Commissioner of Income Tax vs Smt. T. Suryamani Kothavalasa

S. Ananda Reddy, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal, Hyderabad "A" Bench, Hyderabad (for short, "the Tribunal"), referred the following questions, said to arise out of its order in I. T. A. No. 769 of 1983, dated September 25, 1986, for the assessment year 1978-79 u/s 256(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), for the opinion of this court :

"(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the share income derived by the minor, Shri T. Surya Baparao, by reason of his admission to the benefits of partnership should be regarded as share income of the Hindu undivided family represented by the minor ?

(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the share income derived by the minor, Shri T. Surya Baparao by reason of his admission to the benefits of partnership was not his individual income and hence the provisions of Section 64(1)(iii) did not apply ?

(iii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the minor, Shri T. Surya Baparao who under the Partnership Act could not at all become a partner but only be admitted to the benefits of partnership could represent his Hindu undivided family in a firm ?"

The facts leading to the above reference, in brief, are as follows :

The assessee is an individual, who is the wife of the late Theegala Paparao. The assessment was made against her u/s 147, read with Section 143(3) of the Act for the assessment year in question computing the share income received by her son from the firms. The minor son of the assessee was admitted to the benefits of the firms. The late Paparao, husband of the assessee, was a partner in two firms, viz., T. Baparao and Sons and Lakshminarasimha Tile Works, representing his Hindu undivided family (hereinafter referred to as "the HUF'') as karta, consisting of himself, his wife, minor daughter and an adopted minor son. The said Hindu undivided family was having shares in T. Baparao and Sons and Sri Laxminarasimha Tile Works. The said Paparao, karta of the Hindu undivided family, died on September 9, 1977. At the time of his death, Paparao, the karta, representing the Hindu undivided family was having credit balance of Rs. 83,063.97 in the capital account, in the books of T. Baparao and Sons, and Rs. 59,044.08 in the books of Sri Laxminarasimha Tile Works. After the death of Sri Paparao, the adopted minor son, T. Surya Baparao, was admitted to the benefits of partnership through his guardian mother, Smt. Suryamani, by investing a sum of Rs. 70,000 out of Rs. 1,42,108.05 standing to the credit of the Hindu undivided family in both the firms.

Before the Income Tax Officer, it was contended that the minor, T. Surya Baparao, represented the Hindu undivided family and the share income received by him from those two firms should be assessed in the hands of the Hindu undivided family and was not liable to be assessed in the hands of the assessee. The Income Tax Officer felt that no minor can represent any joint family in any firm and that the share income derived by him belongs to him in his individual capacity and was assessable in the individual hands of his mother, Suryamani, under the provisions of Section 64 of the Act. At the same time, he completed the assessment of the Hindu undivided family on a protective basis computing the income from both the firms.

On appeal, the Appellate Assistant Commissioner confirmed the view of the Income Tax Officer. On further appeal, the Tribunal held that there was no bar for the minor to represent the joint family, that there was a direct nexus between the family funds and the share income earned by the minor and hence the same should be rightfully assessed in the hands of the Hindu undivided family, represented by the minor, T. Surya Baparao. It was also further held that neither the capital nor the share income derived therefrom exclusively belongs to the minor, T. Surya Baparao, and hence the share income cannot be included in the income of the assessee, who is the mother of the minor. Thus, the appeal was allowed. Hence, the present reference at the instance of the Revenue.

Sri S. R. Ashok, learned standing counsel for the Income Tax Department, contended that the Tribunal has committed an error in holding that the income derived from the firms by the minor, who was admitted to the benefits of the firm, should be assessed in the hands of the Hindu undivided family. According to learned standing counsel, when once a minor is admitted to the benefits of the partnership firm, the income derived thereunder belongs to the minor as an individual, irrespective of the consideration for such income and, therefore, it is includible in the income of the parents of the minor individual. Therefore, the Assessing Officer was justified in including the income derived by the minor in the income of the mother.

In support of his contention, learned standing counsel relied upon the judgment of the Madras High Court in Commissioner of Income Tax Vs. Smt. S.J.S. Selvalakshmi Ammal, and also the judgment of this court in Commissioner of Income Tax, Andhra Pradesh Vs. B. Pandaiah and Company, . Learned standing counsel also contended that the judgment of the Supreme Court referred to and relied upon by the Tribunal has no application to the facts of the present case, as the apex court was not considering the provisions of Section 64 of the Act. Hence, he sought for answering the questions referred by the Tribunal in favour of the Revenue.

Though notice is served on the respondent-assessee, none appeared on her behalf. Hence, the reference was heard and answered on merits.

