AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
1984 (10) TMI 240
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.... Arunachalam was also a partner in that capacity in another firm called M/s. Sunrise Industries. There, his minor children had been admitted to the benefits of the partnership. For the assessment year 1971-72, Sri C. Arunachalam as an individual filed his return of income made up of property income and refund of annuity deposit. The ITO completed the assessment determining the assessee's total income at Rs. 12,36.8 made up of property income of Rs. 10,643 and refund of annuity deposit (other sources) of Rs. 1,725 in the status of an individual. For the assessment year 1972-73, the ITO made a similar assessment accepting the return of the assessee. In both the said assessments, the share income accruing to the wife and children in the said firms was not brought to tax in the assessee's hands. I.T.R.C. No. 85 of 1978 : Sri K. Anantha Shenoy, the assessee herein, was a partner representing his HUF in the firm of M/s. Gajanana Cloth Stores (Wholesale). His three minor children were also admitted in that firm to the benefits of the partnership. The assessee as an individual filed his return of income being the remuneration received from the firm of M/s. Gajanana Cloth Stor....
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....individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner ; (ii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm in which such individual is a partner. " According to Mr. Srinivasan, learned counsel for the Revenue, this section requires that-(i) there should be a partnership firm carrying on business; (ii) the spouse and/or minor child of an individual should be a partner or admitted to the benefits of the partnership firm; and (iii) such individual should also be a partner of that firm. If these factors co-exist, then s. 64 operates and the share income of the spouse and/or the minors from such firm should be included in the total income of the individual for the purpose of assessment. Mr. Sarangan and Mr. Prasad characterised the submission of Mr. Srinivasan as purely a traditional literal-minded approach without due regard to the intention of the Legislature or the purpose for which s. 64(1) was enacted. The learned counsel urged that the words " any individual " and " such individual " occurring in s. 64(1) do not cover an individual like the karta who b....
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....oned to him in the partition of a Hindu undivided family. " These recommendations were duly considered by the Central Government and as a result thereof, Act IV of 1937 was enacted introducing s. 16(3) in the Indian I.T. Act, 1922. The relevant portion of s. 16(3) read thus : Section 16(3) : " In computing the total income of any individual for the purpose of assessment, there shall be included-- (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly-- (i) from the membership of the wife in a firm of which her husband is a partner ; (ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner ; ". The scope of this section was considered by the Supreme Court in CIT v. Sodra Devi [1957] 32 ITR 615. The question that arose for consideration in that case was whether the word " such individual " in s. 16(3)(a)(ii) included also a female, and the income of minors derived from the partnership firm to which they had been admitted to the benefits was liable to be included in the income of t....
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....nds entering into nominal partnerships with their wives and fathers admitting their minor children to the benefits of the partnerships of which they were members. This evil was sought to be remedied by the enactment of section 16(3) in the Act. If this background of the enactment of section 16(3) is borne in mind, there is no room for any doubt that howsoever that mischief was sought to be remedied by the amending Act, the only intention of the Legislature in doing so was to include the income derived by the wife or a minor child, in the computation of the total income of the male assessee, the husband or the father, as the case may be, for the purpose of assessment... " Sodra Devi's case [1957] 32 ITR 615 (SC) has thus laid down the following three principles: (i) Section 16(3) aimed at foiling husbands' attempt to avoid or reduce the incidence of tax by entering into nominal partnerships with their wives. It was also to prevent tax avoidance by fathers admitting their minor children to the benefits of partnerships of which they were members ; (ii) that the words " any individual " and " such individual " occurring in s. 16(3) were restricted in their connotation and ne....
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....h respect to statutes lumped under the single term "interpretation". We know of no statute which merely declares a rule, with no purpose or objective behind. Every statute, whether addressed to individuals or institutions, has an aim and purpose. That could be gathered only by a rational study of the law. A rational study of law is, to a large extent, a study of its history or the path of the law. History must be a part of the study because, without it, we cannot know the precise scope of rules. We cannot find out why a rule of law has taken its particular shape. Such a study should be the first step towards an enlightened scepticism. In every country, and more so in a developing country, the old laws yield place to new and so too the creative powers of courts in the art of interpretation of statutes. The strict constructions which go by the letter of law dominated the legal scene in the 19th century. The strict constructionists stood by the " golden rule " laid down in Grave v. Barrison [1857] 6 HL 61. The Lord Chancellor said there, that courts should " adhere as rigidly as possible to the express words that are found and to give those words their natural and ordinary meaning ....
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....ow a blinkered way to lay down the law. They should use their hindsight as well. So far as the fiscal statutes are concerned, we must remember one more principle. The provisions in a fiscal statute are not to be so construed as to furnish a chance of escape and a means of evasion. In case of doubt, the fiscal statute should be construed in favour of and beneficial to the subject. Now, we may revert to the question for consideration. The crux of the question is whether the words " any individual " and " such individual " occurring in s. (64(1) include the karta of a HUF. At the heart of the question is the difference between an individual becoming a partner in his personal capacity and an individual becoming a partner in his representative capacity. The legal position of the karta when he becomes a partner in a firm has been explained by Subba Rao J., as he then was, in CIT v. Bagyalakshmi & Co. [1965] 55 ITR 660, 664 (SC) : " 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 implie....
