COMMISSIONER_ OF INCOME TAX, KANPUR v. KAMLA TOWN TRUST

A underlying such bequest or settlement. It is trite to observe that if settlor's poor relatives can legitimately be the recipients of charitable benefits under a public charitable trust, then if such preference is given to poor workmen of the settlor company who are not even related to the settlor, they would stand at least on an equal if not a better footing and in no eventuality on a worse footing, it judging the public charitable nature of the settlement in B their favour. However, the basic fact must remain that the settlement is made in favour of a well earmarked clas5 of needy and poor persons who may form a part of the general public and for whom such charitable bequest or endowment is made, and the preferred class of beneficiaries must form a part and parcel of that very general earmarked class. It must, c therefore, be held that the provision for construction of houses for workmen in general' as found in clause 2(b)(i) of 1945 rectified Deed, so far as it went, did constitute a charitable object.

However, this conclusion of ours does not end the controversy centering round the aforesaid· clause. There are two clear hurdles in the way of Shri Verma for the respondent which militate against his submission that the said clause when read as a whole does create a public charitable trust in favour of workmen in general. The first hurdle is that the term 'workmen in general' as employed in the clause is too general and vague but even assuming that in the context of the residential quarters, chawls or buildings to be constructed for them on the lands situated at Kanpur which are settled in trust by the Settlor Company, it would refer to workmen in Kanpur town, even then the more substantial hurdle in the way of the respondent is projected by the fact that there is an obligation cast on the trustees to construct these residential quarters, chawls or buildings in particular for the workmen, staff and other employees of the company or other allied concerns under the management of and in which the directors of the company may for the time being be interested and for their respec- tive families and dependents. In the light of the words 'in particular' as found in this clause, Dr. Gauri Shankar, learned senior counsel for G Revenue rightly submitted, that they represent a scheme of priority for workmen of the Settlor Company and not a scheme of preference. In other words the trustees are bound under an obligation to construct resid.ential quarters etc. first for the workmen or employees of the Settlor Company or its allied concerns. They have no choice in the matter. They cannot in their discretion select an outside workman as recipient of the benefit under the scheme of the Trust Deed. In effect the general class of beneficiaries

COMMNR. OF INCOME TAX.v. KAMLA TOWNTRUSf (S.B. MAJMUDAR, J.) 339

constituted by the words 'workmen in general' gets whittled down and circumscribed by the words 'in particular for workmen of the company etc.'. Thus in substance it becomes a trust for the benefit of a well defined smaller class of beneficiaries, namely, employees or workmen of the com· pany and its allied concerns and it fails to meet the requirement of a genuine or public or charitable trust. We are in agreement with this submission of Dr. Gauri Shankar. Once such an obligation is cast on the trustees the public character of the endowment gets whittled down and in substance becomes the settlement for an identified group of persons. In this connection we may profitably refer to a Division Bench judgment of the Bombay High Court in the case of Commissioner of Income-Tax, Bombay City II v. Walchand Diamond Jubilee Trust, (1958) 34 ITR 228 c wherein Chagla, C.J., spoke for the Bench. In that case the question was whether the provision made in the Trust Deed to utilise the accumulated income of the property of the trust on charitable objects like giving scholar- ships to deserving students or giving medical reliefs of the nature and kind such as starting maternity homes etc., or giving monetary help to the poor and needy persons and for providing relief to the poor and distressed in time of famine would get adversely affected and would cease to be a charitable object if preference was to be given to such persons as are eligible under the aforesaid provisions who .are at the time or have in the past been employees of Premier construction Co. Ltd. and of the as- sociated companies and their relatives and dependents as the trustees may in their discretion think expedient and proper. In this connection the following pertinent observations were made by Chief Justice Chagla at page 236 of the Report :

"...... Now, undoubtedly, we would have taken a different view of this trust if there was an obligation upon the trustees to prefer the employees. In other words, if the other members of the public were postponed to the employees of the Premier Construction Co. Ltd., then, looking to the other provisions of the deed, we might easily have taken the view that the main purpose of the trust was to benefit the employees and the charity to the public was merely illusory. But there is no obligation cast upon the trustees by this proviso to prefer the employees of the Premier Construction Co. Ltd. It is for the trustees to exercise their discretion. In the first place, they have to utilise the income for carrying out the four objects, and any member of the public who comes within these H

p. 340 Copy page pinpoint

A four objects would be qualified to receive the bounty of the settlor. If a member of the public also happens to be an employee of the Premier Construction Co. Ltd., it is open to the trustees to give him preference. Therefore, the trustees would not be guilty of committing any breach of trust if they selected for the bounty of the settlor such members of the public as did not fall in the B category of employees of the Premier Construction Co. Ltd. That is the real test which we have got to apply. We must not assume that the trustees will exercise their discretion dishonestly or im- properly. The test is whether the exercise of the discretion of the trustees is so fettered that they are bound to select particular c persons in preference to others. That is clearly not the case here.:."

