1. This departmental appeal is directed against the order dated 19-4-88 of the CIT(A), Madras, relating to the assessment year 1984-85.
2. The facts of the case are that the assessee, an individual, filed his return of income for the assessment year 1984-85, disclosing an income of Rs. 88,860. Finding that both the assessee and his wife were partners in a firm called M/s Kalyan Chakravarthy Theatre, the Assessing Officer brought to tax in the hands of the assessee a sum of Rs. 9,489, being the said lady's share in the income of the said firm.
This he did invoking the provisions of Section 64(1) (i) of the I .T.Act, 1961.
3. The said addition was one of the subject-matters of the appeal filed by the assessee before the CIT(A). The assessee's case before the first appellate authority was that the assessee was a partner in the said firm of M/s Kalyan Chakravarthy Theatre not in his individual capacity but in his representative capacity of the karta of a smaller HUF, and that therefore Section 64(1)(i) was not applicable. In this regard, reliance was also placed on behalf of the assessee on the decision of the first appellate authority on this issue relating to the assessment year 1983-84, which was obviously favourable to the assessee.
4. The said arguments found favour with the CIT(A), who decided the issue in favour of the assessee, observing: The issue whether the Explanation to Section 64 is where the "word' 'individual' referred to in Section 64(1)(ii) as an assessee assessed in the status of 'individual' or not one who is being assessed in a 'representative' capacity is the subject-matter of several decisions. The decision of the Madras High Court in 147 ITR 732 is in respect of assessment of a partner's share income under Section 64(1)(ii). However, the Court observed: It is unnecessary to enter into a discussion about the true view of the position of a karta in a partnership, whether he 'represents' none but himself as regards other partners or whether he represents his undivided family as regards his own coparceners.
As this main issue is not decided, I would prefer to follow the view of the High Court in the case of CIT v. Prakashchanda Basantilal[l986] 162 ITR 536, Madhya Pradesh High Court followed the majority view le., that the expression 'individual' is used in Section 64(i)(ii) only in a restricted sense and therefore when a person is being assessed in a 'representative' capacity, the question of applying the provisions of Section 64(1)(ii) by clubbing the income of wife from the partnership firm is wrong. In the circumstances, the Income-tax Officer is directed to delete the addition of Rs. 9,489.
6. Shri L. Raghavan, the learned Departmental Representative, vehemently contended that the CIT(A) has misunderstood the true ratio of the Madras case of CIT v. S. Balasubramaniam [ 1984] 147 ITR 732.
According to him, the said Madras decision supported the Department's case.
In this regard, he also referred to and relied upon the Madhya Pradesh High Court decision in Smt Rukmani Agrawalv. CJT[1988] 170 ITR 133.
7. On his part, Shri S. Sridhar, the learned counsel for the assessee, fairly drew our attention to the fact that the said issue came up for consideration in the assessee's assessment relating to the assessment years 1981-82 and 1982-83, and that the Tribunal decided the issue in favour of the department and against the assessee, following the said Madras case of S. Balasubramaniam (supra) - see the common order dated 24-10-89 of the ITAT, Madras Bench-D in ITA Nos. 285 & 286/Mds/86.
8. The fact-situation obtaining in the previous year relevant to the assessment year 1984-85, which is now before us, being not different from the one obtaining in the previous year relevant to the assessment years 1981 -82 and 1982-83, following the aforesaid common order dated 24-10-1989 of the Tribunal in the assessee's own case, we allow the departmental appeal.
9. Normally the matter should have rested there. But the erroneous perception of the first appellate authority to the effect that that "the main issue has not been decided by the said Madras case of S.Balasubramaniam (supra)", impels us to make the following observations: 10. In the aforesaid Madras case, the assessee therein, was the karta of a HUF. He had a plurality of business interests. He also had a plurality of income-tax assessments, one in his own name as an individual, and another in the name of his HUF. The assessee was a partner in two firms. He got all his six minor daughters admitted to the benefits of partnership one after the other in the said two firms.
In computing the total income of any individual, there shall be included all such income as arises directly or indirectly 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.
Invoking the said provisions, the Assessing Officer included the minors' share income as part of the assessee's total income in his individual assessment. In this regard, the Assessing Officer negatived the assessee's contention that because the assessee was a partner in the said two firms in his "representative" capacity as the karta of the HUF, Section 64(1)(ii) which is applicable only to the cases of individuals, did not apply to his case.