In this reference, there is no dispute as to the facts of the case. Admittedly, the late T. Paparao, husband of the assessee was a partner, representing the Hindu undivided family in two firms, viz., T. Baparao and Sons and Sri Laxminarasimha Tile Works. It is also an admitted fact that the said Hindu undivided family was having credit balance of Rs. 83,063.97 in the first firm, i.e., T. Baparao and Sons, and Rs. 59,044.08 in the second firm, i.e., Sri Laxminarasimha Tile Works. After the death of the karta, who was representing the Hindu undivided family as a partner, in the reconstituted firm, the minor son of the karta was admitted to the benefits of the partnership, through his guardian, the mother, who is the present assessee, by investing a sum of Rs. 70,000 out of the amount standing to the credit of the Hindu undivided family in both the firms.

Now the issue is whether the benefit of profits received by the minor belongs to him in his individual capacity or to the Hindu undivided family. It is not in dispute that while the minor was admitted to the benefits of the firm, an amount of Rs. 70,000 belonging to the Hindu undivided family funds were invested in the partnership business. The share of benefit offered to the minor is not for any service rendered by him, but in lieu of the investment of the Hindu undivided family funds in the business. Therefore, the income received by the minor by way of admission to the benefits of the partnership firm relates to the investment of the Hindu undivided family funds. Therefore, there is a direct nexus between the income received by the minor by way of admission to the benefits of the firm with reference to the investment of the Hindu undivided family hinds in the partnership business.

Almost an identical issue was considered by the apex court in the case of Y.L. Agarwalla and Others Vs. Commissioner of Income Tax, Central Calcutta, In that case, one Yudhisthir Lal Agarwalla, karta of a Hindu undivided family, was a partner in a firm, Grand Smithy Works, having 36 per cent. shares therein. One of the clauses of the partnership firm contemplates that the death or retirement of any of the partners shall not have the effect of dissolving the partnership and that the business be carried on by the surviving partners and the heirs or legal representatives of the deceased and/or retiring partner or if mutually agreed upon, between the surviving partners and heirs, etc., of the deceased or retiring partner with outsiders also. The karta of the Hindu undivided family died on December 18, 1967, leaving behind him his widow, six daughters and three minor sons. After the death of the karta, the widow, for herself and representing four major daughters, wrote to the firm declining to exercise the option reserved under the clause referred to above and refused to join the partnership business and by a fresh deed dated January 11, 1968, the surviving partners admitted three minors to the benefit of the partnership firm, each having 14 per cent. share and continued to carry on the business with effect from December 19, 1967. Clause 6 of the fresh deed ensured to the firm the continued use of the capital of the Hindu undivided family standing in the account of the karta, who was representing the Hindu undivided family as a partner. Then the issue before the court was whether the share of profits allocated to the three minor sons belonged to the family or was to be assessed to Income Tax in their hands. The apex court, after elaborately considering the contentions, held (headnote) :

"Though the three minor sons could not in law be regarded as the nominees or benamidars of the Hindu undivided family in the firm, the incorporation of clause 6 in the new partnership deed and the factual interest-free retention and utilisation of the family''s funds by the firm indicated that the new partnership under the deed dated January 11, 1968, was brought about with the tacit assent and agreement on the part of the widow representing the family and that the quid pro quo for admitting the three minor sons to the benefits of the partnership was the continued use, free of interest, of the capital amount lying in Y''s account by the firm ensured to it by Clause 6. There was, therefore, direct and substantial nexus between the share income allocated to the three minor sons and the family funds that remained with and were utilized by the firm : the share income received by the three minor sons was earned with the aid and assistance of the family funds and was directly related to utilisation of such funds by the firm, and the family had also suffered detriment inasmuch as the capital amount lying to the credit of Y was utilised by the firm free of interest; further, there was no question of any services being rendered by the three minor sons. Therefore, the share income was a return made to the family because of the investment of the family funds in the business and the share income was not the individual income of the minor sons but was the income of the Hindu undivided family and had to be assessed to tax in the hands of the family."

Learned standing counsel, however, contended that the abovesaid judgment does not apply to the facts of the present case inasmuch as the apex court was not considering the provisions of Section 64 of the Act. Though the apex court was not considering the provisions of Section 64 of the Act, it was considering the question with reference to the nature of income derived by the minors, who are admitted to the benefits of the partnership firm and in that context held that when there was a nexus between the Hindu undivided family funds and the benefit of the partnership by way of admission of the minors to the benefits, the income derived by way of benefit from the firm relates to the Hindu undivided family, whose funds were made available to the firm for its business. When once the income derived in that process does not belong to the individual, but belongs to the Hindu undivided family, such income cannot be includible in the income of the assessee-mother in terms of Section 64 of the Act, but assessable as the income of the family.

