B.P. Saraf, J.
1. By this reference made under Section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal, Gauhati Bench, Gauhati, has referred the following question of law for our opinion :
'Whether, on the facts and in the circumstances of the case and having regard to the provision of Section 2(23) of the Income-tax Act, 1961, the Tribunal was justified in holding that the share income of the assessee's wife from Mannalal Jhabarmal is not includible in the hands of the assessee individual under Section 64(iii) ?'
2. There appears to be some mistake in the question as, in view of the facts of the case, the relevant section should be Section 64(1)(i) and not Section 64(iii), We shall, therefore, read Section 64(1)(i) in place of Section 64(iii).
3. The facts of the case may be briefly stated as follows. There was a partnership firm named Mannalal Jhabarmal. In the said firm, while the assessee, Jhabarmal Agarwalla, was a partner in a representative capacity as karta of his Hindu undivided family, his wife, Smt. Gita Devi, was also a partner in her individual capacity. While assessing the income of the assessee for the assessment years 1971-72 to 1974-75, the Income-tax Officer, acting under Section 64(1) of the Income-tax Act, 1961, hereinafter 'the Act', included in his income the income of his wife from the said firm. The assessee challenged the action of the Income-tax Officer on the ground that he being a partner in the firm in his representative capacity as karta of the Hindu undivided family, Section 64(1) did not apply to his case. The
objection of the assesses was accepted by the Appellate Assistant Commissioner and it was held that Section 64(1)(i) did not apply. The Revenue filed an appeal before the Tribunal. The Tribunal upheld the order of the Appellate Assistant Commissioner. The Commissioner of Income-tax thereafter filed an application under Section 256(1) of the Act for reference of a question of law to this court which was allowed by the Tribunal and the question stated above was referred to this court. We are now required to give our opinion as to whether, on a proper interpretation of Section 64(1)(i) of the Act, the income arising to the wife of the assessee from her membership in the firm in which he is a partner in his capacity of a karta of a Hindu undivided family, can be included in his individual income.
4. Learned counsel for the assessee, Dr. D.K. Mishra, as well as learned senior standing counsel for the Department, Mr. D.N. Choudhury, both fairly submitted before us that the High Courts in the country are divided on this point. The High Courts of Allahabad and Madras have taken the view that irrespective of the capacity in which an individual is a partner in a firm, the provisions of Section 64(1) of the Act would apply and the income of the husband, wife and minor children, if they are partners in the same firm, shall be clubbed together. The High Courts of Andhra Pradesh, Bombay, Karnataka, Gujarat, Madhya Pradesh and Punjab and Haryana have taken a contrary view and held that where a karta of a Hindu undivided family is a partner in a firm in his representative capacity along with his wife, the share income of the wife cannot be clubbed together with his income.
5. We have gone through the various decisions of different High Courts and considered the submissions made on behalf of the parties. For a proper appreciation of the rival contentions, we may refer to Section 64(1) of the Act, as it stood at the relevant time. It reads :
'64. (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 ;
(iii) subject to the provisions of Clause (i) of Section 27, to the spouse of such individual from assets transferred directly or indirectly to
the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart;
(iv) subject to the provisions of Clause (i) of Section 27, to a minor child, not being a married daughter of such individual, from assets transferred directly or indirectly to the minor child by such individual otherwise than for adequate consideration ; and
(v) to any person or association of persons from assets transferred otherwise than for adequate consideration to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minor child (not being a married daughter) or both.
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.'
6. The aforesaid Sub-section (1) was substituted by the Taxation Laws (Amendment) Act, 1975, hereinafter 'the Amendment Act of 1975' with effect from April 1, 1976. But, in the instant case, as the assessments pertain to assessment years prior to the coming into force of the Amendment Act of 1975, it is not necessary to refer to the new Sub-section (1).
