TMI Blog1984 (10) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... f property income and refund of annuity deposit. The ITO completed the assessment determining the assessee's total income at Rs. 12,36.8 made up of property income of Rs. 10,643 and refund of annuity deposit (other sources) of Rs. 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 in the status of an individual. The Commissioner of Income-tax, in exercise of his powers under s. 263, revised the assessments in all the above cases and directed that the share income of the wife and minor sons of the assessee sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership firm carrying on business; (ii) the spouse and/or minor child of an individual should be 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 said section to drive home their point that s. 64(1) was never intended to include such an individual whose share income stands excluded from the assessment in his individual status. To appreciate these rival contentions, it is necessary to refer to the correspo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or the partners of the firm or the members of the association individually. Whereas, the word 'individual' is narrower in its connotation being one of the units for the purposes of taxation than the word 'assessee', the word 'individual' has not been defined in the Act and there is authority for the proposition that the word 'individual' does not mean only a huma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thers admitting their minor children to the benefits of partnerships of which they were members ; (ii) that the words " any individual " and It such individual " occurring in s. 16(3) were restricted in their connotation and necessarily excluded from its purview a group of persons forming 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 " for the word " wife " occurring in s. 16(3). The word " spouse was substituted since the Legislature did not accept the view of the Supreme Court in Sodra Devi's case [1957] 32 ITR 615 that the word "individual" meant only the male of the human species. According to the Legislature, it meant a parent, which may be either a male or a female and so it has since been made clear beyond doubt. That, however, does not mean that the other observations in Sodra Devi's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the legislative oven or must be remoulded, the court should first examine it in its proper context to discover, if possible, what it most probably means. Then, after measuring the legislative contribution, the court, where necessary, may add its own contribution. " " A judge should not be a servant of the words " says Lord Denning (The Discipline of Law, page 56) and he went on to add " The judge should not be a mere mechanic in the powerhouse of Semantics. He should be man in charge of it ". In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 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 it cannot become partner in a firm. Qua, the third parties, the karta who becomes a partner retains his representative capacity. He is liable to account for the assets of the family or income received by him for and on behalf of the family. Therefore, the share income accrued to him in the partnership firm can be brought to tax only in the assessment of the HUF and not in his individual status. This is the essential difference in tax liability between the karta partner and other partners under the Act. But Mr. Srinivasan urged that this difference has no material bearing on the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 from that firm is liable to be included while computing the total income of such individual in his assessment in the status of an individual. We cannot, with respect, accept the soundness of this reasoning. On the contrary, we find ourselves, unhesitatingly, driven to the opposite conclusion when we seek to discern the legislative purpose. The statement of objects and reasons which led to the passing of Act IV of 1937 was in the following terms : " Reference is made in sections I and 4 of Chapter III of the Income-tax Enquiry Report, 1936, to the practice of avoiding taxation by means of nominal partnerships between husband and wife or parent and min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 name and 10 per cent. in the name of his wife and gives 15 per cent. to his two minor sons, then that 25 per cent. of the karta's share income would be brought to tax in the HUF assessment. The remaining 25 per cent. of the share income of the wife and minor children would be aggregated with the separate income of the karta and taxed in his assessment in the status of an individual. This would be the anomalous position and a manifest contradiction of the apparent purpose of the section. Not merely that, it would immeasurably impair the rights of the karta and HUF which the Parliament, in our opinion, never intended. If s. 64(1) ex hypothesis excludes income assessable in the hands of the HUF, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 husband may have to pay tax at a higher rate than ordinarily he would have to pay if the addition, of the wife's or children's income to his own brings his total income to a higher slab. But it may not necessarily be so in a case where the income of the former is not appreciable ; even if it is appreciable, he can debit a part of the excess payment to his wife and children. In short, the firm, though registered, would be treated as a distinct unit of assessment, with the difference that, unlike in the case of a registered firm, the entire income of the unit is added to the personal income of the father or the husband, as the case may be. This mode of taxation may be a little hard on a husband or a father in the case of a genuine partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithet. 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 treatment under s. 64(1)(ii) of his minor children's share income from the partnerships." We do not think that the provisions of s. 64(1) are so clear Is to avoid even a reference to the legislative intent. The very fact that it is a debated point and the courts have taken different views itself indicate that the issues involved are complex and the meaning of the words are not free from difficulty. Even otherwise, it is our experience that the truth is generally not On the surface. It lies somewhere under the surface. It is, therefore, proper to search for the legislative intent before coming to any conclusion. In CIT v. Sanka Sankaraiah [1978] 113 ITR 313, the Andhra Pradesh High Court differed from the view taken by the Bench decision of the Allahabad High Court in Madho Prasad v. CIT [1978] 112 ITR 492. S. Obul Reddy C.J., speaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 I person who is capable of having a spouse or of having a minor child will have any applicability. It is, therefore, clear on a consideration of s. 64(1)(ii) read in the light of the decisions of the Supreme Court in Sodra Devi's case [1957] 32 ITR 615 and in Bagyalakshmi's case [1965] 55 ITR 660, that there can be no other meaning except this that the word "individual " and the words 'such individual' must be confined to a person who is being assessed in his individual capacity and in none else." Mr. Srinivasan pointed out that the above reasoning is not correct since the Supreme Court in Sodra Devi's case[1957] 32 ITR 615, has not held that the word " individual " and the words " such individual " must be confined to a person who is being assessed in his " individual capacity " and none else. It seems to us that Mr. Srinivasan is right to that extent. The Supreme Court has not expressly stated so in Sodra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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