Commissioner of Income Tax vs Shri Champalal Jeevraj

Thanikkachalam, J.—The Tribunal, u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), at the instance of the

Department has referred the following common question of law for our opinion.

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in excluding the annual letting value of Rs. 4,200 in

respect of the portion under occupation of the firm while computing the income from property in the hands of the assessee partner for the

assessment years 1970-71 and 1971-72 ?

The assessee, a Hindu undivided family, owned a property at No. 196-A, Govindappa Naicken Street, Madras-1. The ground floor of that

property was let out to the firm, in which, the assessee was a partner, through its karta. No rent was charged against the firm for its occupying the

premises. The assessee did not admit any income from the portion occupied, nor did the firm claim deduction towards expenses by way of rent. In

the assessment of the Hindu undivided family, the Income Tax Officer held that since the firm was a different entity from the assessee-Hindu

undivided family, the fair rent receivable should be deemed to be that of the Hindu undivided family. The Income Tax Officer estimated the income

at Rs. 350 per month and the annual value was taken at Rs. 4,200 and included the same in the assessment for the assessment years 1970-71 and

1971-72. On appeal, the Appellate Assistant Commissioner confirmed the view taken by the Income Tax Officer. On further appeal, the Tribunal

took the view that the partner of the firm also carried on business from which profits were earned and the annual letting out value in respect of that

portion of the property occupied for the purpose of business could not be included in the assessment of the partner, by following the decision of

the Supreme Court in Commissioner of Income Tax, Bihar Vs. Ramniklal Kothari, , and also the provisions of section 67(2) of the Act and

accordingly directed that the property income should be recomputed by excluding the annual value of Rs. 4,200 in each year. On a reference, this

court returned the reference so made unanswered with the direction to the Tribunal to find out as to whether there was any difference in the

principle to be applied, where the karta alone could in law be a partner in the firm and as the present assessee is a Hindu undivided family, the

impact of section 22 of the Act has to be considered in the peculiar circumstances of the case. On rehearing of the appeal, the Tribunal held that

the assessee-Hindu undivided family, which is an assessable entity liable to pay tax, will be entitled to the concession of section 22, if it falls within

its ambit, that the assessee-Hindu undivided family carries on business in the premises, of which it is the owner, through the firm, in which it is

represented by the karta as partner, that the assessee-Hindu undivided family is also assessed on the share income from the firm, that the mere fact

that the assessee-Hindu undivided family as such is not a partner in the firm but only the karta represents the assessee as partner, will not disentitle

the assessee to the benefit u/s 22 of the Act, as the Hindu undivided family in effect occupies for the purpose of its business the portion of the

premises in question. In that view of the matter, the Tribunal held that the notional rent receivable as estimated by the Income Tax Officer and

included in the assessments, required to be deleted and its earlier order does not require modification. So holding, the Tribunal referred the

question of law set out at the outset for the opinion of this court.

Before this court, learned standing counsel for the Revenue submitted that according to the partnership law, a Hindu undivided family cannot be

a partner, but only an individual can be a partner, that the karta of the Hindu undivided family can be considered as an individual partner in the

partnership firm and the Hindu undivided family cannot be a partner in the partnership firm and that, therefore, as the Hindu undivided family is not

doing the business, the share income derived by the partner from the partnership firm is assessable in his individual capacity. Even though the

assessee says that the karta is representing the Hindu undivided family in the partnership firm, the benefits u/s 22 of the Act cannot be made

available to the Hindu undivided family, which is the assessee in the present case. In order to support his contention, learned standing counsel relied

upon various decisions. On the other hand, learned counsel appearing for the assessee submitted that even though the Hindu undivided family is

represented by one of the partners in the firm, it is the Hindu undivided family which is doing the business. Therefore, the share income derived

from the firm should be considered s the income of the Hindu undivided family and since the joint family is the owner of the property, which is

occupied by the firm the benefit u/s 22 of the Act is available to the assessee.

We have heard the rival submissions. The fact remains that the assessee is a Hindu undivided family, owning the property. The ground floor is let

out to the firm, in which the assessee was a partner through its karta. There was no rent charged against the firm for its occupying the portion of the

property and the assessee did not admit any income from the portion occupied by it, nor did the firm claim deduction towards expenses by way of

rent. The share income from the firm was assessed in the hands of the assessee-Hindu undivided family. The point for consideration is, whether the

karta of the Hindu undivided family, who is the partner in the firm, can represent the Hindu undivided family while deriving the share income from

the firm.