7. Mr. D.N. Choudhury, learned standing counsel for the Revenue, submits that Section 64(1) of the Act comprehends within it a case of a partnership where the karta of a Hindu undivided family is a partner. So far as the partnership is concerned, such a partner has to be considered only as an individual and his representative capacity is totally irrelevant. In support of this submission, reliance has been placed on a decision of the Supreme Court in CIT v. Bagyalakshmi and Co., : [1965]55ITR660(SC) . Great stress has been laid on the following observation in the said case (at p. 664) ;
'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. The income-tax law gives the Income-tax Officer power to assess the income
of a person in the manner provided by the Act. 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 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.'
8. Learned counsel also relies on the decision of the Allahabad High Court in Madho Prasad v. CIT, : [1978]112ITR492(All) .
9. We have carefully considered the submissions and the various decisions referred to us. We are in agreement with learned counsel for the Revenue that the decision of the Supreme Court in Bagyalakskmi and Co. : [1965]55ITR660(SC) is most relevant for deciding the point at issue in the present case. We, however, fail to understand as to how the aforesaid decision supports the case of the Revenue as, in our opinion, it clearly goes counter to its submissions. This decision is an authority for the proposition that a contract of partnership only regulates the rights and liabilities of the partners and, as such, has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. The dual position of a partner 'qua the partnership' and 'qua the third parties' has been clearly recognised by the Supreme Court. The legal position that emerges is clear. An individual, who is a partner in a representative capacity as karta of a Hindu undivided family occupies a dual position--qua the partnership, he functions in his personal capacity ; qua the third parties, he functions in his representative capacity.
10 The question that arises for consideration is, while determining the capacity of a partner for the purpose of application of Section 64(1) of the Act, which of the two capacities will be relevant. The determination of this question will depend on the answer to the following questions, namely, (1) whether the Revenue, by any stretch of interpretation, can be said to be a 'partner' or will it be a 'third party' ; (2) whether the rights and obligations of the Revenue in the matter of levy and collection of income-tax on a partner of a firm can be regulated by the terms of the contract of partnership ; (3) whether the Income-tax Act recognises the dual capacity of a partner for the purpose of assessment; and (4) whether the income from a firm can be assessed in the hands of a partner in his individual
capacity even where he represents some other taxable entity, viz., Hindu undivided family, trust, etc.
11. The first two questions, in our opinion, stand fully answered by the decision of the Supreme Court in Bagyalakshmi and Co.'s case : [1965]55ITR660(SC) . The Revenue cannot be treated as a partner in a firm. The rights and obligations of the Revenue are regulated not by the contract of partnership but by the provisions of the Act. It thus falls in the category of 'third parties' and a partner, who is a karta of a Hindu undivided family, functions qua the Revenue in his representative capacity. The liability of such a partner to income-tax would be determined under the provisions of the Act keeping in view such representative capacity.
12. We may now turn to the next question and decide whether, for the purpose of assessment and levy of income-tax, the Act recognises the representative capacity of a partner. In other words, where an individual is a partner in his representative capacity as karta of a Hindu undivided family in whose hands will the income from the firm be assessable--in the hands of the individual who is a partner or the Hindu undivided family whom he represents ?
13. Law in this regard is well-settled. When a person carries on business in partnership with others as a representative of his Hindu undivided family, the income arising from the said partnership to such person is the income of the Hindu undivided family and is assessable in the hands of the Hindu undivided family. This legal position has also been noted by the Allahabad High Court in Madho Prasad's case : [1978]112ITR492(All) wherein it has been observed that 'the joint family is entitled to get from him his share in the profits of the firm and the joint family is liable for his share of losses in the firm'. There is no dispute that the income in such cases will be assessed in the hands of the Hindu undivided family and not the karta, who is a partner. It is, therefore, clear that Parliament while enacting the Income-tax Act was fully conscious of the dual position of a partner and for the purpose of levy, assessment and collection of tax recognised the representative capacity in which he is a partner. He is not subject to tax in such a case in his personal capacity,
14. We may, therefore, analyse Section 64(1) of the Act in the light of the aforesaid legal position. Section 64(1) presupposes that the individual or the spouse or minor children of such individual are having 'income arising to them' from their membership in the firm. The income, in fact, should belong to the individual, his or her spouse, or minor children and it is in this context that the Explanation to the said section provides that in computing the total income referred to for the purposes of Clause (i), the individual in computing whose total income the income referred to in Clause (i) shall be included, shall be the husband or wife, whose total income,
excluding the income referred to in the said provision, is greater. The Explanation thus makes it further clear that the 'income' referred to therein must be the income of the husband or the wife. Unless that is so, the provisions of Section 64(1) will have no application.
