income-tax Officer Vs. N. Balasubramaniam - Court Judgment

Excerpt:
1. these appeals by the revenue are consolidated and disposed of by a common order for the sake of convenience as they involve common issues.these appeals pertain to assessment years 1977-78 to 1982-83 and arise out of the consolidated order of the dy. cit (appeals), coimbatore dated 5-2-1992 wherein he deleted the share of profits derived by the wife of the assessee from the partnership firm included by the assessing officer under section 64(1)(i) of the income-tax act, 1961.the revenue has taken common grounds to urge that the order of the dy.cit(a) is opposed to law, facts and circumstances of the case and he erred in his decision and is not in accordance with the judgment of the jurisdictional high court in the case of cit v. v. kumaraswamy [1987] 163 itr 252 (mad.).2. the assessee is an individual and he is a partner in the firm m/s.n. balasubramaniam & co., hardware merchants at rasipuram in his representative capacity. the original assessments made for these years were re-opened on the ground that the share income from the same firm derived by smt. b. mallika, wife of the assessee, is required to be included under section 64(1)(i). in the reassessments made the share income of smt. b. mallika was duly included as detailed in the impugned assessment orders. on appeal, the inclusion of share income was contested vehemently by the learned counsel for the assessee by relying on the judgment of the andhra pradesh high court in the case of cit v.sanka sankaraiah [1978] 113 itr 313. in that case, it was ruled that where a person is a partner representing the huf consisting of himself, his wife and children, the share income from the firm derived by his wife or minor children cannot be included in the individual assessment of the partner under section 64. the dy. cit(a) duly noted the fact that in the instant case the income of the assessee in his representative capacity from the firm has not been taken as his individual income. by inference it means, that share income of the partner in his representative capacity has been separately assessed presumably in the status of huf because admittedly he represents the huf in the partnership. after noting the aforesaid factual position, the dy. cit(a) abruptly came to the conclusion that in the circumstances of the case the income of the assessee's wife cannot be included in his hands. he has also observed that the decision of the andhra pradesh high court had become final as the special leave petition filed by the revenue against the said judgment has been dismissed by the supreme court. following the aforesaid ruling of the andhra pradesh high court,- the dy. cit(a) concluded that the inclusion of share of profits of smt. b. mallika, wife of the assessee, was not justified in law and accordingly he deleted the inclusion of share income for all these years.3. at the time of hearing, the learned departmental representative has been heard at great length. he has reiterated the common grounds taken by the revenue and supported the orders of the assessing officer.4. the learned counsel for the assessee, on the other hand, vehemently supported the order of the dy. cit(a) by relying on the judgment of the andhra pradesh high court in the case of sanka sankaraiah (supra) and also relied on the latest judgment of the supreme court in the case of cit v. harbhajan lal [1993] 204 itr 361 wherein the controversy has been set at rest in favour of the assessee.5. after due consideration of the rival submissions, the rulings and the record, i hold that the dy. cit(a) was not justified in deleting the share income of the spouse of the assessee from the partnership firm from the assessment of the individual for these years under appeal. the supreme court in the case of l. hirday narainv. ito [1970] 78 itr 26 has held that the income accruing to the minor children of the assessee from their admission to the benefits of partnership in the firm in which the assessee was a partner not in his individual capacity but as the karta of the huf could not be included in the total income of the assessee under section 16(3)(a)(ii) of the indian income-tax act, 1922. that decision has been reaffirmed in the case of harbhajan lal (supra). in the case of cit v. anand sarup [1980] 121 itr 873 (punj. & har.), the assessee therein was a partner in a firm in a representative capacity of his huf in which his wife was also a partner. the punjab & haryana high court held that the share income of the wife could not be included in the total income of the individual.the court has observed at pages 878 and 879 as under : we are in respectful agreement with the view taken by the gujarat high court in dinubhai ishvarlal patel's case [1979] 118 itr 122 and the andhra pradesh high court in sanka sankaraiah's case [1978] 113 itr 313. in cases under section 64(1)(i] and (ii), the income of the spouse or a minor child of such individual is to be clubbed with the income of the assessee only if he is a partner as an individual in a firm. if such an 'individual' represents a huf as its karta and the income in his hands goes to the huf then for the purposes of section 64(1)(i) and (ii), it cannot be held that it is the income of an individual. if the contention of the revenue is correct, then there can be no income from the partnership to the huf whose karta as such is the partner thereof. this position, as such, is not tenable and cannot be accepted. in the present case it has been found as a fact that the assessee is only representing the huf in the firm, m/s. vinod trading co., at present. in this view of the matter, we find that the view taken by the appellate tribunal is correct and the answer to the question is in the affirmative, i.e. against the revenue and in favour of the assessee.this judgment of the punjab & haryana high court in anand sarup's case (supra) has been affirmed in appeal by the supreme court in harbhqjan lal's case (supra). thus minor children's income from the firm and spouse's income from the firm were held to be not includible in the share income of individual who is a partner in the firm in his representative capacity. the decision of the andhra pradesh high court in the case of sanka sankaraiah (supra) was referred to with approval.for the purpose of appreciation, the relevant portion of the leading judgment of the supreme court in the case of l. hirday narain (supra) at page 29 is extracted as under : income for the period november 19, 1949 to september 30, 1950 being assessed to tax as the income of a hindu undivided family and not of an individual, 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 hindu undivided family.it is clear from the above extract that the share income of the spouse or minor children could not be included in the income of the individual where his share income from the firm is assessed as the income of huf.in short, the income of the spouse or minor children is not to be clubbed with the share income assessed in the hands of huf.6. in the present case, there is no dispute about the fact that the share income of the representative partner is not assessed in the hands of the assessee in his individual capacity. the deputy cit (appeals) has categorically stated this in his appellate order at page 4 thereof.it is now to be seen whether the share income of the spouse or minor children, as the case may be, is required to be clubbed in the hands of the assessee in his individual assessments or not. prima facie, the re-assessments in the case of the assessee are all made in the capacity of an individual. only when assessments are made in individual capacity, clubbing is permissible in law. accordingly, the plain provisions of section 64(1)(i) is clearly attracted and the inclusion of share income of the spouse in the total income of the individual is warranted in law. reliance is placed on the decision of the madras high court in the case of cit v. s. balasubramaniam [1984] 147 itr 732 and in the case of v. kumaraswamy (supra). the madras high court in the case of s. balasubramaniam (supra) has pinpointed the requirement of section 64(1)(ii) at page 738 of the report as under : the section's only requirement is that the minor child and his father must both be in the same firm; the section does not require that the father's share income must find a place in father's total income as an individual. we do not think we can read any other or any further requirement in section 64(1)(ii). we have searched in vain for clues and implications elsewhere in the statute to see whether parliament has required the presence of the father's share income in his total income as a condition for including therein the minor child's share income from the same firm. the father's share income may get included in his total income or (to use a goldwynism) it may get included out of his total income, depending upon whether he represents himself or his joint family in the firm. that has nothing whatever to do with the tax treatment under section 64(1)(ii) of his minor children's share income from the partnership.in view of the lucid exposition of law on the requirement of section 64(1)(u) which is equally applicable to the inclusion of share income derived by spouse also, the re-assessments made by the assessing officer including the share income of the spouse in the income of the individual are quite warranted in law.7. accordingly, the dy. cit (appeals) is not justified in directing exclusion of the share income of the spouse from the total income of the individual and consequently his orders are set aside and the orders of the assessing officer are restored on this point.