In our view aforesaid is the correct test evolved by the High Court. Applying the said test to the clause in question we find that though residential quarters, chawls or buildings are to be constructed for the workmen in general and who, as we have already shown earlier, may be a well defined class. of workmen residing in Kanpur and who may be poor and needy in the light of their socio-economic conditions as prevailed in 1945 when the clause was drafted, once we turn to the second part of this clause which lays down in clearest terms that in particular the quarters are to be constructed for the workmen staff and other employees of the company and of its allied concerns, it becomes clear that no discretion is left with the trustees and on the contrary they are enjoined, called upon and under an obligation to construct these quarters, chawls and buildings necessarily for the workmen, staff and other employees of the company and its allies. It is also easy to visualise that other employees of the company may include even affluent employees who may not necessarily constitute an object of charity. Once this conclusion flows from the wordings of the clause, it becomes clear that reference to workmen in general becomes illusory and the settlement can be said to be in substance meant only for catering to the needs of a well defined group of persons, namely, workmen, staff and other employees of the company and its allied concerns and in that case on the aforesaid ratio of the decision of the Bombay High Court, which we approve, the object clause in question would fall short of creating any public charitable trust. In this connection we may also refer to two decisions, one of Calcutta High Court and another of Allahabad High Court, to which our attention was drawn by Dr. Gauri Shankar for the H Revenue. In the case of Mercantile Bank of India (Agency), Ltd., (supra) a.

COMMNR OFINCOMETAXv. KAMLA TOWNTRUSf[S.B. MAJMUDAR,J.] 341

Division Bench of the Calcutta High Court speaking through Derbyshire, A C.J., held that in order to constitute a valid charitable trust it should be for the benefit of the public or the specified section of it. A fluctuating body of private individuals such as the present and future officers and members of the staff and other employees of a Company could not be a part of the general public or of any section of the public and therefore the income of the trust fund was not exempt from the payment of income-tax under section 4(3)(i). It was further observed that Andrew Yule & Co. Ltd., and their subsidiary concerns for whose employees benefit was conferred under the deed employed a large number of persons. The trust was for the benefit of the past, present and future officers, members of the staff and other employees of those concerns. Anyone from the Secretary or some other highly paid member of the staff down to the lowest menial may be included within the benefit of this fund. Necessitious circumstances might include the case of a superior employee earning some thousands of rupees per month, who owning to some misfortune-say the burning down of his house, or the loss of his property - might find himself suddenly in necessitious circumstances, and in need of money to replace his lost property. The learned Judge could see no reason why the administrators of the fund should not be in a position to make a grant to such a person to make up his loss. It might be a most desirable thing to do and the administrators might justly think that they had used some of the funds to the best advantage. But such use cannot be said to be for the relief of poverty. Even E if (as had been argued) the administrators are bound to use this fund solely "to relief persons suffering from indigence, ill-health or other necessitious circumstances," it was impossible to say that the fund is - to use the words of the section - "property held in trust wholly for charitable purposes." A Division Bench of the Allahabad High Court in the case of J.K. Hosiery F Factory (supra) had an occasion to consider the very same clause of the rectified deed of 1945. It is of course true that the said decision was rendered in assessment proceedings of the firm wherein respondent-asses- see was a partner and not in the assessment proceedings of the respondent firm itself. Still the interpretation placed on the very same Trust Deed as rectified in 1945 in proceedings to which respondent-assessee was a party G in another capacity cannot be said to be totally irrelevant. H.N. Seth, J., speaking for the Division Bench made the following observations in this connection :

"We are doubtful whether the construction of residential colony H

p. 342 Copy page pinpoint

A for workmen in general can be regarded as an object of public charity. While enabling the trustees to construct residential quarters, etc., for the benefit of the workmen in general, the settlor made it clear that such buildings were not to be constructed for the benefit of the public in general. The expression "workmen in B general" does not fix a definite class of public which is intended to be benefited under the deed. What types of employees or workers can be said to be covered by this expression is not at all clear. Moreover, the precise language used by the settlor is "to erect ..... residential quarters, etc, for the workmen in general and in particular for the workmen, staff and other employees of the c company or other allied concerns under the management of..... ". This shows that the expression "workmen in general" was not intended to mean merely poor labourers. The expression was intended to cover even such classes of persons who might be employed in any concerned in any capacity whatsoever and who D may be drawing high salaries. Making a provisions for constructing residential quarters, etc. for the benefit of the employees irrespec- tive of whether they are poor or not, can hardly be said to be a charitable object or a work of general public utility."

E As we have discussed earlier the term 'workmen in general' when read in the context socio-economic situation prevailing in 1945 in this country and when also considered in the context of construction of residential quarters, chawls or buildings in Kanpur may partake the character of a well defined class of workmen in Kanpur city who may be poor and needy, still as the trustees are enjoined to construct residential quarters, chawls or buildings in particular for the workmen, staff and other employees of the company it follows that other employees of the company who are the beneficiaries may not necessarily be poor or needy or affluent. We, therefore, concur with the second part of the reasoning of Allahabad High Court in the aforesaid judgment though we are not in a position to subscribe to the general proposition that construction of residential colonies for workmen in general cannot by itself be regarded as an object of public charity. As a result of the aforesaid discussion therefore, it must be held that rectified clause 2(b)(i) of 1945 deed fell short of projecting an object of a public charitable nature and it could not be said that under the rectified deed of H 1945 the trust properties were held by respondent-trust wholly for religious

p. 343 Copy page pinpoint

or charitable purposes. It is of course true that rest of the sub-clauses of A clause 2(b) did refer to charitable objects but as one of the objects was not of a public charitable nature it could not be held that the entire trust was wholly for religious or charitable purposes.

