468. Scope and applicability of sub-section (1) explained with reference to Tribunal decision in Lalchand Bhalla’s case
1. Doubts have been expressed by certain Commissioners of Income-tax regarding the scope and applicability of sub-section (1) of section 64.
2. In this connection the decision of the Income-tax Appellate Tribunal, Chandigarh Bench in the case of Lalchand Bhalla v. ITO [IT Appeal No. 400 of 1973-74, dated 30-11-1974] may be referred to where the Appellate Tribunal has discussed the applicability and scope of sub-section (1) of section 64. An extract of the said decision of the Appellate Tribunal is enclosed [printed here as Annex].
Circular : No. 174 [F. No. 237/20/75-A & PAC-II], dated 12-8-1975.
ANNEX – EXTRACTS FROM TRIBUNAL’S DECISION REFERRED TO IN CLARIFICATION
The other item pertains to the income amounting to Rs. 20,301 that directly arose to the minor Rajinder Mohan during the year of account under consideration from his having been admitted to the benefits of partnership in the firm Permanand Bhalla & Co. to the extent of 20 per cent share in the firm’s profits. The assessee is the father of the said minor and is one of the three adult partners in the said firm. Each of the adult partners purports to represent the respective Hindu undivided family whose karta that adult partner is. The Commissioner considered the Income-tax Officer’s order erroneous as he failed to include in the assessee individual’s assessable total income, the share income earned by Rajinder Mohan as aforesaid.
The contention of the assessee before us was that as the share income earned by Lal Chand, assessee, from the said partnership firm was not earned by him as an individual, there arose no question of applicability of section 64(1)( ii) to his case. It is common case of the parties that the said share income of Lal Chand is assessed and taxed not in his hands as an individual but in the hands of the Hindu undivided family known as Lal Chand Bhalla & Sons whose “karta” he is. From this, the assessee’s learned counsel wishes us to infer that the Income-tax Officer’s order suffered from no error when he did not include the said amount of Rs. 20,301 in the computation of the assessee’s income. We are unable to agree. The fact remains that the assessee admittedly had income from sources other than his partnership of the said firm and according to the instrument of partnership, dated 6-3-1971, Lal Chand is a partner and that his minor child Rajinder Mohan, has been admitted to the benefits of that partnership. That being the position, no other requirement of law was there, in our opinion for applying section 64(1)(ii) to the instant case. Shri Vaish, appearing for the assessee, felt that by adopting the said approach for interpreting the meaning and scope of section 64(1)(ii) we are making out a new case which was not present to the mind of the learned Commissioner himself and that it would not be correct for the Tribunal to sustain the Commissioner’s order on a ground not mentioned in his order. We are afraid, the Commissioner’s order is rather brief and we are unable to reach therein that he purported to base his order, so far as the item of minor’s income is concerned on any other ground which ground according to the assessee is unsustainable. We, therefore, do not agree that a new case is being made out by us. A reference to section 64(2) would, on the other hand, suggest that the Legislature was fully conscious that an individual could be a member of a Hindu undivided family. Thus, if an individual being a “Karta” or an ordinary member of a Hindu undivided family become a partner of any firm on the basis of investment of capital drawn from the Hindu undivided family’s funds so that his share of profits in the said firm and the interest earned on such capital contribution was in law to be assessed as income in the hands of the Hindu undivided family concerned, such individual did not cease to be a partner in the firm so far as section 64(1) was concerned.
It was also contended on the assessee’s side that section 64 was enacted to suppress a certain mischief, i.e., that earlier an individual partner was able to reduce his tax liability by parting with a portion of his share of profits in the firm in favour of his spouse or minor child by bringing in the spouse as a partner, or by admitting the minor child to the benefits of the partnership. The argument ran that there was no scope for such mischief when the individual’s income from the patnership was fully assessed as the income of the Hindu undivided family only. We fear, we are not impressed by this argument. The object of the Legislature as to suppression of a particular mischief need, in our opinion, be gone into only when the language used by the Legislature admits of more than one meaning. In that case, of course, the object of the Legislature can be looked to and also an interpretation beneficial to the assessee can be adopted in a case of a deeming provision like the instant one. We, however, agree with, the learned departmental representative that section 64(1) is not open to two meanings so far as the present controversy is concerned as to the Income-tax Officer’s or the learned Commissioner’s order being erroneous is concerned. The assessee is a partner in the firm in question. He is a partner as an individual as a Hindu undivided family could not in law be a party to an agreement of partnership. The fact that the Hindu undivided family has the sole beneficial interest in the share income earned by the assessee individual firm the said firm does not exclude the applicability of section 64(1) to the case.