COMMISSIONER OF INCOME TAX Vs. CHAMPALAL JEEVRAJ

JUDGEMENT

(1.) THE Tribunal, under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the Department has referred the following common question of law for our opinion.

(2.) THE assessee, a Hindu undivided family, owned a property at No. 196-A, Govindappa Naicken Street, Madras-1. THE ground floor of that property was let out to the firm, in which, the assessee was a partner, through its karta. No rent was charged against the firm for its occupying the premises. THE assessee did not admit any income from the portion occupied, nor did the firm claim deduction towards expenses by way of rent. In the assessment of the Hindu undivided family, the Income-tax Officer held that since the firm was a different entity from the assessee-Hindu undivided family, the fair rent receivable should be deemed to be that of the Hindu undivided family. THE Income-tax Officer estimated the income at Rs. 350 per month and the annual value was taken at Rs. 4,200 and included the same in the assessment for the assessment years 1970-71 and 1971-72. On appeal, the Appellate Assistant Commissioner confirmed the view taken by the Income-tax Officer. On further appeal, the Tribunal took the view that the partner of the firm also carried on business from which profits were earned and the annual letting out value in respect of that portion of the property occupied for the purpose of business could not be included in the assessment of the partner, by following the decision of the Supreme Court in CIT v. Ramniklal Kothari [1969] 74 ITR 57, and also the provisions of section 67(2) of the Act and accordingly directed that the property income should be recomputed by excluding the annual value of Rs. 4,200 in each year. On a reference, this court returned the reference so made unanswered with the direction to the Tribunal to find out as to whether there was any difference in the principle to be applied, where the karta alone could in law be a partner in the firm and as the present assessee is a Hindu undivided family, the impact of section 22 of the Act has to be considered in the peculiar circumstances of the case. On rehearing of the appeal, the Tribunal held that the assessee-Hindu undivided family, which is an assessable entity liable to pay tax, will be entitled to the concession of section 22, if it falls within its ambit, that the assessee-Hindu undivided family carries on business in the premises, of which it is the owner, through the firm, in which it is represented by the karta as partner, that the assessee-Hindu undivided family is also assessed on the share income from the firm, that the mere fact that the assessee-Hindu undivided family as such is not a partner in the firm but only the karta represents the assessee as partner, will not disentitle the assessee to the benefit under section 22 of the Act, as the Hindu undivided family in effect occupies for the purpose of its business the portion of the premises in question. In that view of the matter, the Tribunal held that the notional rent receivable as estimated by the Income-tax Officer and included in the assessments, required to be deleted and its earlier order does not require modification. So holding, the Tribunal referred the question of law set out at the outset for the opinion of this court.

(3.) THEREFORE, it remains to be seen whether a karta of a Hindu undivided family can be a partner in a firm either in his individual capacity or, in his capacity as karta representing the Hindu undivided family. On facts, the authorities below came to the conclusion that the karta is representing the Hindu undivided family. The property in question is owned by the Hindu undivided family. Qua the Hindu undivided family, the income derived by the karta of the Hindu undivided family from the partnership firm was viewed as the income belonging to the Hindu undivided family. The Department also assessed the share income from the firm derived by the karta of the Hindu undivided family as the income of the Hindu undivided family. THEREFORE, the view taken by the Tribunal that the income derived by the karta of the Hindu undivided family is the income derived from the partnership business of the Hindu undivided family, even though the Hindu undivided family is not a partner in the firm, is correct. Learned standing counsel relied upon a decision in Ram Laxman Sugar Mills v. CIT [1967] 66 ITR 613, wherein the Supreme Court has held that (at page 616) "A Hindu undivided family is undoubtedly a 'person' within the meaning of the Act; it is however not a juristic person for all purposes, and cannot enter into an agreement of partnership with either another undivided family or individual. It is open to the manager of a joint Hindu family as representing the family to agree to become a partner with another person. The partnership agreement in that case is between the manager and the other person, and by the partnership agreement no member of the family except the manager acquires a right or interest in the partnership. The junior members of the family may make a claim against the manager for treating the income or profits received from the partnership as a joint family asset, but they cannot claim to exercise the rights of partners nor be liable as partners." This decision in a way supports the contention put forward by learned counsel appearing for the assessee that qua the Hindu undivided family, the income derived by the karta of the Hindu undivided family from the partnership firm is the income derived from the business run by the Hindu undivided family. Learned standing counsel also placed reliance on a decision of the Allahabad High Court in CIT v. Shiv Mohan Lal [1993] 202 ITR 60. According to the facts arising in that case, the Hindu undivided family was the owner of the house property. The business, which was being carried on in the property was not owned by the assessee. Even the other members of the Hindu undivided family were not partners of the firm. THEREFORE, this court, on the facts, held that the income derived by one of the partners cannot be considered to be income from the business of the joint family. Hence, on the facts, this decision will not be of any use to the case on hand. Yet another decision relied upon by learned standing counsel for the Department was Addl. CIT v. N. Vaidyanathan [1989] 180 ITR 198 (Mad), wherein this court has held that the income derived by a partner from the partnership firm is the business income of the assessee entitled to get deduction in the expenditure incurred for such expenses. This court further held that the share income derived by the partner from the partnership firm is also amenable for getting benefit under section 22 of the Act. However, the facts obtaining in that case are different from the facts arising in the case on hand. THEREFORE, the abovesaid decision would render no help to the Department to contend that the income derived by a partner from the firm cannot be considered to be business income of the Hindu undivided family. In Ramniklal Kothari's case [1969] 74 ITR 57, the Supreme Court observed that the business carried on by the firm is the business carried on by the partners and the profits of the firm are the profits earned by all the partners in carrying on the business. Thus, considering the facts arising in the case in the light of the judicial pronouncements cited supra, we have to hold that in the present case, qua the Hindu undivided family, the share income derived by the karta of the Hindu undivided family would be the business income of the Hindu undivided family and since the firm is occupying a portion of the house belonging to the Hindu undivided family, the benefit under section 22 of the Act is available to the Hindu undivided family. Accordingly, we answer the question referred to us in the affirmative and against the Department. There will be, however, no order as to costs. Counsel's fee is fixed as Rs. 1,000.