of the term. Is it, in that sense, that the said
term is used in Section 64(1)(i) and (ii) of the 1961 Act or
is it used only in a narrower sense of one entity, one
distinct being, not in a representative capacity? The Full
Bench of the High Court of Allahabad in Sahu Govind Prasad
vs. CIT [(1983) 144 ITR 851] approving Madho Prasad,
Pilibhit vs. Commissioner of Income Tax [(1978) 112 ITR
492] and the High Court of Madras in CIT, Tamil Nadu-I vs.
S.Balasubramanium [(1984) 147 ITR 732] and in Commissioner
of Income-Tax vs. Shri Manakram [(1990) 183 ITR 382 (MP)]
took the view that the term is used in the said provision in
the wider sense. But a contrary view is taken by the High
Courts of Andhra Pradesh in Commissioner of Income Tax vs.
Sanka Sankaraiah [(1978) 113 ITR 313], Gujarat in Dinubhai
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Ishvarlal Patel vs. K.D.Dixit [(1979) 118 ITR 122], Punjab
& Haryana in CIT vs. Anand Sarup [(1980) 121 ITR 873],
Delhi in Prayag Dass Rajgarhia vs. CIT [(1982) 138 ITR 291]
and Full Bench of Karnataka High Court in Arunachalam vs.
CIT [(1985) 151 ITR 172].
Here, it is necessary to bear in mind the distinction
between the rights and obligations of partners of the
partnership firm and coparceners of Hindu Undivided Family.
In Commissioner of Income Tax, Madras vs.
Bagyalakshmi & Co. [(1965) 55 ITR 660], this Court observed
:
"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.........Except where there is a
specific provision of the Income-tax Act which derogates
from any other statutory law or personal law, the provision
will have to be considered in the light of the relevant
branches of law. A contract of partnership has no concern
with the obligation of the partners to others in respect of
their shares of profit in the partnership. It only
regulates the rights and liabilities of the partners. A
partner may be the Karta of a joint Hindu family; he may be
a trustee; he may enter into a sub-partnership with others;
he may, under an agreement, express or implied, be the
representative of a group of persons; he may be a benamidar
for another. In all such cases he occupies a dual position.
Qua the partnership, he functions in his personal capacity;
qua the third parties, in his representative capacity."
We are in respectful agreement with the aforesaid
observations.
When a Karta of the Hindu Undivided Family is a
partner in a partnership firm, he has dual capacity; qua
the partnership, he functions in his personal capacity and
qua third parties, in his representative capacity. Under
the Income Tax Act, when he is assessed in respect of the
income derived by him from the partnership firm as a
partner, it is in his representative capacity as Karta of
the Hindu Undivided Family and not as an individual as such.
That is because his capacity vis-a-vis spouse/minor children
who are members of the Hindu Undivided Family is that of
Karta and not as individual though vis-a-vis other partners
of the partnership firm he functions in his personal
capacity. This being the position, the income of a Karta’s
spouse/minor child cannot be included in computation of his
total income for that is the income of Hindu Undivided
Family and not his individual income. Section 64 will be
attracted only when an assessees own income is being
assessed and not that of an Hindu Undivided Family. If a
Karta is brought within the ambit of ’individual’ in Section
64(1), the share income of the spouse of the Karta and his
minor children will, in effect, be included in the income of
the Hindu Undivided Family which is not what is contemplated
by Sections 64(1)(i) and (ii) and which, with respect we
say, has rightly been held to be impermissible by this Court
in L.Hirday Narain vs. Income-Tax Officer, A Ward, Bareilly
[(1970) 78 ITR 26], Commissioner of Income-Tax vs.
Harbhajan Lal [(1993) 204 ITR 361] and Commissioner of
Income-Tax vs. Jayantilal Prem Chand Shah [(1995) 211 ITR
111].
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In a Hindu Undivided Family which consists of a Karta,
his sons, their wives and minor grand children, if along
with the Karta the spouse of a son and their minor children
are admitted to the benefits of the partnership or are
partners of the partnership firm, obviously, their share
income from the firm could not be added in computing the
total income of the Karta as in such a case Section 64(1)
will not be attracted. But if the Karta’s spouse and minor
children are admitted to the benefits of the partnership or
are joined as partners of the partnership firm, their share
income from the firm will have to be added up in the income
of the Karta. Obviously, the expression cannot be so
interpreted to yield such inequitable and inconsistent
result which could not have been contemplated by the
Parliament.
