Commissioner of Income Tax vs Smt. S.J.S. Selvalakshmi Ammal

N.V. Balasubramanian, J.—The assessee is a widow of one Jayarama Pillai of Thuraiyur, Trichy. The said Jayarama Pillai passed away on

21-7-1973 leaving behind him his wife Selvalakshmi Ammal (the assessee), his minor son Muthukumar and six daughters of which four were

unmarried as legal heirs. The said Jayarama Pillai, at the time of his death, was partner in the firm called, A.S.R.M. Subbiah Pillai, Trichy company.

According to the revenue, the said Jayarama Pillai bequeathed his share including income to his minor son Muthukumar by appointing his brother-

in-law, i.e., the maternal uncle of the minor as guardian and the minor son at the time of the death of his father Jayarama Pillai had properties of

current accounts as well as a share in the partnership firm. There were 11 partners in the firm A.S.R.M. Subbiah Pillai, Trichy company and the

assessee is one of the partners. The assessments under the provisions of the income tax Act, 1961 (�the Act�) in the case of the assessee for

the assessment years 1976-77 and 1977-78 were completed on the basis of the returns submitted by the assessee. The assessee also derived

share income from some other concerns, interest income and income from the other sources. Subsequent to the completion of the assessment for

the years 1976-77 and 1977-78, the ITO found that the minor child of the assessee, viz., J. Muthukumar, had derived certain share income from

A.S.R.M. Subbiah Pillai company and the same was includible in the hands of the assessee as per the provisions of clause (iii) of sub-section (1) of

section 64 of the Act. The assessments were reopened u/s 147(b) of the Act for both the assessment years 1976-77 and 1977-78 and in the

reassessments made, the minor�s share income from the firm was included in the total income of the assessee. Insofar as the assessment years

1978-79 and 1979-80 are concerned, the income of the minor was included in the hands of the assessee even in the original assessments. The

assessee preferred appeals against the orders of reassessment as well as the assessment made for the assessment years 1978-79 and 1979-80.

The AAC in the abovesaid appeals by the assessee held that the share income received by the minor son Muthukumar was earned only with the

aid and assistance of the family fund, and following a decision of the Supreme Court in the case of Y.L. Agarwalla and Others Vs. Commissioner

of Income Tax, Central Calcutta, he held that the share income received by the minor son was nothing but 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 son but was the income of the

HUF and had to be assessed to tax in the hands of the family. The AAC, therefore, held that to attract the provisions of section 64(1)(iii), the

income should have arisen directly or indirectly to the minor child and since the income has not arisen to the child, but arose to the HUF, there is no

question of invoking the provisions of section 64(1)(iii). When the income earned was not the income of the minor, according to the AAC, the ITO

was not justified in including the income of the minor on account of his admission to the benefits of partnership in the firm, viz., A.S.R.M. Subbiah

Pillai, in the hands of the assessee. In this view of the matter, he deleted the addition and allowed the appeals.

The revenue carried the matter by way of appeal before the Tribunal and the Tribunal held that the question to whom the income accrues is a

relevant question and just because the minor was admitted to the benefits of the partnership firm, the income did not automatically accrue to the

minor. Therefore, the Tribunal held that in each case, the question that has to be considered is to whom the income accrues. The Tribunal held that

the document left by the assessee�s husband though styled as a will cannot be regarded as a will, but only a document by which his brother-in-

law was directed to manage the affairs till his son Muthukumar attained majority. The Tribunal also noticed the relevant clause in the partition deed

and then came to the conclusion that the share income accrued to the joint family as there was no question of any service rendered by the minor

and the share income must be regarded as a return to the family because of the investment of the family funds in the business. In this view of the

matter, the Tribunal confirmed the order of the AAC and held that the minor was admitted to the benefits of the partnership firm only as a nominee

of the HUF in which he was a member along with his mother and minor sisters and since he was representing the joint family and he was not

admitted to the benefits of the partnership firm in his individual capacity, the income cannot be included in the hands of the assessee u/s 64(1)(iii).