Now is left the consideration of one submission of Shri Verma, learned senior counsel for the Respondent who relied upon Explanation B to sub-section (3) of section 4 of 1922 Act which read as under :

"In this sub-section 'charitable purpose' includes relief of the poor, education, medical relief and advancement of any other object of general public utility, but nothing contained in clause (i) or clause c (ii) shall operate to exempt from the provisions of this Act that part of the income from property held under a trust or other legal obligation for private religious purposes which does not ensure for the benefit of the public."

In our view the said Explanation cannot be of any avail to the respondent- D assessee so far as the rectified deed of 1945 is concerned. The emphasis in the Explanation is on charitable objects of general public utility like relief of poor, education, medical relief and advancement of any other object of general public utility. Once it is held that clause 2(b) (i) of 1945 rectifica- tion deed imposed an obligation on the trustees to utilise the trust property E for the benefit of the settlor company's own workmen and employees, it would cease to be projecting an object of providing relief to poor workmen only. Nor would it advance any other object of general public utility but would be confined to the utility of a well defined class of employees and workmen of the settlor company and its allied concerns only. For all these reasons, therefore, it is not possible to accept the submission of Shri F Verma, learned senior counsel for respondent-assessee based on this Ex- planation. This contention, therefore, stands rejected.

Conclusions G The aforesaid decisions on the contentions canvassed on behalf of the rival contesting parties by their learned senior advocates, yield the following result :

(i) For assessment years 1949-50 to 1955-56 the respondent- assessee would not be entitled to get the benefit of section 4(3) (i) of the 1922 Act H

p. 344 Copy page pinpoint

A and income derived by it from its properties would not get exemption from income tax under the said provision.

(ii) For the assessment years 1956-57 to 1961-62 the income derived by the respondent-assessee from trust properties during these years will get exempted under section 4(3)(i) of 1922 Act as the 1955 rectified Trust B Deed is held by us to be having objects of wholly charitable nature.

(iii) For the assessment years 1962-63 to 1965-66 the income derived from trust properties by the respondent-trust will be entitled to exemption from income tax under section 11 of the 1961 Act subject to the compliance c with the conditions laid down therein as even during this period the rectified Trust Deed of 1955 as interpreted by us will be treated to have held the field.

Final Order

D In the light of the aforesaid discussion and the conclusion to which we have reached the questions referred for opinion of the High Court will stand answered as under :

Question refen-ed at the instance of the assessee in !TR No. 18/73

E Question No. 1

Answered in the affirmative in favour of the Revenue and against the assessee.

Question 2 F Answered in the affirmative in favour of the Revenue and against the assessee as the answer of the High Court on this question was not sup- ported by the learned counsel for the respondent.

G Question refe1Ted at the instance of Revenue in !TR No. 715/72

Question No. (a)

Answered in the affirmative in favour of the assessee and against the Revenue as answer of the High Court was not challenged before us by H learned counsel for the Revenue.

COMMNR. OFINCOMETAXv. KAMLA TOWNTRUSf[S.B. MAJMUDAR,J.] 345

Question No. (b) A Answered in the negative in favour of the assessee and against the Revenue as the answer of the High Court was not challenged by learned counsel for the appellant-revenue.

Question No. (c) B Answered in the affirmative in favour of the assessee and against the Revenue as the answer of the High Court was not challenged by learned counsel for the Revenue.

Question No. (d) c Answered in the negative in favour of the assessee and against the Revenue.

Question No. (e)

Answered in the negative in a favour of the assessee and against the D Revenue.

In the result, out of these 17 appeals filed by the Revenue seven appeals pertaining to assessment years 1949-50 to 1955-56 will stand al- lowed while Revenue's remaining ten appeals pertaining to assessment E years 1956-57 to 1965-66 will stand dismissed. In the facts and circumstan- ces of the case there will be no order as to costs in these appeals.

R.A. Appeals disposed of.

A COMMISSIONER OF INCOME TAX LUDHIANA v. SHRI OM PRAKASH

NOVEMBER 16, 1995

B [B.P. JEEVAN REDDY AND SUHAS C. SEN, JJ.]

Income Tax Act, 1961 :

Section 64( 1}-Computation of total income of individual--Partnership C firm-Comprising of assessee (husband) and wife as partners-Minor children admitted to benefits of partnership-Assessee (husband) being partner not as individual but as Karta of H.U.F.-Income accruing to wife and minor children-Not includible in the total income of assessee or H.U.F.

A conflict of opinion among the High Courts on the meaning and D interpretation of clause (i) and (ii) of sub-section (1) of section 64 (as they · stood prior to 1st April, 1976) of the Income Tax, 1961 fell for resolution in this batch of appeals.

On behalf of the appellant - revenue it was contended that even though the husband/father is a partner in a firm as the Karta of the E H.U.F., he does not cease to be an individual and section 64(1) of the Act is applicable.

