Madhya Pradesh High Court
Smt. Rukmani Agrawal vs Commissioner Of Income-Tax on 8 May, 1986
Equivalent citations: [1988]170ITR133(MP)
JUDGMENT C.P. Sen, J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the assessee by the Income-tax Appellate Tribunal to answer the following question :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the share of profits derived by Shri Ramdhan Agrawal in his capacity as karta of the Hindu undivided family from the firm of M/s. Ramdhan Agrawal could be included in the hands of the assessee under Section 64 of the Income-tax Act ?
2. The assessee is a partner in the firm, M/s. Ramdhan Agrawal. She was being assessed in the status of an individual. Her husband, Shri Ramdhan Agrawal, was also a partner in the firm, M/s. Ramdhan Agrawal, as a karta of the Hindu undivided family and, therefore, Shri Ramdhan had been representing it in his capacity as karta of the Hindu undivided family. Therefore, the assessee contended that her income cannot be clubbed with that of the income of her husband as a partner in the firm, M/s. Ramdhan Agrawal, since he was a partner in his capacity as karta of the Hindu undivided family. The Income-tax Officer was of the view that the Hindu undivided family could not enter into a partnership as has been held by various High Courts and that in a partnership firm, it is always the individual who is a partner. According to the Income-tax Officer, it did not matter whether the income derived by the husband was ultimately assessable in the hands of the Hindu undivided family of which Ramdhan was the karta. The Income-tax Officer, on consideration of Section 64(1)(i) of the Act, found that the income arising to the spouse from the membership in the firm was includible in the income of the assessee. Therefore, he clubbed the income of the husband with the income of the assessee for the purposes of assessment. An appeal was preferred before the Appellate Assistant Commissioner which was dismissed. In further appeal, the Income-tax Appellate Tribunal held that though the assessee is an individual in the instant case and the income earned by Shri Ramdhan Agrawal as karta of the Hindu undivided family might be includible in the assessment of the Hindu undivided family, none the less, when Ramdhan entered into a contract with his wife for entering the firm, M/s. Ramdhan Agrawal, he was binding himself to the terms of the contract. It is entirely another matter that by virtue of his membership of the Hindu undivided family and by virtue of his having exploited the nucleus of the Hindu undivided family funds, the income earned by him from the firm was assessable in the hands of the Hindu undivided family of which he was the karta. Therefore, while assessing the assessee, the income of her husband was rightly clubbed with that of her income as a partner of the firm. The cases relied on by the assessee, i.e., Madho Prasad v. CIT [1978] 112 ITR 492 (All), CIT v. Sunka Sankaraiah [1978] 113 ITR 313 (AP) and Dinubhai Ishwarlal Patel v. ITO [1979] 118 ITR 122 (Guj) were clearly distinguishable because those cases were concerned with the assessment of the Hindu undivided families and not of individuals under Section 64. Thereafter, the assessee made an application for reference of the aforesaid question.
3. Under section 64(1)(i) of the Income-tax Act, in computing the total income of an individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual from the membership of the spouse in a firm carrying on business in which such individual is a partner. Therefore, the present case is clearly governed by this provision and the assessee has been rightly assessed under the Act. The Allahabad High Court in Madho Prasad v. CIT [1978] 112 ITR 492 has held that where the karta of a Hindu undivided family enters into a partnership with others, as far as his relation to the firm and his rights and obligations in regard to the other partners are concerned, he is a partner only as an individual, though his joint family is entitled to get from him his share in the profits of the firm and the joint family is liable for his share of losses in the firm. The joint family, as such, does not become a partner nor will other members of the family become partners of that firm. A Full Bench of the Allahabad High Court in Sahu Govind Prasad v. CIT [1983] 144 ITR 851 has held that a partner of a firm may have a dual capacity--representative and personal. He may be a representative, i.e., karta qua others, i.e., other than the partners representing the members of the Hindu undivided family. But with his partners he functions in his personal capacity, A Hindu undivided family is itself an assessable unit and the income earned as the karta is taxed in the hands of the Hindu undivided family. No part of such income is computed in his assessment. When Section 64 speaks of "computation of total income of any individual", it, ex hypothesi, excludes from such computation income which is assessable in the hands of the Hindu undivided family. However, the karta remains an individual though the income which he earns in a representative capacity is taxable in the hands of the Hindu undivided family. The karta is also assessable in his individual status. Section 64 confines itself to such individual assessment. It seeks to add the income of the spouse or minor child in the computation of income in the individual assessment. If the share 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 Section 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. This matter has been made clear by amending Section 64 by the Amending Act of 1975. The cases cited by the assessee before the Tribunal and the other cases, i.e., CIT v. Rameshwarlal Sanwarmal [1971] 82 ITR 628 (SC), Y. L. Agarwalla v. CIT [1978] 114 ITR 471 (SC), Arunachalam v. CIT[1985] 151 ITR 172 (Kar) and CIT v. S. K. Thakkar [1985] 154 ITR 303 (Bom) are clearly distinguishable because those cases were in respect of assessment of Hindu undivided families.
4. Therefore, we answer the question in the affirmative, i.e., in favour of the Revenue. Parties to bear their own costs.