Accordingly, the Tribunal dismissed the appeals preferred by the revenue.

The revenue having failed to get a reference, approached this Court and on the basis of the directions of this Court in T.C.P. Nos. 473 to 476

of 1983, dated 23-1-1984, the Tribunal has stated a case and referred the following questions of law for our consideration :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the share income arising to

minor Muthukumar from his admission to the benefits of partnership in A.S.R.M. Subbiah Pillai should not be included in the hands of his mother,

who is also a partner in the same partnership, in terms of section 64(1)(iii) of the income tax Act, 1961 ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the share income accruing to the

minor from the firm of A.S.R.M. Subbiah Pillai, actually belonged to the Hindu undivided family and, therefore, the provisions of section 64(1)(iii)

cannot be pressed into service in this case ?

Mr. C.V. Rajan, the learned counsel for the revenue, submitted that the minor was admitted to the benefits of the partnership firm and the share

income of the minor is includible in the hands of the assessee. He further submitted that the source of investment is irrelevant in considering the

question whether the provisions of section 64(1)(iii) are attracted or not. He placed reliance on the decisions of the Madhya Pradesh High Court in

(i) Commissioner of Income Tax Vs. Smt. Nirmala Devi, (ii) Commissioner of Income Tax Vs. Smt. Sobhagwantibai, and (iii) Chandrakala Bai

Naila Vs. Commissioner of Income Tax, and submitted that the provisions of section 64(1)(iii) are applicable and the income arising to a minor

child admitted to the benefits of a partnership firm is referable to the fact of admission of the child to the benefits of the said partnership firm and

such income is includible in the total income of the parent under the provisions of section 64(1)(iii). He further submitted that the question of source

of investment in the firm by the minor is not relevant. He also placed reliance on an earlier decision of this Court in the case of COMMISSIONER

OF INCOME TAX, MADRAS Vs. K M S LAKSHMANIER., wherein this Court was considering the provisions of section 16(3)(a)(ii) of the

Indian income tax Act, 1922 and held that even though the minors had contributed to the partnership assets, their shares of the joint family

property, minors� share income from the partnership firm should be included in the father�s income. He further submitted that the decision in

Y.L. Agarwalla�s case (supra ), relied upon by the Tribunal, considered only the question with reference to the income aspect, but the Apex

Court has not considered the provisions of section 64(1)(iii).

Mr. Janakiraman, the learned counsel for the assessee, on the other hand, contended that the minor was admitted to the benefits of the

partnership firm and the funds of the joint family were employed in the firm and, therefore, the share income received is really the income of the

HUF and as the character of the property is the joint family property, the income also should belong to the joint family. He, therefore, submitted

that since it is not the income of the minor, the provisions of section 64(1)(iii) are not applicable to the facts of the case.

We have carefully considered the submissions of the learned counsels for the respective parties. We have already set out the facts. There was a

dispute as regards certain factual aspects of the matter. But, there is no dispute and it was not disputed before the Tribunal that Jayarama Pillai was

the karta of the joint family and his share income was assessed in his hands in the status of individual, but in the estate duty proceedings, it was

taken as joint family property. The Tribunal, in our view, rightly proceeded on the basis that Jayarama Pillai as karta was representing the joint

family in the firm. After his death, the family consisted of his wife, the assessee herein, the minor son Muthukumar and some daughters. The said

Jayarama Pillai left a document which according to the Tribunal, cannot be regarded as a will at all. Though the entire document is not before us, a

narration of the document clearly shows that all the properties earned by Jayarama Pillai should go to his minor son and his maternal uncle was

appointed as guardian who was to hand over all the properties with accounts to the minor son when he attained majority. The Tribunal construed

the document not as a will, but as a document empowering the maternal uncle of the minor son to look after the affairs till the minor son attained

majority. The Tribunal, in our view, overlooked the fact that Jayarama Pillai devised his entire property to his minor son and the brother-in-law of

the deceased was directed to manage the property till the minor son attained majority and then hand over the property to him after deducting the

expenses with accounts. The fact that there was a devise in favour of the minor son clearly shows that the document should be regarded only as a

will and under the will, the property should go to the minor son. It is also relevant to notice the partnership deed dated 23-8-1973, the relevant

clause of which reads as under :

S. Jayarama Pillai died on 21-7-1973. The abovesaid Jayarama Pillai has drawn up a will in respect of his share in the firm and other properties.

