TMI Blog1984 (10) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Sunrise Industries. There, his minor children had been admitted to the benefits of the partnership. For the assessment year 1971-72, Sri C. Arunachalam as an individual filed his return of income made up of property income and refund of annuity deposit. The ITO completed the assessment determining the assessee's total income at ₹ 12,36.8 made up of property income of ₹ 10,643 and refund of annuity deposit (other sources) of ₹ 1,725 in the status of an individual. For the assessment year 1972-73, the ITO made a similar assessment accepting the return of the assessee. In both the said assessments, the share income accruing to the wife and children in the said firms was not brought to tax in the assessee's hands. I.T.R.C. No. 85 of 1978 : Sri K. Anantha Shenoy, the assessee herein, was a partner representing his HUF in the firm of M/s. Gajanana Cloth Stores (Wholesale). His three minor children were also admitted in that firm to the benefits of the partnership. The assessee as an individual filed his return of income being the remuneration received from the firm of M/s. Gajanana Cloth Stores. The ITO accepted the same and completed the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inor 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. According to Mr. Srinivasan, learned counsel for the Revenue, this section requires that-(i) there should be a partnership firm carrying on business; (ii) the spouse and/or minor child of an individual should be a partner or admitted to the benefits of the partnership firm; and (iii) such individual should also be a partner of that firm. If these factors co-exist, then s. 64 operates and the share income of the spouse and/or the minors from such firm should be included in the total income of the individual for the purpose of assessment. Mr. Sarangan and Mr. Prasad characterised the submission of Mr. Srinivasan as purely a traditional literal-minded approach without due regard to the intention of the Legislature or the purpose for which s. 64(1) was enacted. The learned counsel urged that the words any individual and such individual occurring in s. 64(1) do not cover an individual like the karta who becomes a partner in a firm in his representative capacity. The learned counsel referred to us the legislative background of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad thus : Section 16(3) : In computing the total income of any individual for the purpose of assessment, there shall be included-- (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly-- (i) from the membership of the wife in a firm of which her husband is a partner ; (ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner ; . The scope of this section was considered by the Supreme Court in CIT v. Sodra Devi [1957] 32 ITR 615. The question that arose for consideration in that case was whether the word such individual in s. 16(3)(a)(ii) included also a female, and the income of minors derived from the partnership firm to which they had been admitted to the benefits was liable to be included in the income of the mother who was a partner in that partnership. Bhagwati J., speaking for the majority view, pointed out (at p. 620) : The word 'assessee' is wide enough to cover not only an 'individual' but also a Hindu undivided family, company and local authority and every firm and other association of persons o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ife or a minor child, in the computation of the total income of the male assessee, the husband or the father, as the case may be, for the purpose of assessment... Sodra Devi's case [1957] 32 ITR 615 (SC) has thus laid down the following three principles: (i) Section 16(3) aimed at foiling husbands' attempt to avoid or reduce the incidence of tax by entering into nominal partnerships with their wives. It was also to prevent tax avoidance by fathers admitting their minor children to the benefits of partnerships of which they were members ; (ii) that the words any individual and such individual occurring in s. 16(3) were restricted in their connotation and necessarily excluded from its purview a group of persons forming a unit of assessment; and (iii) the words any individual and such individual were intended to cover the male of the species and did not include the female of the species. Section 64(1) of the I.T. Act, 1961, has been modelled upon s. 16(3). of the Indian I.T. Act, 1922. It may not be inappropriate also to state that s. 64(1) of the Act is a successor to s. 16(3) of the Indian I.T. Act, 1922, with the substitution of the word spouse f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out why a rule of law has taken its particular shape. Such a study should be the first step towards an enlightened scepticism. In every country, and more so in a developing country, the old laws yield place to new and so too the creative powers of courts in the art of interpretation of statutes. The strict constructions which go by the letter of law dominated the legal scene in the 19th century. The strict constructionists stood by the golden rule laid down in Grave v. Barrison [1857] 6 HL 61. The Lord Chancellor said there, that courts should adhere as rigidly as possible to the express words that are found and to give those words their natural and ordinary meaning . But the modern trend has been not all that way. The art of interpretation has undergone modification. The courts now look to the purpose or intent, scheme or design of the legislation and add its own contribution by filling in gaps. Professor Reed Dickerson in his book The Interpretation and Application of Statutes states (at p. 15) : ...Whether the statute is clear or obscure, whether or not it adequately resolves the current issue, and whether it can be applied as it came from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsonal capacity and an individual becoming a partner in his representative capacity. The legal position of the karta when he becomes a partner in a firm has been explained by Subba Rao J., as he then was, in CIT v. Bagyalakshmi Co. [1965] 55 ITR 660, 664 (SC) : 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. The karta of a HUF unlike other individuals has thus a two-fold capacity. Qua the partnership, he functions in his personal capacity, because the rights of partnership are governed by the Partnership Act, 1932. The relation of partners arises from contract and not from status. The partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The HUF may be a person or unit of assessment under the Act, but i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase 'in which such individual is a partner' occurring in s. 64 includes a human being who may be the karta of an HUF... While disagreeing with the view taken by the other High Courts, there and then the learned Chief