On behalf of the respondent - assessee it was contended that since the husband/father was a partner in a firm not as an individual but as the Karta of the H.U.F. Section 64(1) of the Act is not attracted. F Disposing of the appeals, this Court

HELD : 1. Where a person is a partner in a Partnership firm not in his individual capacity but as the Karta of the H.U.F., neither the income G accruing to his wife on account of her being a partner in the same partnership firm nor the income accruing to his minor children on account of their being admitted to the benefits of such partnership firm, can be ip.cluded in the total income of such person - neither in his individual (

assess~~nt nor in the assessment of the H.U.F. (360-C]

H 2. It may not be quite apt to say that vis-a-vis the member of the 346

p. 347 Copy page pinpoint

H.U.F., the Karla is still an individual and, therefore, such income of wife and minor children should be included in the income of the Karla derived as Karla. Nor such income of the wife and/or minor children should be included in the individual assessment of the Karla. It also ignores the clear language employed in clauses (i) and (ii). In each of these two clauses, the expression "such individuals" occurs twice. Firstly, the "individual" must be a partner in a firm and the wife and/or minor children of such in- dividual must also be deriving income from such partnership firm (either on account of her membership) or on account of being admitted to the benefits of partnership, as the case may be. [358-E-H]

3.1. The opening words of section 64 (1) of the Income Tax Act,1961 C are "in computing the total income ofany individual".Then it proceeds to say that in the total income of such individual shall be included the income of his spouse arising from the membership of such spouse in the partnership firm in which such individual is the partner. It proceeds further and says that the income arising to the minor children of such individual who are D admitted to the benefits of partnership wherein such individual is a partner shall also be included in the total income of such individual. [357-E-F]

3.². So far as other partners in the partnership firm are concerned, they are not really concerned in what capacity a particular person is a partner, i.e., whether as an individual, as a Karla, as a trustee or otherwise. E To them, he is an individual, a person. This aspect however becomes relevant as between the partner and those whom he represents in the partnership firm. To wit, where a person is a partner as the Karta of a H.U.F., the capacity in which he is a partner in the partnership firm is relevant as between him and the other members of the H.U.F. For, the income the Karta receives as a partner is not his individual income; it is the income of the H.U.F. and he receives it on behalf of the H.U.F. It is for this reason that the income of the wife and minor children arising from their membership/admission to the benefits of partnership firm, is held not includible in the income of the H.U.F. since the total income of H.U.F. is not the total income of the individual (husband or father, as the case may be). [358-A-C]

3.3. For Section 64(1) to get attracted, it is necessary that the hus- band/father should be a partner in a partnership firm as an individual i.e., in his individual capacity. It is not attracted where he is a partner as the H

p. 348 Copy page pinpoint

A Karta of H.U.F. to which such wife and/or minor children l,>elong. [358-DJ

L. Hirday Narain v. Income Tax Officer, A. Ward, Bareilly, 78 ITR 26, Commissioner of Income Tax v. Harbhajan/al, 204 ITR 361 and Commis- sioner of Income Tax, Gujarat v. Jayantilal Premchand Shah, 211 ITR 111, relied on. B Commissioner of Income Tax v. Sankaraiah, 113 ITR 313 and Arnnachalam v. Commissioner of Income Tax, 151ITR172, approved.

Sahu Govind Prasad v. Commissioner of Income Tax, 144 ITR 851 and Commissioner of Income Tax v. Slui Manakram, 183 ITR 382, held c inapplicable.

4Copy pinpoint4. It is made clear that clauses (i) and (ii) of sub- section (1) of section 64, as they stood before April 1, 1976, have been merely interpreted. The facts of the individual cases have not been gone into. That is a matter for the authorities under the Act to enquire into and pronounce upon. [360-BJ

E CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4234 (NT) of 1983 Etc. Etc.

From the Judgment and Order dated 29.10.80 of the Punjab & Haryana High Court in S.T.R. No. 153 of 1979.

F Dr. V. Gauri Shankar, Rajappa and S.N. Terdol for the appellants.

The Judgment of the Court was delivered by

B.P. JEEVAN REDDY, J. A conflict of opinion among the High G Courts on the meaning and interpretation of clauses (i) and (ii) of sub- section (1) of Section 64 (as they stood prior to 1st April, 1976) of the Income Tax Act, 1961 falls for resolution in this batch of appeals. Prior to April 1,, 1976 the said clauses along with the explanation read thus: ./

"(1). In computing the total income of any individual, there shall be included all such income as arises directly or indirectly

C.l.T. v. OMPRAKASH[B.P.JEEVAN REDDY,J.} 349 _., (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; B

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 c 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, D 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". E We may made it clear, at the outset, that whatever we say hereinafter is relevant only to the aforesaid provisions contained in clauses (i) and (ii) of Section 64(1), i.e., to clauses (i) and (ii) as they obtained prior to April 1, 1976.

The sub-section opens with the words "in computing the total income of any individual", and provides for inclusion of the income arising directly or indirectly to persons specified in the sub-section, in the situation specified therein, in the total income of such individual. Clause (i) says that where the spouse of an individual is the member of a firm wherein the individual is a partner, the income of such spouse shall be included in the income of that individual. The Explanation contained in sub-section (i) says that among the spouses, the income of the spouse with lesser income shall