According to this will, A. Selvaraj, Party No. 7 and brother of Selvalakshmi, Jayarama Pillai�s wife, has been appointed executor of the will and

guardian of his minor son Muthukumar, aged 7. Since as per the will Muthukumar, minor aged 7 is the legatee of Jayarama Pillai as per clause 12

of the deed of 1-4-1964 minor Muthukumar shall be admitted to the benefits above of the partnership without share in the losses in the place of

Jayarama Pillai as per section 30 of the Indian Partnership Act, 1932, by and through his guardian and maternal uncle with effect from 22-7-1973

by the consent of persons to 10 and the business of A.S.R.M. Subbiah Pillai shall be continued to be carried on as before. These terms were

carried upon by us orally carried and we hereby confirm the same by writing. Therefore, the amounts standing to the name of S. Jayarama Pillai in

this firm on 22-7-1973 to his credit in his capital and current accounts have been closed and transferred to the name of minor Muthukumar in the

account of A. Selvaraj, guardian and maternal uncle.

Under the above clause, the amounts standing to the credit of Jayarama Pillai, both in capital accounts and the current accounts, were closed and

transferred to the name of the minor son in the account of A. Selvaraj who was representing the minor in the firm. A reading of the relevant clause

of the document left by the said Jayarama Pillai clearly shows that the entire property, viz., capital as well as the amounts standing in the current

accounts of Jayarama Pillai, would go to the minor son and the minor son should have been assessed only in the capacity of an individual, as he has

no male issue on the date of devolution of the property in his favour. Therefore, the Tribunal proceeded, in our view, on the wrong basis that the

property devolved on the minor son should be taken as joint family property and the Tribunal was wrong in characterising the document left by

Jayarama Pillai as a document to look after and manage the affairs of the minor in the firm. Mr. Janakiraman, the learned counsel for the assessee,

contended that it is not permissible for this Court to question the finding of the Tribunal on this aspect of the matter. However, we are unable to

accept the contention of Mr. Janakiraman, because the second question raised at the instance of the revenue challenges the finding of the Tribunal

that the share income actually belonged to the HUF and the observation of the Tribunal that it was not a will and the property belonged to the

family was made on the basis of the said document and, therefore, we are of the view that this Court has jurisdiction to go into the aspect of the

matter. Therefore, on the facts of the case as disclosed in the order, it is clear that the property was really the capital account as well as current

account and the property is the individual property of the minor son and the ITO was justified in invoking the provisions of section 64(1)(iii) to

include the share income in the hands of the assessee. Even assuming that the property is that of joint family, we are of the view that the provisions

of section 64(1)(iii) are attracted on the facts of the case.

The decision of the Madhya Pradesh High Court in the case of Smt. Nirmala Devi (supra) makes it clear that the provisions of section 64(1)(iii)

make it obligatory on the part of the ITO to include the income of the minor child, if the income arises to the minor child in the partnership firm and

the income was referable to the fact of admission of the child to the benefits of the said partnership firm. The Court held that the question of source

of investment in the firm by the minor was not relevant or decisive for making the income of the minor includible in the total income of the assessee.

The decision of the Madhya Pradesh High Court in Chandrakala Bai Naila�s case (supra) is also a case where a minor son of the assessee was

admitted to the benefits of the partnership firm and the investment was the joint family fund and the Madhya Pradesh High Court held that the

income of the minor from admission to the benefits of the partnership was includible in the total income of his mother-assessee, on the ground that

the source of investment of the minor is not relevant or decisive for making the income of the minor includible in the total income of the assessee.

