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Commissioner of Income Tax, Bombay City-i Vs. S.K. Thakkar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome tax Reference No. 71 of 1975
Judge
Reported in(1984)86BOMLR533; (1985)45CTR(Bom)188; [1985]154ITR303(Bom); 1984MhLJ979; [1984]19TAXMAN530(Bom)
ActsIncome Tax Act, 1961 - Sections 64 and 64(1)
AppellantCommissioner of Income Tax, Bombay City-i
RespondentS.K. Thakkar
Excerpt:
.....of inc.-tax, patiala v. anand sarup (1980) 121 i.t.r. 701 (p.&h.), commr. of inc.-tax, haryana, rohtak v. shri amar nath bhatia (1982) 148 i.t.r. 701 (p.&h.), prayag dass rajgarhia v. commr. of inc.-tax, delhi (1980) 138 i.t.r. 291 (delhi) agreed with. - - 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 decided on. this is best illustrated by an example......received by the assessee's wife from the firm of importex international was includible in the total income of the assessee under section 64(1) of the income-tax act, 1961 ?'2. the assessee was a partner during the assessment year 1968-69 to 1970-71 in a partnership firm called importex international. the other partners were the assessee's wife and brother-in-law. the assessee was partner as part of his huf.3. the ito included the share of profits derived by his wife from the firm in the total income of the assessee under the provisions of s. 64(1) of the act. the assessee preferred appeal to the aac. he dismissed them. the assessee went up before the income-tax appellate tribunal. the tribunal upheld the assessee contention that his wife's share of profits from the firm could not be.....
Judgment:

Bharucha, J.

1. A point of some interest arises in this reference at the instance of the Revenue under s. 256(1) of the I.T. Act, 1961. There had been a difference of opinion among among some High Courts about it. The question that we are required to answer the indicates the point :

'Whether, on the facts and in the circumstances of the case, the share of profit received by the assessee's wife from the firm of Importex International was includible in the total income of the assessee under section 64(1) of the Income-tax Act, 1961 ?'

2. The assessee was a partner during the assessment year 1968-69 to 1970-71 in a partnership firm called Importex International. The other partners were the assessee's wife and brother-in-law. The assessee was partner as part of his HUF.

3. The ITO included the share of profits derived by his wife from the firm in the total income of the assessee under the provisions of s. 64(1) of the Act. The assessee preferred appeal to the AAC. He dismissed them. The assessee went up before the Income-tax Appellate Tribunal. The Tribunal upheld the assessee contention that his wife's share of profits from the firm could not be included in his total income. It held that s. 64(1) had not application to case. Section 64(1), in its opinion, concerned itself with the assessment of an individual. What was needed to be considered was whether the individual was a partner in his individual capacity or in his capacity as a karta. Section 64(1) applied only to an assessee who was a partner in an individual capacity.

4. To appreciate the arguments, it is necessary to reproduce s. 64(1)(i) and Explanation 1 to s. 64(1) :

'64. Income of individual to include income of spouse, minor child, etc. - (1) In computing the total income of the 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 of a business in which such individual is a partner;...

Explanation 1. - For the purpose of the 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 clause (iii), 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 decided on.'

5. In was contended by Mr. Dhanuka, learned counsel for the Revenue, that by reason of s. 64(1), the income derived by the assessee's wife from the firm was required to be added in computing the total income of the assessee. Mr. Dhanuka submitted that the HUF could not be partner in a firm as such. When a karta entered in to a contract of partnership on behalf of his HUF, the partnership was between the individuals who formed it; neither the HUF nor its members were partners. The Karta was personally and individually a partner qua the other partners in the firm. He was only accountableto his HUF. The expression 'individual' in s. 64 comprehended within it the case of a partnership where the karta of an HUF was a partner as the karta was liable to be considered only as an individual in so far as the firm was concerned. The object of s. 64 was to prevent evasion of tax and the Explanation was aimed at along the Revenue to tax at the higher rate in the contingencies contemplated. Mr. Dhanuka laid stress upon the judgments of the Allahabad High Court which uphold the stand of the Revenue.

6. Mr. Rajgopal, learned counsel for the assessee, submitted that the provisions of s. 64(1) applied only when the individual was a partner of the firm in his individual capacity and not in a representative capacity. There are judgments of the Andhra Pradesh, Gujarat, Punjab and Haryana and Delhi High Courts which support Mr. Rajgopal's contention.

7. Before we proceed to consider the judgments, we purpose to analyse the provisions of 64(1)(i) and the Explanation 1 to s. 64(1). By reason of the former, there shall, in computing the total income of an individual, be included the income that arises to the spouse of such individual by reason of the spouse being a partner in a firm in which the individual is a partner. The 'individual' mentioned in the provision can either to be the husband or the wife. Therefore, the spouse can be either the wife or the husband. There is no indication in clause (i) as to whether the income of the wife from the partnership has to be added on to the total income of the husband or whether the income of the husband from the partnership is to be added on to the total of the wife. That indication is found in Explanation 1 to s. 64(1). It provides that, for the purposes of clause (i), the individual, in computing whose total income the referred in clause (i) is to be included, shall be the husband or the wife whose total income, excluding the income referred to in clause (i), is greater. It is, therefore, clear that s. 64(1)(i) and Explanation to 1 to sub-s. (1) are integral parts of the scheme and must be read together. When so read, it is apparent that the requirement is that the 'individual' must be partner not in representative but in personal a capacity. This is best illustrated by an example. Where both husband and wife are partners in individual capacities and the income of the wife, excluding the income derived from the partnership, is greater, the income of the husband derived from the partnership shall be added to the income of the wife for the purpose of computing her total income. But if the husband is a partner in a representative capacity, as for example, as Karta of an HUF and his wife's income, excluding the income derived from the partnership, is greater, the income derived by him from the partnership for and on behalf of the HUF cannot be tacked on to the income of the wife for the purposes of computing her total income.