Learned standing counsel also relied upon a decision of this court in Commissioner of Income Tax, Andhra Pradesh Vs. B. Pandaiah and Company, That was a case where in a partnership of two brothers, the third brother, who was deaf and dumb, was admitted to the benefits of the firm giving a l/3rd share in the profits. When the firm presented an application for registration, the Income Tax Officer rejected to register the same on the ground that an adult cannot be admitted to the benefits of the partnership firm. This view was confirmed by the first appellate authority as well as by the Tribunal. But, however, the Tribunal, on a new ground that the benefit of l/3rd to the deaf and dumb brother could be considered as charitable, directed the Income Tax Officer to grant registration. On a reference, a Division Bench of this court, negatived the contention of the assessee and answered the question in favour of the Revenue holding that the Tribunal cannot make a new ground for the first time, that too reserving a share to the extent of 1/3rd for charity. The issue as well as the facts in the above case are totally different and, therefore, the above decision is not applicable to the facts of this case.

In Commissioner of Income Tax Vs. Smt. S.J.S. Selvalakshmi Ammal, , one Jayarama Pillai was a partner in a firm called ASRM Subbiah Pillai, Trichy company, representing the Hindu undivided family. The said Jayarama Pillai died on July 21, 1973, leaving behind him his wife, Selvalakshmi Ammal, the assessee herein, his minor son Muthukumar, and six daughters, of which four were unmarried, as legal heirs. Before his death, Jayarama Pillai executed a document, according to the Revenue, a will, under which he bequeathed his share, including the income, to his minor son, Muthukumar, by appointing his brother-in-law, i.e., maternal uncle of the minor, as guardian. In the assessments of the assessee, who is the mother of the minor, for 1976-77 and 1977-78, the assessments were framed without clubbing the income of the minor, but subsequently the assessments were reopened and assessments were framed not only for those years but also for 1978-79 and 1979-80, clubbing the income of the minor received from the firm in which he was admitted to the benefits of the firm. When the said assessments were assailed before the Appellate Assistant Commissioner, he concurred with the view of the Assessing Officer. But, however, when the matter was carried to the Appellate Tribunal, the Tribunal took the view that there was no bequest and the admission of the minor to the benefits of the firm was only in lieu of the capital lying to the credit of the erstwhile Hindu undivided family, represented by its karta, Jayarama Pillai, and, therefore, the income received by the minor has got nexus to the investment of the Hindu undivided family, and, therefore, the said income is not the individual income of the minor and not includible in terms of Section 64(1)(iii) of the Act. A Division Bench of the Madras High Court, on the facts, gave a finding that the minor succeeded to the properties, as per the document executed by Jayarama Filial, in his individual capacity and, therefore, the income derived by the minor, Muthukumar is computable and includible to the assessee, the mother of the minor in terms of Section 64(1)(iii) of the Act. The Division Bench also distinguished the judgment of the apex court in the case of Y.L. Agarwalla and Others Vs. Commissioner of Income Tax, Central Calcutta, on the premise that the apex court was not considering the issue with reference to the provisions of Section 64(1)(iii) of the Act. It was also further observed that when once the minor is admitted to the benefits of the partnership firm and income accrues due to the fact of such admission of the minor to the benefits of the partnership firm, it is not necessary to probe further into the question what is the source of investment of the minor in the partnership firm. We are unable to agree with the above observations of the Madras High Court. It would be pertinent to refer to the observations of the learned author in Kanga and Palkhivala''s The Law and Practice of Income Tax, eighth edition, Volume I, which was also referred in that decision, and it reads as follows (page 942) :

"This section applies irrespective of whether the assessee''s spouse or minor children are allowed a share in the firm without any contribution on their part to the capital or assets of the firm, or whether they bring their own capital or become members of the firm in their own right. Thus this section applies to a case where the members of a Hindu family, upon severance of the joint family status, continue to run the family business in partnership and a minor son''s share in the family property remains in the firm as his contribution to the assets of the partnership."

The provisions of Section 64 were brought into the statute in order to plug the loophole of diversion of income from being taxed in the hands of the individuals. If the income received in the hands of the minor or any other individual referred to in the said provision is as a result of diversion of income by the individual, it would be proper to construe the provision so as to avoid such contingency. But in the facts of the present case, admittedly, the capital is owned by the Hindu undivided family, which was a partner represented by its karta. After the death of the karta, the sole minor son of the karta was admitted to the benefits of the partnership firm, which had utilised the capital or part of the capital of the erstwhile Hindu undivided family. The said capital was utilized by the firm without paying any interest. If it is held that the income derived by way of benefits of the firm, is as a result of the admission of the minor, then it would result in the detriment of the Hindu undivided family, whose funds have been utilized. If such a view is held to be good, it would also be contrary to the settled position of law that where any income or property is derived or acquired with the aid and assistance of joint family funds, the income or the assets acquired thereunder would be considered as joint family income or properties. In the light of the above, we are of the considered opinion that the view taken by the Tribunal is just and reasonable. The income received by the minor, who was admitted to the benefits of the firm, is to be treated as income, of the Hindu undivided family and not of the individual minor, and in such case it would not be indudible in the income of the assessee u/s 64(1)(iii) of the Act.

Under the above circumstances, we answer all the questions referred to us in the affirmative, against the Revenue and in favour of the assessee.