Commissioner of Income Tax vs Mulji Gordhandas

The assessee Mulji Gordhandas, Morvi, was a partner in the firm Hansraj Keshavji of Morvi representing his HUF. The three minor sons of assessee, namely, Rajesh, Munesh and Suresh were admitted to benefit of partnership firm. Assessee had been assessed in respect of his share of profit from the firm in the status of HUF. He had not filed any return of his status as individual, as he has no taxable income. The ITO issued notice under s. 148 requiring the assessee to file a return in his individual capacity which was returned as nil. Applying s. 64, the shares allotted to minor sons of assessee, who were admitted to the benefit of partnership, in the firm in which he was also a partner representing HUF were assessed as income of assessee in his individual capacity. This order on appeal was not sustained by AAC holding that since s. 64 applies only in case of an individual and not in case of a person becoming partner in his status as Karta of HUF, exigency for operating of s. 64 in the present case did not arise. As assessee was a partner in the firm, representing his HUF and not in his individual capacity, it was not a case where income arose directly or indirectly to the spouse of an individual from the share in the firm as its partner or by admission of the minor to the benefits of partnership in a firm in which such individual was a partner. It was a case where income had arisen to minor children of a person who was partner in the firm representing his HUF and not in his individual capacity, the two being separate entities for the purpose of IT Act. In arriving at this decision, learned AAC has followed the decision of this Court in Dinubhai Ishvarlal Patel Vs. K.D. Dixit, Income Tax Officer, Ahmedabad and Others, . The Tribunal affirmed the order of AAC. At the instance of Revenue on an application being made under s. 256(1), the Tribunal has referred following question of law arising out of its order in three ITA Nos. 984, 985 and 986 of 1982 relating to asst. yrs. 1971-72, 1972-73 and 1973-74 :

"Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that income of the minor sons of the assessee from the firm of Hansraj Keshavji, Morvi in which he was a partner representing his HUF was not liable to be included in the individual income of the assessee?"

The issue is now concluded by decision of the Supreme Court in Commissioner of Income Tax, Ludhiana, etc.etc. Vs. Shri Om Prakash, etc.etc., .

The Court explained :

"An HUF is itself an assessable entity or unit. The income earned by the Karta is taxed in the hands of the HUF. No part of such income is computed in his individual assessment. When s. 64 speaks of ''computation of the total income of any individual'', it ex hypothesi excludes from such computations, income 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 of minor children of the individual from the firm, with such other income of that individual which is assessable in his individual status. It is thus clear that the share income of the Karta from the partnership-firm is not exigible to tax a second time under s. 64."

The Court further held :

"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 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 an HUF, the capacity in which he is a partner in the partnership firm is relevant as between him and the other members of the HUF. For, the income the Karta receives as a partner is not his individual income; it is the income of the HUF and he receives it on behalf of the HUF. It is for this reason that the income of the wife and minor children arising from their membership/admission to the benefits of the partnership firm, is held not includible in the income of the HUF, since the total income of the HUF is not the total income of the individual (husband or father, as the case may be). For s. 64(1) to get attracted, it is necessary that the husband/father should be a partner in the partnership as an individual, i.e., in his individual capacity. It is not attracted where he is a partner as the Karta of HUF to which such wife and/or minor children belong. This is the holding of the decisions of this Court in L. Hirday Narain Vs. Income Tax Officer, Bareilly, , Commissioner of Income Tax (Central), Ludhiana and Others Vs. Harbhajan Lal and Others, and Commissioner of Income Tax, Gujarat, Ahmedabad Vs. Jayantilal Prem Chand Shah, . It may not be quite apt to say that vis-a-vis the members of the HUF, 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."

In view of the aforesaid declaration of law, the question referred above is answered in affirmative, that is to say, in favour of the assessee and against the Revenue.

There shall be no order as to costs.