- be included in the income of the spouse having larger income. It does not matte1 whether the individual in whose income the income of the spouse is included is husband or wife. Clause (ii) says that if the mill.or child of such individual is admitted to the benefits of the partnership firm, in which H

p. 350 Copy page pinpoint

A such individual is a partner, the income arising to such minor child shall be included in the income of such individual. The Explanation clarifies that where both the mother and father of a minor child are partners in the firm to benefits of which such minor child is admitted), the income of the minor child shall be included in the income of that parent whose total income (excluding the income referred to in clause (ii)) is greater. B No difficulty arises where the individual is a partner in the firm as an individual. In such a case, the income arising to his/her spouse from the membership of such partnership will be included in the income of that individual. Similarly where the partner of a minor child is a partner in c his/her individual capacity, the income arising to the minor from his admission to the benefits of such partnership will be included in the income of that individual. Difficulty has arisen in a limited category of cases - and these are such cases - where the husband/father is a partner is a firm as the Karta of an Hindu Undivided Family (H.U.F.) and this is the only D question considered in this Judgment. In such cases, the plea is that the husband/father is a partner in the firm not as an individual but as the representative of the H.U.F. and, therefore, clauses (i) and (ii) have no application.' Indeed, three lines of thought have emerged regarding the meaning and purport of clauses (i) and (ii). They are : (a) since the husband/father is a partner not as an individual but as the Karta of the E H.U.F. i.e., as the representative of the H.U.F., clauses (i) and (ii) of sub-section (1) are not at all attracted; in such a case the income of the wife or the minor child, as the case may be, cannot be included in the individual income of the husband/father under the said clauses; (b) clauses (i) and (ii) of sub-section (1) operate and apply even where the "individual" F happens to be the Karta of the H.U.F. In such a case, all that the clauses mean is that the income of the wife or the minor child, as the case may be has to be included in the income of the H.U.F. (c) even though the husband/father is a partner in a firm as the Karta of H.U.F., he does not cease to be an individual, which means that the income arising to the wife from the membership of such partnership firm - or the income arising to his minor child from being admitted to the benefits of such partnership firm - has to be included in the individual assessment of such hus- band/father. In other words, though the income of the wife/minor children cannot be included in the total income of the H.U.F., it has to be included in the individual assessment of such husband/father. It does not matter that such husband/ father has no separate individual income of his own; even

p. 351 Copy page pinpoint

in such a case, a separate assessment has to be made upon him as an individual, in which assessment the income of the wife and the child arising on the aforesaid account has to be included.

We must immediately say that of the three lines of thought aforesaid, the second line of thought is foreclosed and is no longer available in view of the decisions of this Court in L. Hirday Narain v. Income Tax Officer, A. Ward, Bareilly, 78 I.T.R. 26, Commissioner of Income-tax v. Harbhajan/al, 204 I.T.R. 361 and Commissioner of Income-tax, Gujarat v. Jayanthilal Premchand Shah, 211 I.T.R. III. We may briefly refer to the ratio of each of these three decisions. c In Hirday Narain, the assessee, Hirday Narain, and his five sons were members of H.U.F. His accounting year relevant to the Assessment year 1951-52 was the year commencing on October 1, 1949 and ending with September 30, 1950. During the said accounting year, two events occurred. On November 19, 1949 there was a partition between Hirday Narain and D his five sons and on April 8, 1950 another son was born to Hirday Narain. Over-ruling the objections of the assessee, the Income tax Officer made an assessment .for the entire year in the status of H.U.F. On appeal, the Appellate Assistant Commissioner treated the sum of Rs. 18,520 as being the income of the former H.U.F. for the period October 1, 1949 to November 18, 1949 and directed its exclusion from the assessment. Pur- E suant to the directions of the Appellate Assistant Commissioner, the Income-tax Officer made two assessments - one assessing the sum of Rs. 18,520 as the income of the former H.U.F. for the period October 1, 1949 to November 18, 1949 and the other assessing the income of Rs. 1,06,156 for the remaining period as the income of the smaller H.U.F., applying, at the same time, Section 16(3)(a) (ii) of the Indian Income Tax Act, 1922. Hirday Narain then made an application for rectification under Section 35 of the 1922 Act claiming that in the matter of his assessment in the status of H.U.F., Section 16(3)(a)(ii) cannot be invoked. The Income-tax Officer accepted the plea but declined to give relief on another ground. The assessee thereupon approached the High Court under Article 226 which matter was ultimately carried to this Court, Shah, J ., speaking for the Bench (comprising himself and Hegde, J.) held that inasmuch as a son was born to Hirday Narain after the partition on November 19, 1949 and before the end of the accounting year, he could not have been assessed as an in- dividual for the period November 19, 1949 to September 30, 1950 and that H

352 SUPREME COURT REPORTS [1995) SUPP. 5 S.C.It

A he ought to have been assessed in the status of H.U.F. Once this is so, the learned Judge held, "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 H.U.F. It may be mentioned that Section 16(3)(a)(ii) considered in the said judgment is in pan mateira with clause (ii) of Section 64(1) (before it was amended with effect from B April I, 1976).

In Harbhajan/al, the question again was whether the income arising to the minor children from their being admitted to the benefits of a partnership firm could be included in the income of their father who was C a partner in that partnership firm as the Karta of the H.U.F. Following the decision Hirday Narain, this Court (B.P. Jeevan Reddy, and S.P. Bharucha, JJ.) held that such inclusion was not permissible. No further contention was raised or considered in the said decision.