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....nbsp; " 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 hypothesis excludes from such computation, 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 or 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. In our opinion, the phrase 'in which such individual is a partner' occurring in s. 64 includes a human being who may be the karta of an HUF... " While disagreeing with the view taken by the other High Courts, there and then the learned Chief Justice concluded (at p. 864) : " As mentioned above, s. 64 d....
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....ort which has been so drafted as to deal only with the abuses to which I have referred. " We may also hark back to the recommendation No. (iii) made in the Income-tax Enquiry Report, 1936, which we have extracted earlier. While dealing with the minor's income, the report said thus: " the income of a minor derived from assets apportioned to him in the partition of a Hindu undivided family " should be deemed to be the income of the father. But this recommendation was not accepted by the Government while enacting s. 16(3) of the Indian I.T. Act, 1922. There is no dispute on this aspect. Section 16(3) of the Indian I.T. Act, 1922, as we have already observed, was primarily designed to strike at the evil resulting from the widespread practice of husbands entering into nominal partnerships with their wives and fathers admitting their children to the benefits of partnerships. It was solely aimed at foiling an individual's attempt to avoid or reduce the incidence of tax by admitting the spouse as a partner, or getting a minor child admitted to the benefits of partnership in a firm or adopting any other modes covered by the section (see CIT v. Manilal Dhanji [1962] 44 ITR 876 (SC....
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....t is an equally well settled principle of construction that where alternative constructions are equally open, that alternative is to be chosen which will be consistent with the smooth working of the system which the statute purports to be regulating ; and that alternative is to be rejected which will introduce uncertainty, friction or confusion into the working of the system. " There is yet another reason why we should not accept the construction suggested by Mr. Srinivasan. The constitutional validity of s. 16(3)(a)(i) of the Indian I.T. Act, 1922, was upheld by the Supreme Court by confining the same to a few of the intimate members of a family who ordinarily are under the protection of the assessee and are dependent upon him. This is what the Supreme Court observed in Balaji v, ITO [1961] 43 ITR 393, 404 : " The object sought to be achieved was to prevent the prevalent abuse, namely, evasion of tax by an individual doing business under a partnership nominally entered with his wife or minor children. The scope of the provisions is limited only to a few of the intimate members of a fam....
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....(1)(f) and (g) of the Constitution. " This is also the reason with which the validity of s. 64(1)(i) and (ii) could be sustained. The wife and children envisaged under s. 64(1)(i) and (ii) of the Act are those that are dependent upon the individual. They are dependent upon his personal earnings and not those who have a right to be maintained out of the family funds by being members of the HUF. If we ignore this principle and widen the scope of the word " individual " by including a partner in his representative capacity, we would be driving the section perilously close to the realm of arbitrariness and unconstitutionality. It is well settled that a statute should be so construed as to avoid grave doubt as to its constitutional validity. It should not be given a broad construction, if its validity could be saved by a narrow one. The decision of the Madras High Court in CIT v. Balasubramaniam [1984] 147 ITR 732 proceeded solely on the literal meaning of the word " individual " in s. 64(1)(ii) ignoring altogether the purpose for which the section was enacted. V. Balasubrahmanyan J., who spoke for the Bench of the Madras High Court, observed (p. 738) : ....
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....in a firm. If the trustee's spouse or a minor child are to be a partner of that firm, the income realised by the spouse or the minor child in that firm will have to be added to the income of the trustee earned from sources other than partnership in his individual capacity ...... We are unable to share the view of the Allahabad High Court that the words 'in which such individual is a partner ' take in a karta or trustee or representative of a group of persons. The expression 'individual' only takes in a person in his individual capacity and does not take in the karta of a Hindu joint family or a trustee or one who acts as a representative of others. " We respectfully agree with these observations of the learned Chief Justice of the Andhra Pradesh High Court. The Gujarat High Court in Dinubhai Ishvarlal Patel v. Dixit, ITO [1979] 118 ITR 122, has concurred with the view of the Andhra Pradesh High Court. B. J. Divan C.J., who spoke for the Bench, also gave some more reasons in the following terms (at p. 130) : " It can be said that it is just by a chance that the karta was....
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....Sodra Devi's case, in the light of the Income-tax Enquiry Report, 1936, and the decision of the Central Government for the purpose of enacting s. 16(3) in the Indian I.T. Act, 1922, it would be clear that the words " such individual is a partner " occurring in s. 64(1) cannot include an individual who may be the karta of a HUF or any other person in his representative capacity. At the risk of repetition, we may again point out that the provisions of the section were intended to ensure that the assessee-individual does not escape his personal liability to income-tax by different types of arrangements. The Explanation I to s. 64(1) introduced by the Finance Act, 1979, also supports our view. The Punjab and Haryana High Court in CIT v. Anand Sarup [1980] 121 ITR 873 and the Delhi High Court in Prayag Dass Rajgarhia v. CIT [1982] 138 ITR 291, also agreed with the view taken by the Andhra Pradesh High Court and the Gujarat High Court. The questions of law referred by the Tribunal for the opinion of this court have been referred to this Full Bench. The question of law referred in I.T.R.C. No. 89/76 is : &nb....