15. This position can be still made clear with the help of the following illustrations. Let us first take a case where the husband is a partner in a firm as a karta of his Hindu undivided family in which his wife is also a partner. The income falling to the share of the husband is Rs. 25,000 and that falling to the share of the wife is Rs. 50,000. Admittedly, the income of the husband belongs to the Hindu undivided family and under the provisions of the Act, the said income is assessable in the hands of the Hindu undivided family and not in the hands of the husband in his personal capacity. The income of the wife is Rs. 50,000 which is higher than that of the husband. In such a case, the income of the husband not being assessable in his hands as his income (the same being assessable in the hands of the Hindu undivided family) the provisions of Section 64(1) cannot be applied. Only if the representative capacity is disregarded, it may be possible to include Rs. 25,000 falling to the share of husband from his membership in the partnership with that of his wife. If that is done, it will amount to double taxation of the very same income--once in the hands of the Hindu undivided family to which it belongs and again in the hands of the wife of the individual who was the partner. Besides, it will also amount to inclusion of income arising to a Hindu undivided family in the income of the wife of the karta.
16. We may take another illustration. Take a case where the husband is a partner in a firm in a representative capacity as karta of his Hindu undivided family wherein the wife is also a partner representing a charitable trust. In such a case, the incomes of both the husband and the wife belong to others and not to either of them. None of them is assessable on any part of such income falling to their share from their membership of the partnership. If the capacity in which they are partners is ignored and the provisions of Section 64(1) applied, it will lead to a curious situation. In such a situation, though no income arises to either the husband or the wife and none of them is assessable under the Act (assuming that they do not have any other income), by virtue of Section 64(1) of the Act, tax shall be levied on either of them in respect of the income from the firm falling to the share of both of them as representatives of some other taxable entities. That is not possible under the scheme of the Act. If, disregarding their representative capacities, the income is clubbed and assessed in the hands of either the husband or the wife, it will mean taxation of the same income twice, once in the hands of the actual taxable entity to which the income belongs and again in the hands of the individual who has nothing to do with the income except receiving it as a representative of the real assessee.
17. The aforesaid two illustrations make it abundantly clear that if a literal interpretation is given to the word 'individual' used in Section 64(1) of the Act in complete disregard to the scheme and object of the Act, it will render the Act itself unworkable. Such an interpretation is not permissible by the well-accepted principles of interpretation of statutes. We, accordingly, hold that the expression 'individual' used in Section 64(1) of the Act has to be read in the context of income arising to such individual from the membership of the partnership, etc. If the income does not arise to him, then the section would not apply. In a case where the karta of a Hindu undivided family is a partner in his representative capacity, admittedly the income does not arise to him. The income arises to the Hindu undivided family and by virtue of the provisions of the Income-tax Act itself, it is assessable in the hands of the Hindu undivided family. The Act recognises the concept of a person being a partner in a firm in his individual capacity as well as a karta of the Hindu undivided family. It is aware of the provisions of the Indian Partnership Act, 1932. It has clearly provided that where the karta is a partner in a firm and it is found as a matter of fact that he is a partner representing the Hindu undivided family, the income arising from such partnership shall belong to the Hindu undivided family and shall be assessed in the hands of the Hindu undivided family. The law being so clear and explicit in regard to the dual status of an individual, we have no manner of doubt in our minds that Section 64(1) cannot apply to a case where an individual is a partner in a firm as karta of his Hindu undivided family.
18. In view of what is stated above, we answer the question referred to us in the affirmative, in favour of the assessee and against the Revenue. We make no order as to costs.