12. Thereupon, at the instance of the Department, the following question of law was referred to the High Court for their esteemed opinion: Whether, on the facts and in the circumstances of the case, it has been rightly held that the provisions of Section 64(1)(ii) of the Income-tax Act, 1961, would not be applicable and, therefore, the share income arising to the minor daughters of the assessee have to be deleted 13. The High Court answered the reference against the assessee and in favour of the Department. In this connection the Court observed as follows: (a) All that Section 64(1)(ii) requires in express term is that the minor children and their parent must both have their membership in the same firm, the one by virtue of admission to the benefits of the partnership, and the other by virtue of being a full-fledged partner. In other words, the only precondition to the applicability of the said section is that both the father and the minor child must have their membership in one and the same firm. No further requirement can be read into that section.
(b) In cases of the type under consideration, the enquiry is not about the tax treatment to be given to the share income which is derived from the membership in a firm by a karta of a HUF. The question, on the contrary, is how to treat the share income of a minor child whose father's share from the same firm does not get assessed in his individual hands? The answer to this question lies not in the Hindu Law, nor in the Partnership Law, but in Section 64(1)(ii) itself. Referring to the decision to the contrary taken by the Andhra Pradesh, Gujarat, and Punjab and Haryana High Courts, the jurisdictional High Court observed that the construction placed by the said High Courts on Section 64(1 )(ii) would only benefit taxpayers whose personal law is governed by Hindu Law and, even amongst this class of taxpayers, it would help only those who can afford to have their partnership share income taxed in their joint family hands. The said construction will not help other taxpayers similarly circumstanced whose personal law is not Hindu Law.
14. The true ratio of the said Madras case is that in cases where both the parent and the minor children derive income from a partnership, the minor's share should get assessed in the individual hands of the parent. This is so, even if the parent happened to represent the HUF in the firm. The only consequence in such cases is that the share income of the firm allocated to the parent would not be assessed in his individual hands, but in the hands of the HUF whom he represents. But this circumstance is no bar to the full play of Section 64(1)(ii). In other words, the shares of the minors would get assessed in the individual hands of the parent.
15. A reference in this regard may also be usefully made to the Full Bench decision of the Allahabad High Court in the case of Sahu Govind Prasad v. CIT[ 1983] 144 ITR 8511. After noticing the legislative history of Section 64(1)(i) and on an in-depth consideration of a long catena of cases, including those in which a view contrary to the one taken in the aforesaid Madras case had been taken, the Full Bench arrived at the same conclusion as the jurisdictional High Court in the case of S. Balasubramaniam (supra).
(2) the spouse and/or minor child of an individual should be a partner or admitted to the benefits of the partnership firm; If these factors co-exist, Section 64 operates. Under it, the share income of the spouse and/or the minors from such firm is included while computing the total income of the individual.
The question is, what does the phrase 'in which such individual is a partner' occurring at the end of the two clauses of Section 64 mean? Does it cover a karta if he is a partner as such, or is it restricted to one who is a partner in his own right, Le., purely in his personal capacity A human being can be a spouse and parent. He can at the same time be the guardian of the minor children or the karta of his HUF, etc. He can be all or any of these: and, in addition, be a partner in a firm in which his spouse or minor children are also partners.
Take the case of a karta of an HUF. He may as such be a partner in a firm. As karta he represents the members of the family. But, 'it is well-settled that when the karta of a joint Hindu family enters into a partnership with strangers, the members of the family do not ipso facto become partners in that firm' Firm Bagat Ram Mohanlalv. CEPT [1956] 29 ITR 521 (SC).
When the wife or minor children of the karta become partners in a firm, they are not there as members of the HUF. They function as partners independently.
What is the position of the karta when he becomes a partner in a firm? This aspect was considered by the Supreme Court in CIT v. Bagyalakshmi & Co. [1965] 55 ITR 660. It was held (p. 664): 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.
A partner, being an individual, has a dual capacity - representative and personal. He may be a representative, Le., a karta qua others, Le., 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 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 him 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, guardian or trustee or benamidar, etc., is immaterial.
17. In the case before, We are concerned with the assessment of the assessee in his individual capacity. He is a partner in M/s Kalyan Chakravarthy Theatre. So is his wife. Since he is a partner in the said firm in his representative capacity, the share of the income of the firm allocated to him has not been brought to tax in his hands in his individual assessment. In other words, his "representative capacity" has been recognised and given effect to and the matter rests there.
When it comes to Section 64(1)((i) [whose praseology is identical with that of the old Section 64(1)(ii) dealing with income of minor children], the fact that the assessee was a partner in the firm M/s Kalyan Chakravarthy Theatre in his representative capacity becomes irrelevant, with the result, the share income of his wife needs, in law, to be included in the assessee's total income in his individual assessment. This is exactly what was done by the Assessing Officer in this case.
18. In view of the foregoing, therefore, we set aside the impugned order of the CIT (Appeals) on this issue and restore that of the Assessing Officer.