Judgment:
1. These appeals by the revenue are consolidated and disposed of by a common order for the sake of convenience as they involve common issues.

These appeals pertain to assessment years 1977-78 to 1982-83 and arise out of the consolidated order of the Dy. CIT (Appeals), Coimbatore dated 5-2-1992 wherein he deleted the share of profits derived by the wife of the assessee from the partnership firm included by the Assessing Officer Under Section 64(1)(i) of the Income-tax Act, 1961.

The revenue has taken common grounds to urge that the order of the Dy.

CIT(A) is opposed to law, facts and circumstances of the case and he erred in his decision and is not in accordance with the judgment of the jurisdictional High Court in the case of CIT v. V. Kumaraswamy [1987] 163 ITR 252 (Mad.).

2. The assessee is an individual and he is a partner in the firm M/s.

N. Balasubramaniam & Co., Hardware Merchants at Rasipuram in his representative capacity. The original assessments made for these years were re-opened on the ground that the share income from the same firm derived by Smt. B. Mallika, wife of the assessee, is required to be included Under Section 64(1)(i). In the reassessments made the share income of Smt. B. Mallika was duly included as detailed in the impugned assessment orders. On appeal, the inclusion of share income was contested vehemently by the learned counsel for the assessee by relying on the judgment of the Andhra Pradesh High Court in the case of CIT v.Sanka Sankaraiah [1978] 113 ITR 313. In that case, it was ruled that where a person is a partner representing the HUF consisting of himself, his wife and children, the share income from the firm derived by his wife or minor children cannot be included in the individual assessment of the partner Under Section 64. The Dy. CIT(A) duly noted the fact that in the instant case the income of the assessee in his representative capacity from the firm has not been taken as his individual income. By inference it means, that share income of the partner in his representative capacity has been separately assessed presumably in the status of HUF because admittedly he represents the HUF in the partnership. After noting the aforesaid factual position, the Dy. CIT(A) abruptly came to the conclusion that in the circumstances of the case the income of the assessee's wife cannot be included in his hands. He has also observed that the decision of the Andhra Pradesh High Court had become final as the Special Leave Petition filed by the revenue against the said judgment has been dismissed by the Supreme Court. Following the aforesaid ruling of the Andhra Pradesh High Court,- the Dy. CIT(A) concluded that the inclusion of share of profits of Smt. B. Mallika, wife of the assessee, was not justified in law and accordingly he deleted the inclusion of share income for all these years.

3. At the time of hearing, the learned departmental representative has been heard at great length. He has reiterated the common grounds taken by the revenue and supported the orders of the Assessing Officer.

4. The learned counsel for the assessee, on the other hand, vehemently supported the order of the Dy. CIT(A) by relying on the judgment of the Andhra Pradesh High Court in the case of Sanka Sankaraiah (supra) and also relied on the latest judgment of the Supreme Court in the case of CIT v. Harbhajan Lal [1993] 204 ITR 361 wherein the controversy has been set at rest in favour of the assessee.

5. After due consideration of the rival submissions, the rulings and the record, I hold that the Dy. CIT(A) was not justified in deleting the share income of the spouse of the assessee from the partnership firm from the assessment of the individual for these years under appeal. The Supreme Court in the case of L. Hirday Narainv. ITO [1970] 78 ITR 26 has held that the income accruing to the minor children of the assessee from their admission to the benefits of partnership in the firm in which the assessee was a partner not in his individual capacity but as the Karta of the HUF could not be included in the total income of the assessee under Section 16(3)(a)(ii) of the Indian Income-tax Act, 1922. That decision has been reaffirmed in the case of Harbhajan Lal (supra). In the case of CIT v. Anand Sarup [1980] 121 ITR 873 (Punj. & Har.), the assessee therein was a partner in a firm in a representative capacity of his HUF in which his wife was also a partner. The Punjab & Haryana High Court held that the share income of the wife could not be included in the total income of the individual.

