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

21st July, 1973 leaving behind him his wife Selvalakshmi Ammal, the assessee herein, 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 a 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 M/s A. S. R. M. Subbiah Pillai, Trichy

Company, and the assessee is one of the partners. The assessments under the provisions of the IT Act in the case of the assessee for the asst. yrs.

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 other sources. Subsequent to the completion of the assessments 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 cl. (iii) of sub-s. (1) of s. 64 of the IT Act, 1961

(hereinafter to be referred to as ''the Act''). The assessments were reopened under s. 147(b) of the Act for both the asst. yrs. 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. In so far as the asst.

yrs. 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 assessments made for the asst. yrs. 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 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, , 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 s. 64(1)(iii) of the Act, 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 s. 64(1)(iii) of the Act. 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., M/s 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 appeals 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 attains 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 under s. 64(1)(iii) of the Act.

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 TCP Nos. 473 to 476 of

1983 dt. 23rd January, 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 Tribunal was right in law in holding that the share income arising to minor

Muthukumar from his admission to the benefits of partnership in M/s 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 s. 64(1)(iii) of the IT Act, 1961 ?

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

the firm of M/s A. S. R. M. Subbiah Pillai, actually belonged to the HUF and therefore, the provisions of s. 64(1)(iii) cannot be pressed into

service in this case ?

Mr. C. V. Rajan, 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 s. 64(1)(iii) of the Act 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, , (iii) Chandrakala

Bai Naila Vs. Commissioner of Income Tax, and submitted that the provisions of s. 64(1)(iii) of the Act 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 s. 64(1)(iii) of the Act. 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 s.

16(3)(a)(ii) of the Indian IT 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, cited 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 s. 64(1)(iii) of the Act.

Mr. Janakiraman, 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 s. 64(1)(iii) of the Act are not applicable to the facts of the case.

We have carefully considered the submissions of the learned counsel 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 Kartha 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 Kartha 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 attains 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 attains

majority. The Tribunal, in our view, overlooked the facts 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 attains 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 dt. 23rd August, 1973, the

relevant clause of which reads as under :

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

properties. Accordingly, 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

cl. 12 of the deed of 1st April, 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 s. 30 of the Indian Partnership Act, 1932, by and through his guardian and maternal uncle w.e.f. 22nd July, 1973

by the consent of persons 1 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 22nd July, 1973 to his credit in his capital and current accounts have been closed and transferred in 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, 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

accounts and the property is the individual property of the minor son and the ITO was justified in invoking the provisions of s. 64(1)(iii) of the Act

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

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

the Act 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 vs. CIT (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 CIT vs. Sobhagwantibai (supra).

This Court in an earlier decision, in the case of CIT vs. 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, s. 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, s. 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.

The decision of the Supreme Court, strongly relied upon by the learned counsel for the assessee in Y. L. Agarwalla vs. CIT (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 s. 64(1)(iii) of the Act

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 HUF funds and was directly related to the utilisation of such funds by the firm and further that the HUF 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.

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 s. 64(1)(iii) of the Act can be introduced or not, the decision of the Supreme

Court in Y. L. Agarwalla''s case, cited supra, is not of much help, 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,

cited 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 business of s. 64 of the Act. We have already held that under the provisions of s. 64(1)(iii) of the Act, 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) with regard to s. 64 of the Act, 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 s. 64(1)(iii) of the Act 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 s. 64(1)(iii) of the Act.

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.