HUF as a partner

Though HUF is included in the definition of ‘person’ in section 2(31), but it is not a juristic person for all purposes. HUF is not like a corporation or limited company, and it has, therefore, no legal entity different from, and separate from, the members who are comprised in the HUF. However, it was held that there is no legal bar on members of the HUF from entering into partnership.Mere mention of a partner as representing as the karta of a family will not make a HUF as a partner.​​ 

When a karta or a manager of an HUF enters into a contract of partnership with a stranger, the other members of the family do not ipso facto become partners in the firm. In such a case, family as an unit does not become a partner. The other members of the family are not parties of the firm so constituted and as such, the other members cannot demand an inspection of the account books of the firm nor bring about dissolution of the firm or winding up the business. The karta can join others in partnership in dual capacity, i.e., in his individual capacity as well as the karta of the HUF.

Section 64(1)(i ) provides for clubbing up of income of spouse derived by the spouse in his or her capacity as a member of the firm carrying on business in which the individual is also a partner.

Since the provisions of section 64(1) apply only to an entity 'individual', income of the minor children of an individual admitted to the benefits of a partnership in which karta is also a partner in his representative capacity, could not be included in the income of the joint family—L. Hirday Narain v. ITO [1970] 78 ITR 26 (SC) and also L. Hirday Narain v. CIT [1965] 57 ITR 363 (All). The principle of the Supreme Court decision would hold good if the wife of the karta is a partner in a firm in which her husband is also a partner in his representative capacity as the karta of HUF. Under the circumstances, it is submitted that the clubbing of wife's share of income cannot take place.

For the purposes of inclusion under section 64(1)(i), it is imperative that both the spouses should be partners in the same firm in their own personal individual capacity.​​ If one or both of them are partners in the firm in their representative capacity, then the clubbing up cannot take place—Dinubhai Ishvarlal Patel v. K.D. Dixit, ITO [1979] 118 ITR 122 (Guj.), CIT v. Sanka Sankaraiah [1978] 113 ITR 313 (AP), Prayag Dass Rajgarhia v. CIT [1982] 138 ITR 291 (Delhi) and C. Arunachalam v. CIT [1985] 151 ITR 172 (Kar.) (FB). And now the Bombay High Court has also approved as correct the Gujarat High Court view in its decision in CIT v. S.K. Thakkar [1985] 154 ITR 303.

However, the Allahabad High Court in Madho Prasad v. CIT [1978] 112 ITR 492, Addl. CIT v. Yashwant Lal [1979] 119 ITR 18 and Sahu Govind Prasad v. CIT [1983] 144 ITR 851 (FB) and the Madras High Court in CIT v. S. Balasubramaniam [1984] 147 ITR 732 have disagreed with this view and have held that inclusion of such income should in any case take place in the individual's hands.

It is submitted that the Andhra Pradesh High Court and the Madras High Court decisions require reconsideration. Section 64 applies only to 'individuals'—L. Hirday Narain's case (supra) and, therefore, very thoughtfully the section has not used the word 'person' in the opening part of the section. 'Person' includes all other categories of assessees but 'individual' means only human beings. Again, the entire scheme of the section as evident from the Explanations to the section suggests that the inclusion of income takes place with a view to collecting higher tax by taxing incomes on larger quantums. Explanation 7 to the section visualises that clubbing may interchange from year to year.

If the karta representing the HUF is a partner along with some other persons and if karta's wife is also a partner in the firm, then to include the income of karta's wife in the individual personal income of the karta would be illogical and so also HUF's income in the wife's hands. This illogicality is further heightened where the wife is a partner in her representative capacity of a trust for the benefit of her nephews with her husband as a partner in his representative capacity of karta of the HUF.

It is clear that the Gujarat High Court view in Dinubhai Ishvarlal Patel's case is logically sound and, therefore, rightly approved and followed by the Andhra Pradesh, Punjab and Haryana, Delhi, Karnataka and finally the Bombay High Courts.

Keeping in view the above legal position, it would be correct to contend that clubbing will not take place where karta is a partner in a firm representing the HUF and the wife is also a partner in her own individual capacity or in any other capacity.

[1999] 238 ITR 1044  ​​​​ COMMISSIONER OF INCOME-TAX VS. SHRI OM PRAKASH (SC) When the karta of a Hindu undivided family is a partner in a partnership firm, he has a dual capacity; qua the partnership, he functions in his personal capacity and qua third parties, in his representative capacity.​​ Under the Income-tax Act, 1961, when he is assessed in respect of the income derived by him from the partnership firm as a partner, it is in his representative capacity as karta of the Hindu undivided family and not as an individual as such. That is because his capacity vis-a-vis his spouse/minor children who are members of the Hindu undivided family is that of karta and not as individual though vis-a-vis other partners of the partnership firm he functions in his personal capacity.​​ This being the position, the income of a karta's spouse/minor child cannot be included in the computation of his total income for that is the income of the Hindu undivided family and, not his individual income. Section 64 of the Income-tax Act, 1961, will be attracted only when an assessees' own income is being assessed and not that of a Hindu undivided family.​​ If a karta is brought within the ambit of "individual" in section 64(1), the share income of the spouse of the karta and his minor children will, in effect, be included in the income of the Hindu undivided family which is not what is contemplated by section 64(1)(i) and (ii) which is impermissible. ​​ 

Conclusion

Where spose is of the partner who is a partner in representative capacity, the law is handicapped and clubbing provision can not be applied to HUF.

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