In Jayanthilal Premchand Shah, a Three-Judge Bench comprising D S.P. Bharucha, S.C. Sen and K.S. Paripoornan, JJ. held that the income of the minors arising on account of their being admitted to the benefits of a partnership firm cannot be included in the total income of their father who was a partner of the said firm as the Karta of the H.U.F. The aforesaid decisions are binding upon us. In this view of the matter, only two alterna- E tives survive, i.e. (a) and (c) mentioned above, and we have to see which one is the correct one.

A majority of the High Courts have adopted the first line of thought aforesaid. The High Courts taking this view are Andhra Pradesh, Gujarat, Punjab and Haryana, Delhi, Karnataka, Bombay, Madhya Pradesh, Kerala, F Guwahati and Rajasthan. It is not necessary to refer to the reasoning of all these decisions. It w~uld suffice to note the reasoning of two decisions, viz., Commissioner of Income-Tax v. Sanka Sankaraiah 113 I.T.R. 313, a decision of the Andhra Pradesh High Court, the first one to take this view and that of the Full Bench of the Karnataka High Court in Arunachalam G v. Commissioner of Income-tax, 151I.T.R.172. In Sanka Sankaraiah it was held:

"This Section (64(1)) applies only to the computation of total income of an individual. The expression 'individual' does not comprehend in its meaning the 'Karta' of a joint family. If it were the intention of the legislature that the expression 'individual' used

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in Section 64 should also take in a Hindu undivided family, then it would have used the expression 'person' so as to include a Hindu undivided family and not the words 'spouse of such individual in clause (i)' or the words' 'a minor child of such individual in clause (iii)' or the words either spouse or parent' in the Explanation. This section aims at putting an end to the attempts of an individual to avoid or reduce the incidence of tax by transferring the assets to a spouse or minor child. Under this section, the husband's share of the profits of a firm, where husband and wife are both partners could be assessed in the wife's hands or vice versa, depending upon the fact whose total income is greater. The income of the minor child admitted to the benefits of the partnership is similarly to be c included in the income of that parent whose total income is greater".

It is not necessary to state all the facts of the case except the following; the assessee, Sanka Sankaraiah, effected a partition between himself and his two minor sons by way of a Partial partition. The Tribunal D accepted his plea that even after the said partial partition effected on April 9, 1967, the assessee constituted a smaller H.U.F., comprising himself, his wife and his minor daughter. The assessee and his wife constituted a partnership, to the benefits of which the two minor sons were admitted. The income received by the wife and the income received by the minor sons from the partnership firm was sought to be included in the individual income of the assessee which was objected to by him, whereupon the following question was referred for the opinion of the High Court :

"Whether, on the facts and in the circumstances of the case, the share incomes derived by the assessee's wife and minor children could be considered in the hands of the assessee- individual under section 64 of the Income-Tax Act, 1961?"

It is on those facts that the observations aforesaid were made by the High Court. G

In Arunachalam, K. Jagannatha Shetty, J. (as he then was), speaking for the Full Bench of the Karnataka High Court pointed out, in the first instance, what, in his opinion, is the essential difference in tax liability between the Karta-partner and other partners of a firm and then proceeded to hold that the income accruing to wife/minor child cannot be H

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A included in the individual assessner/of the husband/father in such a situa- tion. This decision considers cases of two different assessees. In the case of one assessee, his minor sons were admitted to the benefits of partnership of which he was a member as the Karta of his H.U.F. The other was a case where the Commissioner directed, under Section 263 of the Income Tax Act, 1961, that the share income of the wife and the minor sons of the B assessee be included in the total income of the assessee who was a partner ·' in that firm as the Karta of H.U.F. The Full Bench held that the share income of the wife/minor children cannot be included in the individual assessment of the husband/father, for the reason that he is a partner not in his individual capacity but as the Karta of the H.U.F., i.e., in a repre- C sentative capacity.

The High Courts which have adopted the third line of thou~h are Allahabad, Madras, Madhya Pradesh and Orissa. We may refer to the reasoning of the Full Bench of the Allahabad high Court in Sahu Govind D Prasad v. Commissioner of Income- tax, 144 I.T.R. 851. The Full Bench holds that where the Karta of a H. U.F. is a partner in the firm wherein his wife is also a partner and/or to the benefits of which his minor children are admitted, the income accruing to wife/minor children has to be included . in the individual assessment of the husband/father though such income cannot be included in the income of the H.U.F. i.e., in the share income E received by the husband/father as the Karta of the H.U.F. The ratio of the Full Bench is to be found in the following observations :

"A partner, being an individual, has a dual capacity- representative and personal. He may be a representative i.e., a Karta qua others F i.e., 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 G 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 of benamidar, etc., is immaterial.

H An HUF is itself an assessable entity of unit. The income

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earned by the karta is taxed in the hands of the HUF. No part of such income is computed in his individual assessment. When Section 64 speaks of 'computation of the total income of any individual', it ex hypothesis excludes from such computation, in- come which is assessable in the hands of the HUF. Section 64 does not deal with the share income of the karta from the firm. It is confined to the clubbing together of the share income of the spouse or minor children of the individual from the firm, with such other income of that individual status. It is thus clear that the share income of the karta from the partnership furn is not exigible to tax a second time under section 64. c In our opinion, the phrase 'in which such individual is a partner' occurring in Section 64 includes a human being who may be the karta of an HUF. This is what was held by this Court in Madho Prasad's case (1978) 112 ITR 492. With respect we agree with that decision". D In Commissioner of Income-tax v. Slui Manakram, 183 I.T.R. 382, the Madhya Pradesh High Court has pointed out that for including the income of the wife/minor children in the individual assessment of the hus- band/father under Section 64(1), it is not necessary that the husband/father should have separate individual income of his own. Even if he has no E

- .... separate individual income, still the income of the wife/minor children has to be included by making a separate assessment on the husband/father in his individual capacity.

