COMMISSIONER OF INCOME TAX Vs. JAIN HARDWARE STORES

JUDGEMENT

(1.) THIS reference is made under the INCOME TAX ACT, 1961, at the instance of the CIT, North Eastern Region. The assessee is a partnership firm consisting of four partners, and one among the four is Dindayal Jain. The firm paid to Dindayal Jain Rs. 2,340 in the relevant asst. year 1978 -79, Rs. 2,864 in the asst. year 1979 -80, Rs. 4,032 in the asst. year 1980 -81 and Rs. 4,924 in the asst. year 1981 -82. These four amounts were the interest amounts paid on investments. The firm sought deduction of the four amounts as they were paid to the HUF of which Dindayal Jain is the Karta. These four amounts were not paid to a partner of the firm. The ITO rejected the claim. The CIT (A) and the Tribunal allowed the, deductions. Thereafter, the following question is referred to be answered by this Court for the four assessment years :

(2.) CONCEPTUALLY , an HUF is not a juristic person and in that sense is not sui juris. (The Latin phrase means of his own right or is not subject to legal disability like infancy, mental disorder or under the power of a guardian and can manage its affairs). In the IT Act of 1961, an HUF is defined to be a person and, therefore, is a unit of assessment. The incidents of an HUF in numerous cases were spelt out to mean that the HUF acts through its Karta and cannot enter into an agreement with any individual, but can be a partner in a firm and cannot exercise all rights of a partner under the Partnership Act. A coparcener of an HUF can lay claim against the Karta to monies received on behalf of the Hindu undivided family. The coparceners of the HUF are not considered partners of a firm. These attributes show that an HUF is not a juristic person but at the same time is a unit of assessment and that HUF can be a partner but the constituent coparceners are not partners and that the Karta is accountable to the coparceners may sound esoteric. But all these are real in the fiscal world. These aspects demonstrate the breadth of accession which is provided by the Karta to the HUF. This elucidation is sufficient now here ; the rest may have to be dealt with in Hindu law in a case relating to Mitakshara.

(3.) IN a reference case under the IT Act, on September 22, 1989, in Income -tax Reference No. 5 of 1983 (CIT vs. Jhabarmal Agarwalla (1990) 88 CTR (Gau) 14 : (1990) 184 ITR 431), this Court dealt with the cognate case under S. 64 of the Act. Dr. B. P. Saraf J., speaking for the Bench, posed the following question in para 11 of that decision (at page 436) : "We may now turn to the next question and decide whether, for the purpose of assessment and levy of income -tax, the Act recognises the representative capacity of a partner. In other words, where an individual is a partner in his representative capacity as Karta of an HUF in whose hands will the income from the firm be assessable in the hands of the individual who is a partner or the HUF whom he represents ?", and answered the question in para 16 thus (at page 438) : "that a literal interpretation of the word 'individual' will render the Act itself unworkable. Such an interpretation is not permissible by the well -accepted principles of inter - pretation of statutes. We, accordingly, hold that the expression 'individual' used in S. 64 of the Act has to be read in the context of income arising to such individual from the membership of the partnership, etc. If the income does not arise to him, then the section would not apply. In a case where the Karta of an HUF is a partner in his representative capacity, admittedly the income does not arise to him. The income arises to the HUF and by virtue of the provisions of the IT Act itself, it is assessable in the hands of the HUF. The Act recognises the concept of a person being a partner in firm in his individual capacity as well as a Karta of a HUF. It is aware of the provisions of the Indian Partnership Act, 1932. It has clearly provided that where the Karta is a partner in a firm and it is found as a matter of fact that he is a partner representing the HUF the income arising from such partnership shall belong to the HUF and shall be assessed in the hands of the Hindu undivided family. The law being so clear and explicit in regard to the dual status of an individual, we have no manner of doubt in our minds that S. 64(1) cannot apply where an individual is a partner in a firm as Karta of his HUF."