Justice concluded (at p. 864) : As mentioned above, s. 64 does not catch the income which is assessable in the hands of the HUF. It confines itself to the case of an individual assessee. It seeks to add the income of the spouse or minor child in the computation of the individual's assessment. It is not necessarily confined to the share income of the individual from the partnership firm. If the share income of the individual from the partnership firm is liable to be included while computing such individual's total income, it may be so included. That will be when the individual is a partner in his personal capacity. But if he is a partner in a representative capacity, with the result that the entire income that he gets as his share from the firm is assessed in the hands of the entity which he represents, then that share income is outside the purview of s. 64. None the less, the share income of the spouse or the minor children fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or reduce the incidence of tax by admitting the spouse as a partner, or getting a minor child admitted to the benefits of partnership in a firm or adopting any other modes covered by the section (see CIT v. Manilal Dhanji [1962] 44 ITR 876 (SC) ). The Legislature in enacting the provisions of s. 16(3) obviously had no intention whatsoever to disturb the prudent management of the family affairs by the karta of a HUF. It would be, therefore, illogical to extend the operation of s. 64(1) to such a person. Let us take an illustration, which can be stated in a few words, to show how the social end which was aimed at by the section is obscured by the construction suggested by Mr. Srinivasan and supported by the decision in Sahu Govind Prasad's case [1983] 144 ITR 851 (All) [FB]. Suppose the karta is a partner in a firm with a contribution of 50 per cent. capital. Obviously, according to the reasoning in the Sahu Govind Prasad's case, the 50 per cent. share income stands excluded from the scope of s. 64(1) of the Act, since it is liable to be included in the assessment of the HUF. If the same karta instead of contributing 50 per cent. capital, invests only 25 per cent. in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wife or minor children. The scope of the provisions is limited only to a few of the intimate members of a family who ordinarily are under the protection of the assessee and are dependants of him. The persons selected by the provisions, namely, wife and minor children, cannot also be ordinarily expected to carry on their business independently with their own funds, when the husband or the father is alive and when they are under his protection. Doubtless some of the said partnerships may be genuine and the wife or minor children may have contributed capital to the business ; but the provisions do not in any way affect their rights and even the liability inter se between the husband and the wife or the minor children, as the case may be, in respect of the tax paid. It is true that in computing the total income of an individual for the purpose of assessment, their income in their capacity as partners shall be included in the income of the individual; but the section does not prevent the husband or the father, as the case may be, from debiting against them in the partnership accounts that part of the tax referable to the share or shares of their income. It may be that a father or a hus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ahmanyan J., who spoke for the Bench of the Madras High Court, observed (p. 738) : We prefer to rest our decision on a simple understanding of the simple words of s. 64(1)(ii). The section's only requirement is that the minor child and its father must both be in the same firm ; the section does not require that the father's share income must find a place in the father's total income is an individual. The learned judge further observed (p. 738) : Mr. Srinivasamurthy is recorded as telling the Tribunal that it would be exceedingly 'strange' that the minor children's share income from a firm must get taxed in the father's individual assessment when his own share income from the same firm is not so included. Before us learned counsel used a harsher epithet. He said that it was 'atrocious'. We must dismiss these remarks as tax-planning rhetoric. 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 treatme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the partnership happens to be admitted to the benefits of the partnership or the spouse happens to be a partner. In neither case, qua the wife or qua the minor child, is he anyone else than a representative. It is clear that so far as the HUF is concerned, as was pointed out by the Supreme Court, if a trust is represented in the partnership or if there is a sub-partnership or even a benami partner in any one of these capacities, he is there in no capacity other than as a representative. And it is just by chance that he happens to be the very individual whose spouse is also a partner in the same firm or whose minor child has been admitted to the benefits of that partnership firm, but the word 'individual' occurring in s. 64(1)(ii) must be given the meaning, as pointed out in Sodra Devi's case [1957] 32 ITR 615 (SC), to mean a person who is capable of having a spouse or who is capable of having a minor child. HUF, trust or a sub-partnership do not fall within either of these categories and, therefore, it is obvious that the provisions mean the word 'individual' as a person who is being assessed merely in his individual capacity because only then can the concept of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the share in the firms of Messrs Sunrise Industries Syndicate and M/s. Sunrise Industries had to be included in the assessee's individual assessment ? The question of law referred in I.T.R.C. No. 90/76 is : Whether the Tribunal was correct in holding that section 64(1)(ii) of the Income-tax Act, 1961, was applicable on the facts of the case and, therefore, the income of the minor children from the share in the firm of M/s. Sunrise Industries had to be included in the assessee's individual assessment ? The question of law referred in I.T.R.C. No. 85/78 is : Whether the Appellate Tribunal was justified in holding that section 64(1)(ii) of the Income-tax Act, 1961, is not applicable to the facts of the case and, therefore, the income of the minor children from the share in the firm of Messrs Gajanana Cloth Stores had to be excluded from the assessee's individual assessment ? Our answer to the question referred in I.T.R.C. No. 89/76 is in the negative and in favour of the assessee. Our answer to the question referred in I.T.R.C. No. 90/76 is in the negative and in favour of the assessee. Our answer to the question refe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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