8. The first for the reported cases on the point is of a Division Bench of the Allahabad High Court in Madho Prasad, Pilibhit v. CIT : [1978]112ITR492(All) . The court considered the legal position of a karta of a Hindu joint family when he became a partner of a firm in the context of 'a minor child of such individual from the admission of the minor to the benefits of the partnership in a firm in which such individual is a partner'. (Section 64(1)(i) as it then read). They referred to the judgments of the Supreme Court in Firm Bhagat Ram Mohanlal v. CEPT : [1956]29ITR521(SC) and CIT v. Bagyalakshmi & Co. : [1965]55ITR660(SC) . It was held in the former case that when the part of the a joint Hindu family entered into a partnership with strangers, the members of the family did not imposed facto become partner of the firm. In the latter case, it was held that a contract of partnership had no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. A partner could be a karta of a joint Hindu family in which case he occupied a dual position. Qua the partnership, he functioned in his personal capacity and qua the third parties in his representative a capacity. From this legal position, it followed, according to the learned judges of the Allahabad High Court, that the words 'in which such individual is a partner' occurring in s. 64(1) indicated that, in order to attract the liability under clause (ii), the father of a minor admitted the benefits of a partnership should be a partner of the firm, whether as an a individual or as karta of a joint family. Since the joint family as such could not be a partner and only an individual could be a partner, the word 'individual' referred to the husband or wife of the spouse or of the father of minor and indicated that the share of the minor would be treated as the individual income of his father and not as the income of the joint family of which the father was the karta. The Allahabad High Court followed this decision in Addl. CIT v. Yashwant Lal : [1979]119ITR18(All) . In 1982, a Division Bench of the Allahabad High Court considered the judgments of the other High Courts and referred the point for decision by a Full Bench. The Full Bench judgment is in Sahu Govind Prasad. CIT : [1983]144ITR851(All) . The Full Bench reiterated the conclusion arrived at in Madho Prasad's case : [1978]112ITR492(All) . In the context of the judgment of other High Courts, it observed that though the karta may be a representative, he continued to remain an individual and the share of his spouse or minor children from the firm was liable to be included while computing his total income as an individual.

9. The Allahabad decisions do not consider the impact of Explanation 1 to s. 64(1) upon the clauses thereof. As we have said, this Explanation must be read with the clauses. So read, we have no doubt that the 'individual' referred to therein is one who is a partner as an individual, and not a representative capacity.

10. In CIT v. Sanka Sankaraiah : [1978]113ITR313(AP) , a Division Bench of the Andhra Pradesh High Court held that the expression 'individual' in s. 64(1) did not comprehend the part of a joint family. Citing the Supreme Court judgment in Bagyalakshmi & Co.'s case : [1965]55ITR660(SC) , the court observed that qua the partnership, a partner functioned in has individual capacity and qua the third parties in a representative capacity. Where a person represented as a trustee or karta or benamidar, s. 64 could not be invoked. The Andhra Pradesh High Court was unable to share the view of the Allahabad High Court that the words 'in which such individual is a partner' took in a karta or trustee or representative of a group of persons. The expression 'individual', in its view, only took in a person in his individual capacity and did not take in the karta of a Hindu Joint family or trustee or one who acted as a representative of others.

11. The Gujarat High Court in Dinubhai Ishvarlal Patel v. K. D. Dixit, ITO : [1979]118ITR122(Guj) , followed the Andhra Pradesh judgment just cited and dissented from the Allahabad judgment in Madho Prasad's case : [1978]112ITR492(All) . It held that the 'individual' referred to in s. 64(1) had to be one in his individual capacity so as to be capable of having a spouse or a minor child. Support was drawn from Explanation 1 to s. 64(1). It was clear in view of the Explanation, that the 'individual' referred to in s. 64(1) 'can only to be an assessee who is being assessed in his individual a capacity and not one who is being assessed in a representative capacity, either as representing an association of persons or a trustee or a HUF or some such similar other entity.'

12. The Punjab and Haryana High Court in CIT v. Anand Sarup [1980] 121 ITR 873 and CIT v. Shri Amar Nath Bhatia and the Delhi High Court in Prayag Dass Rajgarhia v. CIT : [1982]138ITR291(Delhi) , have taken a view similar to that which has commended itself to the Andhra Pradesh and Gujarat High Courts and, indeed, to us.

13. We are of the view that the individual contemplated by the provisions of s. 64(1) is an individual who is a partner of a firm in his individual capacity and not as karta and representative of an HUF.

14. Accordingly, we answer the question posted to us in the negatived and in favour of the assessee.

15. The Revenue shall pay to the assessee the costs of the reference.


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