JUDGMENT
S.M. Jhunjhunuwala, J.
1. By this reference filed under section 256(1) of the Income-tax Act, 1961, the following questions of law have been referred to this court by the Income-tax Appellate Tribunal at the instance of the Revenue :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the share profit of the assessee’s spouse Smt. Lina V. Sanghavi, from the firm of Ashit Constructions, Pune, is not includible under section 64(1)(i) of the Act, in the assessment of the assessee ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in cancelling the Commissioner’s order under section 263 of the Act ?”
2. This reference relates to the assessment year 1975-76.
3. The assessee was a partner in the firm of Messrs. Ashit Construction in his representative capacity as karta of his Hindu undivided family. Smt. L. V. Sanghavi, the wife of the assessee, was also a partner in the said firm in her individual capacity. In the assessment of the income of the assessee for the assessment year 1975-76, the Income-tax Officer did not include the share of the said Smt. L. V. Sanghavi in the profits of the firm in the total income of the assessee. The Commissioner of Income-tax took the view that the Income-tax Officer erred in not including the share of profit of the said Smt. L. V. Sanghavi in the total income of the assessee and, therefore, issued a notice under section 263 of the Income-tax Act, 1961 (for short, “the Act”), to the assessee calling upon him to show cause as to why the assessment order passed by the Income-tax Officer should not be set aside with the direction to the Income-tax Officer to include the share of the said Smt. L. V. Sanghavi in the profits of the said firm in the foal income of the assessee. On behalf of the assessee, objections were raised against such intended inclusion. However, the Commissioner of Income-tax rejected the objections of the assessee, set aside the assessment order of the Income-tax Officer and directed the Income-tax Officer to compute the income of the assessee after adding the share of the said Smt. L. V. Sanghavi in the profits of the said firm in the total income of the assessee. Aggrieved with the order of the Commissioner of Income-tax, the assessee preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal held in favour of the assessee, vacated the order of the Commissioner of Income-tax and upheld the order of the Income-tax Officer. It is in these circumstances the present reference has been filed at the instance of the Revenue.
4. Section 64(1) of the Act, as it stood at the relevant time, reads as follows :
“64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly –
(i) to the spouse of such 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;
(iii) subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart;
(iv) subject to the provisions of clause (i) of section 27, to a minor child, not being a married daughter of such individual, from assets transferred directly or indirectly to the minor child by such individual otherwise than for adequate consideration; and
(v) to any person or association of persons from assets transferred otherwise than for adequate consideration to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minor child (not being a married daughter) or both.
Explanation. – For the purpose of clause (i), the individual in computing whose total income the income referred to in that clause is to be included shall be the husband or wife whose total income (excluding the income referred to in that clause) is greater; and, for the purpose of clause (ii), where bath the parents are members of the firm in which the minor child is a partner, the income of the minor child from the partnership shall be included in the income of that parent whose total income (excluding the income referred to in that clause) is greater; and where any such income is once included in the total income of either spouse or parent, any such income arising in any succeeding year shall not be included in the total income of the other spouse or parent unless the Income-tax Officer is satisfied, after giving that spouse or parent an opportunity of being heard, that it is necessary so to do.”
5. The aforesaid sub-section (1) was substituted by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976. Since the assessment in the instant case pertains to the assessment year prior to the coming into force of the substituted sub-section (1), it is not necessary to refer to the same.