While the learned counsel for the Revenue commends to us the view taken by Allahabad High Court et al (what may be called the third line of thought), the learned counsel for the assessees etspouse the first line of thought accepted by the Andhra Pradesh, Karnataka and other High Courts mentioned above.

In the Indian Income Tax Act, 1922, as originally enacted, there was no provision like the one concerned herein. Section 16(3) providing for the same was introduced only in the year 1937. The constitutional validity of this provision was questioned in Balaji v. Income-Tax Officer, Special Inves_tigation Circle, [1962] 2 SCR 983. It would be appropriate to refer to some of the reasons given by the Constitution Bench while upholding the H

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A validity. Subba Rao, J., speaking for the Court, observed, in the first instance, that the beneficial provision made in the Income-tax for dis- tributing the profit made by the partnership firm among its partners also provided an effective device to evade taxation. "A husband or a father could nominally take his wife or his minor sons in partnership with him so B that tax burden be lightened, ................... This device enables an assessee to secure the entire income of the business but at the same time to evade income-tax which he would have otherwise been liable to pay." The learned Judge pointed out that said provisions was made pursuant to the recom- mendations made by the Income-tax Inquiry Commission, 1936 as a measure of plugging the loopholes in the Act. Inasmuch as the validity of c the provision was questioned on the ground of violation of Article 14, the learned Judge examined the principles underlying the said Article and held that the provision which included the income derived by wife and or minor children alone in the income of the husband/father while not induding the income of others does not suffer from discrimination. The learned Judge D observed that the argument based upon violation of Article 14 ignores the object of the Legislation, viz., to prevent evasion of tax. Learned Judge observed: "A similar device would not ordinarily be resorted to by in- dividu~ls by entering into partnership with persons other than those men- tioned in the sub-section, as it would· involve a risk of the third-party turning round and asserting his own rights. The Legislature, therefore, selected for the purpose of classification only that group of persons who in fact are used as a clock to perpetrate fraud on taxation." The learned Judge then dealt with the argument that there might be a genuine partner- ship between an individual and his wife and that such a situation is not saved by the said provision. He held : "In demarcating a group, the net was cast a little wider, but it was necessary, as any further sub-classification as genuine and non-genuine partnerships might defeat the purpose of the Act... ..... There is a greater scope for fraudulent evasion by constituting fictitious partnership along with one's wife and minor children than in a case of separate income of the spouses derived from different sources ......... . G When the Legislature of .this country, which is assumed to known the conditions of the people and their requirements, with the awareness of this particular widespread fraudulent device in the matter of evasion of taxes, made a law to prevent the said fraud, it is difficult for this Court in the absence of any counter-balancing circumstances to hold, on the analogy H c!rawn from American decisions, that the need for such a law is not in

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existence." The learned Judge also rejected the attack upon the con- A stitutionality of the said provision based on Article 19(1)(g) holding that it constituted a reasonable restriction which was found necessary "to prevent the prevalent abuse, namely, evasion of tax by an individual doing business under a partnership nominally entered with his wife or minor childn,n." The learned Judge added finally, "This mode of taxation may be a little B hard on a husband or a father in the case of genuine partnership with wife or minor children,_ but that is offset, to a large extent, by the beneficent results that flow therefrom to the public, namely, the prevention of evasion of income-tax, and also by the fact that, by and large, the additional payment of tax made on the income of the wife or the minor children will ultimately be borne by them in the final accounting between them." c While enacting Section 64 of the Income-tax Act, 1961 the Parlia- ment kept in view the decision of this Court in Commissioner of Income Tax v. Sodra Devi, 32 l.T.R. 615 and the report of the Direct Taxes Administration Committee 1958-59. Section 64 basically carried forward the idea in sub-section 3 of Section 16 of the Indian Income-Tax Act, 1922, no doubt, with certain modifications. One constant, however, remained, viz, the provisions contained in clauses (i) and (ii) of Section 64(1) were confined only to the partnership income. Now, what are the ingredients of the section? The opening words are "in computing the total income of any individual". Then it proceeds to say that in the total income of such individual shall be included the income of his spouse arising from the membership of such spouse in the partnership firm in which such individual is the partner. It proceeds further and says that the income arising to the minor children of such individual who are admitted to the benefits of partnership wherein such individual is a partner shall also be included in the total income of such individual. Now an individual can be a partner in a partnership first in his individual capacity or in the capacity of the Karta of a H.U.F. or, for that matter, in any other capacity, e.g., as a trustee. There may be a firm comprising an individual and his wife, to which their minor children are admitted. There can also be a firm comprising two or more individuals wherein the wife/wives of one or more of the partners are partners. The minor children of one or more of the partners may also have been admitted to the benefits of the partnership firm. In fact, there can be any number of situations where the wife is also a partner along with her husband in a partnership firm or where the minor children of an individual H