It will be pertinent to note here that under Section 4
of the 1961 Act, the charging section, the total income of
the previous year or years of every person is charged for
any assessment year at the rate or rates prescribed by the
Finance Act. We may notice here the definition of the term
’person’ which is defined in Section 2(31) of the 1961 Act,
and reads as under :
"2( 31)."person" includes - (i) an individual, (ii) a
Hindu undivided family, (iii)a company, (iv ) a firm, (v) an
association of persons or a body of indi viduals, whether
incorporated or not, (vi) a local authority, and (vii)every
artificial judicial person, not falling within any of the
preceding sub- clauses."
A plain reading of the definition, extracted above,
shows that both ’an individual’ and ’a Hindu Undivided
Family’ are inter alia constituents of the meaning of the
term ‘person’. The expression ’any individual’ is narrower
than the terms ‘person’ and ’assessee’ defined in Section
2(7); an individual is a person but every person need not
be an individual. So also an individual may be an assessee
but every assessee need not be an ’individual’. Had the
Parliament intended to give wider meaning to the word
’individual’ in Sections 64(1)(i) and (ii) so as to include
the Karta of a Hindu Undivided Family it would have drafted
the provision differently. It is thus clear that
’individual’ in Section 64(1) does not take in Karta of the
Hindu Undivided Family within its import.
Yet another aspect which militates against bringing in
Karta within the meaning of the term ’individual’ in Section
64(1) is that it speaks of total income of any individual
and total income of the Hindu Undivided Family need not be
total income of Karta as an individual.
The object of Section 64(1) of the 1961 Act, like the
object of Section 16(3) of the 1922 Act, is to check the tax
evasion resorted to by individuals forming partnership as a
cloak to perpetrate fraud on taxation. But cases of genuine
partnership where any individual takes the spouse and minor
children as partners will also be within the clutches of
Section 64(1), a fact adverted to by Balaji’s case (supra).
It is true that if Karta is held not to fall within the
meaning of the term ’individual’ in Section 64(1), the tax
evasions sought to averted would continue in the case of the
Hindu Undivided Family where a Karta takes the spouse or
minor children to the benefits of the partnership or as
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members in the partnership firm. But it cannot be lost
sight of that ’individual’ and Hindu Undivided Family are
two different tax entities and Parliament has chosen to
confine the application of Section 64(1) for purposes of tax
evasion in regard to individuals without being Kartas of the
Hindu Undivided Family in the fold of section either by
defining individual or otherwise. On the ground that Karta
of a Hindu Undivided Family will draw an unfair advantage of
this interpretation, we cannot enlarge the meaning of the
term ’individual’ by the process of interpretation so as to
rope in Karta within the meaning of the term ’individual’
and by implication, the Hindu Undivided Family within the
clutches of Section 64(1) of the 1961 Act.
From the above discussion, it follows that income in
the hands of Karta of the Hindu Undivided Family as partner
of a partnership firm cannot be treated as income of
individual and, if that be so, the income arising to the
spouse or minor child of the Karta of the Hindu Undivided
Family cannot be included in his income as such under
Sections 64(1)(i) and (ii) of the 1961 Act.
For the above reasons, we are inclined to take the
view that the expressions ‘any individual’ and ‘such
individual’ in Sections 64(1)(i) and (ii) are employed in
restricted sense and do not include a Karta of a Hindu
Undivided Family. Accordingly, we approve the judgments of
the High Courts of Andhra Pradesh, Gujarat, Punjab &
Haryana, Delhi, Kerala, Rajasthan and Karnataka and overrule
the judgments of the High Courts of Allahabad, Madras,
Madhya Pradesh and Orissa taking a contrary view.
In the light of the above discussion, we answer the
question, referred to above, in the affirmative, in favour
of the Assessee and against the Revenue.
In the result, Civil Appeals Nos. 4234/83,
2979-81/89, 10629- 10631/95, 2900/80, 2287/80,
2335-41(NT)/91, 968-970(NT)/91, 1222(NT)/87, 1222-23/86,
11553-11554/95, 1217-19/86, 37/88, 2435-39(NT)/95 and C.A.
No.________/99 @ S.L.P. (C) No. 1608/80 filed by the
Revenue against the orders of the High Courts are dismissed;
in Civil Appeals Nos.309- 311(NT)/85, 654-55(NT)/85 and
650-652(NT)/87, filed by the assessees, the orders of the
Madras High Court are set aside, the questions referred to
are answered in the affirmative, i.e., in favour of
assessees and against the Revenue and the appeals are
allowed.
T.R.C. No.1/83 is allowed. We shall take it that the
following question is referred to us:
"Whether, the Appellate Tribunal was justified and in
law correct in holding that the share income determined by
the assessee’s wife from M/s. Madurai Mahalakshmi Agencies,
cannot be included under Section 64 of the Income-tax Act,
1961 in the total income of the assessee who is assessed in
the status of an individual?"
and we answer the question in the affirmative in
favour of the assessee and against the Revenue.
There shall be no order as to costs.
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