Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX,LUDHIANA, ETC. ETC.
Vs.
RESPONDENT:
SHRI OM PRAKASH, ETC. ETC.
DATE OF JUDGMENT16/11/1995
BENCH:
JEEVAN REDDY, B.P. (J)
BENCH:
JEEVAN REDDY, B.P. (J)
SEN, S.C. (J)
CITATION:
1996 AIR 593 1995 SCC Supl. (4) 737
JT 1995 (8) 245 1995 SCALE (6)487
ACT:
HEADNOTE:
JUDGMENT:
J U D G M E N T
B.P. JEEVAN REDDY, J.
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
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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
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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
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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
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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
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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,
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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 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 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
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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
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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
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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.