The same view has also been reiterated by the same Court in Smt. Sobhagwantibai�s case (supra ).

This Court in an earlier decision, in the case of K.M.S. Lakshmanier (supra ), has taken a view that the minor�s share income could be

included in his father�s income, even though the minors had contributed to the partnership assets their shares of the joint family property. The

reasoning of this Court runs as under :

On behalf of the assessee it has also been contended that as the minors were not admitted gratis into the firm, but owe their membership to the

fact that they contributed to the assets their shares in the joint family property, section 16(3)(a)(ii) can have no application. The suggestion is that

unless the minors are admitted to the benefits of the partnership without any contribution to the assets, section 16(3)(a)(ii) has no application. This

is really putting the first contention in another way. There is nothing in the section which justifies the Court in drawing a distinction between a case

where a minor�s property is with a firm and the case where the minor is allocated a share without any contribution to the assets. The section can

only be construed in accordance with the words used in it and there is no foundation for this argument in view of what the section says...."" (p. 672)

The decision of the Supreme Court strongly relied upon by the learned counsel for the assessee in Y.L. Agarwalla�s case (supra ), in our

view, has no application to the facts of the case. The decision of the Supreme Court was not dealing with the aspect of the section 64(1)(iii) and

the question that was raised before the Supreme Court was whether the income should be treated as the income of the individual or that of the joint

family and in that context, the Supreme Court held as under :

...There can be no doubt that the share income that was received by the three minor sons during the relevant period was earned with the aid and

assistance of Hindu undivided family funds and was directly related to the utilisation of such funds by the firm and further that the Hindu undivided

family had suffered detriment in the process of realisation of such income inasmuch as the capital amount lying to the credit of the deceased,

Yudhisthir Lal, was utilised by the firm free of interest. Further, in this case, there was no question of any services being rendered by the three

minors and, therefore, the share income received by them must, in substance, be regarded as a return made to the family because of the investment

of family funds in the business...."" (p. 479)

The above passage clearly indicates that the Supreme Court was dealing with only the case in whose hands the income should be assessed and for

the purpose of determining the question whether the provisions of section 64(1)(iii) can be invoked or not the decision of the Supreme Court in

Y.L. Agarwalla�s case (supra ), is not much helpful, to the facts of the case.

Further, there is one more important and distinguishable feature on the facts of that case. In that case, the money continued in the name of the

deceased and there was no transfer of money in favour of the minor and there was no provision for return of the capital and utilisation of the capital

account and there was no interest payable by the firm to the joint family. Therefore, the decision of the Supreme Court in Y.L. Agarwalla�s case

(supra ), has no application in considering the question whether the share income of the minor is includible in the hands of the assessee invoking the

provision of section 64. We have already held that under the provisions of section 64(1)(iii), the income accrues to the minor child in the

partnership firm for being admitted to the benefits of the partnership firm and once the income accrues due to the fact of admission of the minor to

the benefits of the partnership firm, it is not necessary to probe further into the question as to what is the source of the investment of the minor in

the partnership firm.

In Kanga and Palkhivala�s The Law and Practice of income tax, Eighth Edn., Vol. I, p. 846 with regard to section 64, the learned author

observed as under :

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....

It is clear that the income arose to the minor because of the admission of the minor to the benefits of the partnership firm and by virtue of the

admission, the share income was paid to the minor. Though the source of investment was the joint family property, the income accrued to the minor

son by virtue of his admission to the benefits of the partnership firm and by virtue of the contract between the partners. Therefore, we are of the

view that the provisions of section 64(1)(iii) are attracted to the facts of the case as income arose directly to the minor child because of the

admission of the minor to the benefits of the partnership firm. In this view of the matter, we hold that the Tribunal was not correct in holding that the

income is not includible in the hands of the mother who is also a partner in the same firm in terms of section 64(1)(iii).

In fine, we answer both the questions of law referred to us in the negative and in favour of the revenue. However, in the circumstances of the case,

there will be no order as to costs.