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A are admitted to the benefits of a partnership firm wherein that individual is a partner. So far as other partners in the partnership firm are concerned, they are not really concerned in what capacity a particular person is a partner, i.e., whether as an individual, as a karta, as a trustee or otherwise. To them, he is an individual, a person. This aspect however becomes B relevant as between the partner and those whom he represents in the partnership firm. To wit, where a person is a partner as the karta of a H.U.F., the capacity in which he is a partner in the partnership firm is relevant as between him and the other members of the H.U.F. For, the income the Karta receives as a partner is not his individual income; it is the income of the H.U.F. and he received it on behalf of the H.U.F. It is c for this reason that the income of the wife and minor children arising from their membership/admission to the benefits of partnership firm, is held not includible in the income of the H.U.F. since the total income of H.U.F. is not the total income of the individual (husband or father, as the case may be). For Section 64(1) to get attracted, it is necessary that the hus- D band/father should be a partner in a partnership firm as an individual, i.e., in his individual capacity. It is not attracted where he is a partner as the Karta H.U.F. to which such wife and/or minor children belong. This in the holding of the decisions of this Court in Hirday Narain, Harbhajan/al and Jayantilal Premchand Shah. It may not be quite apt to say that vis-a-vis the members of the H.U.F., the karta is still an individual and, therefore, such income of wife and minor children should be included in the income of the karta derived as karta. Nor are we satisfied that such income of the wife and/or minor children should be included in the individual assessment of the karta. Indeed, the argument is that even if the karta has no individual income of his own, even then the said income of the wife and children should be included in the husband/father's individual assessment by making ' such a separate assessment. This argument ignores the fact that the hus- band/father is a partner in the partnership firm not in his individual capacity but as the karta. It also ignores the clear language employed in clauses (i) and (ii). In each of these two clauses, clauses, the expression G "such individual" occurs twice. Firstly, the "individual" must be a partner in a firm and the wife and/or minor children of such individual must also be deriving income from such partnership firm (either on account of her membership or on account of being admitted to the benefits of partnership, as the case may be). For the purposes of clauses (i) and (ii), it is not his H capacity vis-a-vis other partners of the firm that is relevant but his capacity

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vis-a-vis his wife and/or minor children. If this basic fact is ignored, anomalous results may follow as indicated by the Andhra Pradesh High Court in Sanka Sankaraiah.

The learned counsel for the Revenue says that if the above view is taken by this Court, the very objective underlying the said clauses - and emphasised in eloquent terms in Balalji - would be defeated. The result would be, learned counsel says, the income of, say the minor children arising from their being admitted to the benefits of a partnership firm can neither be included in the H.U.F.'s income nor can it be included in the individual assessment of the father in a case where the father is partner in the firm as the karta of that H.U.F. This confers an undue - and an unfair c - advantage to Hindus among whom alone the concept of Hindu undivided family obtains. While members of other communities, among whom the concept of H.U.F. does not obtain, would be directly in the path of the said provisions, the Hindus would be escaping the rigour of the said provisions through the device of H.U.F., says the learned counsel. There D is certainly a fair amount of force in this submission but this is an argument really against the very concept, and the permissibility of such concept, in the Income Tax Act. We are not unaware of the criticism that very often H.U.F. is being used to deny the state the tax legitimately due to it. But that is a larger question which does not arise in these cases. As a matter E of fact, wherever the Parliament has thought it fit, it has intervened to checkmate the evil, e.g., sub-section (2) of Sei::tion 4 of the Gift-Tax Act inserted by Finance (No.²) Act, 1971 and sub-section (lA) of Section 4 of Wealth Tax Act inserted by the very same Finance Act. Similarly, sub-sec- tion (2) was introduced in Section 64 by the Finance Act, 1979 with effect from April 1, 1980. Then Explanation 3 was added by the Taxation Laws F (Amendment) Act, 1975 with effect from April 1, 1976, but clauses (i) and (ii) in sub-section (1) remained untouched (except for the deletion of the words "of which such individual is a partner" in clause (iii) corresponding to clause (ii) until they were deleted by Finance Act, 1992 w.c.f. April 1, 1993 and insertion of sub-section (lA) - with which aspects we are not G concerned herein. Suffice it to say that on the language employed in the sub-section and the clauses concerned herein, the view taken by it may possible be the only view possible. Majority of High Courts too have accepted this view. It cannot also be said that the view taken by us militates in any manner against the ratio of Balaji nor does it tend to defeat the H

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A object of the provisions as explained in the said decision.

We must make it clear that we have merely interpreted clauses (i) and (ii) of sub-section (1) of Section 64, as they stood before April 1, 1976. We have not gone into the facts of the individual cases before us. That is a matter for the authorities under the Act to enquire into and pronounce B upon.

For the above reasons, we hold that where a person is a partner in a partnership firm not in his individual capacity but as the karta of the H.U.F., neither the income accruing to his wife on account of her being a partner in the same partnership firm nor the income accruing to his minor c children on account of their being admitted to the benefits of such partner- ship firm, can be included in the total income of such person - neither in his individual assessment nor in the assessment of the H.U.F. Our holding is confined to the above situation alone.

D All the appeals are disposed of with the aforesaid enunciation of legal position. The Income-tax Tribunal or the other concerned authorities under the Act, as the case may be, shall pass orders in each of these individual cases in accordance with the above legal position.

No costs.

v.s.s. Appeals disposed of.