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CASE NO.: Appeal (civil)  4234 of 1983

PETITIONER: COMMISSIONER OF INCOME TAX,LUDHIANA

RESPONDENT: OM PRAKASH

DATE OF JUDGMENT: 27/07/1999

BENCH: S.P.BHARUCHA & B.N.KIRPAL & S.RAJENDRA BABU & S.S.M.QUADRI & M.B.SHAH

JUDGMENT: JUDGMENT

DELIVERED BY: S.S.M.QUADRI,J.  

     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 arising out of 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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