In Dwarkadas Rameshwar Goenka Vs. Commissioner of Income Tax, Madras, , this court while considering the provisions contained in section

40(b) of the Act, followed the decision of the Supreme Court in Commissioner of Income Tax, Madras Vs. Bagyalakshmi and Co., Udamalpet,

wherein it was held as under (at page 399) :

A contract of partnership has no concern with the obligation of the partner to others in respect of their shares of profit in the partnership. It only

regulates the rights and liabilities of the partners. 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.

While considering the provisions of section 64(1)(i)(ii) of the Act, the Supreme Court in the case of Commissioner of Income Tax (Central),

Ludhiana and Others Vs. Harbhajan Lal and Others, followed the decision in L. Hirday Narain Vs. Income Tax Officer, Bareilly, , wherein it was

held that (headnote) :

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 Hindu undivided family could not be included in the total income of the assessee and

section 16(3)(a)(ii) of the 1922 Act did not apply. Section 64(1)(ii) of the 1961 Act, prior to its amendment with effect from April 1, 1976, was in

pari materia with section 16(3)(a)(ii) of the 1922 Act and there was no good and compelling reason to depart from the view taken therein.

Therefore, it remains to be seen whether a karta of a Hindu undivided family can be a partner in a firm either in his individual capacity or, in his

capacity as karta representing the Hindu undivided family. On facts, the authorities below came to the conclusion that the karta is representing the

Hindu undivided family. The property in question is owned by the Hindu undivided family. Qua the Hindu undivided family, the income derived by

the karta of the Hindu undivided family from the partnership firm was viewed as the income belonging to the Hindu undivided family. The

Department also assessed the share income from the firm derived by the karta of the Hindu undivided family as the income of the Hindu undivided

family. Therefore, the view taken by the Tribunal that the income derived by the karta of the Hindu undivided family is the income derived from the

partnership business of the Hindu undivided family, even though the Hindu undivided family is not a partner in the firm, is correct. Learned standing

counsel relied upon a decision in Ram Laxman Sugar Mills Vs. Commissioner of Income Tax, Uttar Pradesh and Another, , wherein the Supreme

Court has held that (at page 616) ""A Hindu undivided family is undoubtedly a ''person'' within the meaning of the Act; it is however not a juristic

person for all purposes, and cannot enter into an agreement of partnership with either another undivided family or individual. It is open to the

manager of a joint Hindu family as representing the family to agree to become a partner with another person. The partnership agreement in that

case is between the manager and the other person, and by the partnership agreement no member of the family except the manager acquires a right

or interest in the partnership. The junior members of the family may make a claim against the manager for treating the income or profits received

from the partnership as a joint family asset, but they cannot claim to exercise the rights of partners nor be liable as partners."" This decision in a way

supports the contention put forward by learned counsel appearing for the assessee that qua the Hindu undivided family, the income derived by the

karta of the Hindu undivided family from the partnership firm is the income derived from the business run by the Hindu undivided family. Learned

standing counsel also placed reliance on a decision of the Allahabad High Court in Commissioner of Income Tax Vs. Shiv Mohan Lal, . According

to the facts arising in that case, the Hindu undivided family was the owner of the house property. The business, which was being carried on in the

property was not owned by the assessee. Even the other members of the Hindu undivided family were not partners of the firm. Therefore, this

court, on the facts, held that the income derived by one of the partners cannot be considered to be income from the business of the joint family.

Hence, on the facts, this decision will not be of any use to the case on hand. Yet another decision relied upon by learned standing counsel for the

Department was Additional Commissioner of Income Tax Vs. N. Vaidyanathan, , wherein this court has held that the income derived by a partner

from the partnership firm is the business income of the assessee entitled to get deduction in the expenditure incurred for such expenses. This court

further held that the share income derived by the partner from the partnership firm is also amenable for getting benefit u/s 22 of the Act. However,

the facts obtaining in that case are different from the facts arising in the case on hand. Therefore, the abovesaid decision would render no help to

the Department to contend that the income derived by a partner from the firm cannot be considered to be business income of the Hindu undivided

family. In Commissioner of Income Tax, Bihar Vs. Ramniklal Kothari, , the Supreme Court observed that the business carried on by the firm is the

business carried on by the partners and the profits of the firm are the profits earned by all the partners in carrying on the business. Thus,

considering the facts arising in the case in the light of the judicial pronouncements cited supra, we have to hold that in the present case, qua the

Hindu undivided family, the share income derived by the karta of the Hindu undivided family would be the business income of the Hindu undivided

family and since the firm is occupying a portion of the house belonging to the Hindu undivided family, the benefit u/s 22 of the Act is available to the

Hindu undivided family. Accordingly, we answer the question referred to us in the affirmative and against the Department. There will be, however,

no order as to costs. Counsel''s fee is fixed as Rs. 1,000.