- (1.) THIS order will dispose of Income-tax Reference No. 91 of 1977 relating to the assessment year 1972-73 and Income-tax Reference No. 17 of 1978, relating to the assessment year 1973-74, in which the question referred to this court at the instance of the revenue is the same as in the earlier reference. The question referred in Income-tax Reference No. 91 of 1977 is as under : "whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the share income of the assessee's wife from the firm, M/s. Vinod Trading Co. , could not be clubbed with his income under Section 64 (1) (i) of the Income-tax Act, 1961?"
(2.) BRIEFLY stated the facts are that Shri Anand Sarup was assessed in the status of an individual prior to the assessment year 1970-71. The assessee was a partner in the firm, M/s. Vinod Trading Co. , Ludhiana. During the assessment year 1970-71, the assessee, vide declaration dated 10th September, 1969, had impressed all his capital in the aforesaid firm together with all rights, title and interest in the aforesaid firm, with the character of a HUF, consisting of his wife and five sons. Thus, he ceased to be the partner of M/s. Vinod Trading Go. from the assessment year 1970-71, He simply represented the HUF in the firm from that year onwards. In respect of the share in the firm, M/s. Vinod Trading Co. , the ITO took the status of the assessee as that of an individual and in view of Section 64 (1) (i), he clubbed the share income of the assessee and of his wife' in the former's hands. When the matter was challenged before the AAC by the assessee, the AAC accepted his plea that he represented the HUF in the said firm and, accordingly, ordered the deletion of the share income which was assessed in the hands of the assessee. The AAC accepted the status of the HUF in that respect but on the question of clubbing the income of the assessee's wife in the hands of the assessee, he took the view that that was rightly clubbed under Section 64 in his hands. However, on second appeal by the assessee before the Appellate Tribunal, the assessee's contention was accepted and the Tribunal found as under : "the limited question for consideration is whether or not Section 64 has been rightly invoked by the lower authorities, as respects the income which accrued to the assessee's wife from the firm, M/s. Vinod Trading Co. Clause (i) of Section 64, Sub-section (1), can be invoked only when the income arises to the spouse of the individual member in a firm carrying on business in which such individual is also a partner. The contention of the assessee is that he is not a partner, of the firm, M/s. Vinod Trading Co. , and, therefore, any income accruing to his wife from the said firm cannot be assessed in his hands. We agree with the contention of the assessee. It is clear from Clause (i) of Section 64, Sub-section (1), that both the indivi dual as well as the spouse, whose income is to be clubbed with the indivi- dual's income, should be the partners of the firm. The assessee ceased to be the partner of M/s. Vinod Trading Co. after he impressed his entire capital and other interest in the said firm with the character of HUF during the assessment year 1970-71. This fact has been accepted by the AAC, inasmuch as he deleted the share income which was considered to be the income of the assessee by the Income-tax Officer. In respect of the share income which was included in the hands of the assesssee, the Appel late Assistant Commissioner held that that belonged to the HUF and not to the assessee. , This finding clearly shows that the assessee ceased to be the partner in his individual capacity. He is only representiug the HUF in the firm, M/s. Vinod Trading Co. , at present. In these circumstances, the income accruing to assessee's wife from the said firm cannot be assessed in the hands of the assessee, because he is not a partner the firm, M/s. Vinod Trading Co. We, therefore, think that Section 64, (sic) Secction (1), Clause (i), has not been rightly invoked by the lower authority (sic) far as the income of the assessee's wife is concerned. "
(3.) BEFORE us, the main contention of the learned counsel for (sic)evenue is that under the law of partnership, HUF, as such, could not become a partner of the firm. The karta who wants to join the partnership firm as its member may do so after shedding his representative capacity. Any income accruing to such partner will be treated as his individual income. In support of his contention, he relied upon two Supreme Court judgments Firm Bhagat Ram Mohanlal v. CEPT [1956] 29 ITR 521 and CIT v. Bagyalakshmi and Co. [1965] 55 ITR 660 and the judgments of the Allahabad High Court in Madho Prasad v. CIT [1978] 112 ITR 492 and Addl. CIT v. Yashwant Lal [1979] 119 ITR 18. On behalf of the assessee, the learned counsel has relied, upon a judgment of the Andhra Pradesh High Court in CIT v. Sanka Sankaraiah [1978] 113 ITR 313 and that of the Gujarat High Court in Dinubhai Ishwarlal Patel v. K. D. Dixit, ITO [1979] 118 ITR 122. After hearing the learned counsel for the parties and considering the various contentions raised by the learned counsel for the revenue, we agree with the view taken by the -Gujarat High Court in Dinubhai's case [1979] 118 ITR 122 and the Andhra: Pradesh High Court in Sanka Sankaraiah's case [1978] 113 ITR 313. In Firm Bhagat Ram Mohanlal's case [1956] 29 ITR 521 (SC), what was stated by the Supreme Court is this (p. 525): "it is well settled that when the karta of a joint Hindu family enters into a partnership with strangers, the members of the family do not ipso facto become partners in that firm. They have no right to take part in its management or to sue for its dissolution. The creditors of the firm would no doubt be entitled to proceed against the joint family assets including the shares of the non-partner coparceners for realisation of their debts. But that is because under the Hindu law, the karta has the right when properly carrying on business to pledge the credit of the joint family to the extent of its assets, and not because the junior members become partners in the business. In short, the liability of the latter arises by reason of their status as coparceners and not by reason of any contract of partnership by them. ";