The court has observed at pages 878 and 879 as under : We are in respectful agreement with the view taken by the Gujarat High Court in Dinubhai Ishvarlal Patel's case [1979] 118 ITR 122 and the Andhra Pradesh High Court in Sanka Sankaraiah's case [1978] 113 ITR 313. In cases under Section 64(1)(i] and (ii), the income of the spouse or a minor child of such individual is to be clubbed with the income of the assessee only if he is a partner as an individual in a firm. If such an 'individual' represents a HUF as its karta and the income in his hands goes to the HUF then for the purposes of Section 64(1)(i) and (ii), it cannot be held that it is the income of an individual. If the contention of the revenue is correct, then there can be no income from the partnership to the HUF whose karta as such is the partner thereof. This position, as such, is not tenable and cannot be accepted. In the present case it has been found as a fact that the assessee is only representing the HUF in the firm, M/s.

Vinod Trading Co., at present. In this view of the matter, we find that the view taken by the Appellate Tribunal is correct and the answer to the question is in the affirmative, i.e. against the revenue and in favour of the assessee.

This judgment of the Punjab & Haryana High Court in Anand Sarup's case (supra) has been affirmed in appeal by the Supreme Court in Harbhqjan Lal's case (supra). Thus minor children's income from the firm and spouse's income from the firm were held to be not includible in the share income of individual who is a partner in the firm in his representative capacity. The decision of the Andhra Pradesh High Court in the case of Sanka Sankaraiah (supra) was referred to with approval.

For the purpose of appreciation, the relevant portion of the leading judgment of the Supreme Court in the case of L. Hirday Narain (supra) at page 29 is extracted as under : Income for the period November 19, 1949 to September 30, 1950 being assessed to tax as the income of a Hindu undivided family and not of an individual, 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 Hindu undivided family.

It is clear from the above extract that the share income of the spouse or minor children could not be included in the income of the individual where his share income from the firm is assessed as the income of HUF.In short, the income of the spouse or minor children is not to be clubbed with the share income assessed in the hands of HUF.6. In the present case, there is no dispute about the fact that the share income of the representative partner is not assessed in the hands of the assessee in his individual capacity. The Deputy CIT (Appeals) has categorically stated this in his appellate order at page 4 thereof.

It is now to be seen whether the share income of the spouse or minor children, as the case may be, is required to be clubbed in the hands of the assessee in his individual assessments or not. Prima facie, the re-assessments in the case of the assessee are all made in the capacity of an individual. Only when assessments are made in individual capacity, clubbing is permissible in law. Accordingly, the plain provisions of Section 64(1)(i) is clearly attracted and the inclusion of share income of the spouse in the total income of the individual is warranted in law. Reliance is placed on the decision of the Madras High Court in the case of CIT v. S. Balasubramaniam [1984] 147 ITR 732 and in the case of V. Kumaraswamy (supra). The Madras High Court in the case of S. Balasubramaniam (supra) has pinpointed the requirement of Section 64(1)(ii) at page 738 of the report as under : the section's only requirement is that the minor child and his father must both be in the same firm; the section does not require that the father's share income must find a place in father's total income as an individual.

We do not think we can read any other or any further requirement in Section 64(1)(ii). We have searched in vain for clues and implications elsewhere in the statute to see whether Parliament has required the presence of the father's share income in his total income as a condition for including therein the minor child's share income from the same firm.

The father's share income may get included in his total income or (to use a Goldwynism) it may get included out of his total income, depending upon whether he represents himself or his joint family in the firm. That has nothing whatever to do with the tax treatment under Section 64(1)(ii) of his minor children's share income from the partnership.

In view of the lucid exposition of law on the requirement of Section 64(1)(u) which is equally applicable to the inclusion of share income derived by spouse also, the re-assessments made by the Assessing Officer including the share income of the spouse in the income of the individual are quite warranted in law.

7. Accordingly, the Dy. CIT (Appeals) is not justified in directing exclusion of the share income of the spouse from the total income of the individual and consequently his orders are set aside and the orders of the Assessing Officer are restored on this point.