6. As per section 64(1)(i) above, in computing the total income of any individual, there could be included all such income as arose directly or indirectly to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual was a partner. The sub-section applied only to the computation of “the total income of any individual”. Therefore, unless an individual was a partner in the firm in individual capacity in which the spouse had a share, the spouse’s share of profits in such a firm could not be included in the individual’s total income. Further, what was to be included in the total income of an individual under clause (i) was the income of a spouse arising directly or indirectly “from the membership of the spouse” in the firm of which the individual was a partner. The income received from the firm by the spouse under any other contract with the firm or in any other capacity did not fall under clause (i) of sub-section (1) of section 64 and was not includible in the other spouse’s total income. In the facts of the case, the assessee was a partner in the said firm in his capacity as a karta of his Hindu undivided family. The said Smt. L. V. Sanghavi, wife of the assessee, was also a partner in the said firm in her individual capacity. The question that arises for consideration is whether, on a proper interpretation of the said section 64(1)(i) of the Act, the income which arose to the said Smt. L. V. Sanghavi from the membership of the said firm in which the assessee was a partner in his capacity as karta of his Hindu undivided family, could be included in his individual income.
7. A partnership, though a creature of contract, does recognise dual capacity of the individual becoming partner therein. A contract of partnership has no concern with the obligation of the partners to others in respect of their shares in the profits of the partnership. It regulates the rights and liabilities of the partners. As held by the Supreme Court in CIT v. Bagyalakshmi and Co. [1965] 55 ITR 660, 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. Thus, the dual position of a partner “qua the partnership” and “qua the third parties” has been clearly recognised. Hence, an individual, who is a partner in a representative capacity as karta of a Hindu undivided family occupies a dual position – qua the partnership, he functions in his personal capacity; qua the third parties, he functions in his representative capacity.
8. Under the Hindu law a joint family is one of status. The income-tax law gives the Income-tax Officer power to assess the income of a person in the manner provided by the Act. Sections 4 and 5 of the Act which are the charging sections levy tax on every person, and “person” is defined by clause (31) of section 2 as including amongst others “a Hindu undivided family”. When an individual carries on business in the partnership with others as a representative of his Hindu undivided family, the income arising from the partnership to such individual is the income of the Hindu undivided family and is assessable in the hands of the Hindu undivided family and not the karta, who is a partner. He is not subject to tax in such a case in his personal capacity.
9. As per the Explanation to section 64(1), for the purpose of clause (i), the individual in computing whose total income the income referred to therein was to be included was the husband or wife whose total income was greater. The Explanation thus made it clear that the “income” referred to therein was to be the income of the husband or the wife. Unless it was so, the provisions of section 64(1) had no application.
10. A question similar to the question referred to us for opinion was considered by a Division Bench of the Gauhati High Court in the case of CIT v. Jhabarmal Agarwalla [1990] 184 ITR 431 of which one of us (Dr. B. P. Saraf J.) was a member. The facts in that case have been similar to the facts in the case before us. In that ease also the assessee was a partner in a representative capacity as karta of his Hindu undivided family and his wife was also a partner in her individual capacity. After considering various judgments cited including that of the Supreme Court in the case of Bagyalakshmi and Co. [1965] 55 ITR 660, the Division Bench aptly analysed section 64 of the Act and has held that in a case where the karta of a Hindu undivided family is a partner in his representative capacity, the income does not arise to him. The income arises to the Hindu undivided family and by virtue of the provisions of the Act itself, it is assessable in the hands of the Hindu undivided family. We are in agreement with the view taken by the Gauhati High Court in the case of Jhabarmal Agarwalla [1990] 184 ITR 431. We hold that for the purpose of assessment and levy of income-tax, the Act recognises the representative capacity of a partner. We further hold that the expression “individual” used in section 64(1) of the Act was required to be read in the context of income arising to such individual from the membership of the partnership. Since the income did not arise to the assessee individually, section 64(1)(i) had no applicability. Since the assessee was a partner in his representative capacity as karta of his Hindu undivided family, the income from the said firm did not arise to him. The income arose to the Hindu undivided family of which the assessee was a karta and by virtue of the provisions of the Act itself, it was assessable in the hands of the Hindu undivided family of the assessee. Hence, the share of Smt. L. V. Sanghavi in the profits of the firm could not have been added to the total income of the assessee under section 64(1)(i) of the Act.
11. In view of what is stated above, we answer both the questions referred in the affirmative, that is, in favour of the assessee and against the Revenue.
12. There shall be no order as to costs.