Mrs. Sujata Manohar, J.

1. The present Application No. 144 of 1990, relates to the assessment year 1981-82. It is under section 256(2) of the Income tax Act, 1961. Income tax Reference No. 62 of 1987 relates to the assessment years 1972-73, 1973-74, 1975-76, 1977-78 and 1979-80. Income tax Reference No. 733 of 1987 relates to the assessment year 1978-79. The relevant facts are as follows :

The assessee who is an individual was originally was a partner in the firm styled as Variety Plywood and Quality Plywood, Bombay, in his individual capacity On August 20, 1970, out of his separate and self acquired funds, he impressed the sum of Rs. 30,000 with the character of his Hindu undivided family property. He retired from the two partnership firms with effect from October 1, 1970. On the same day, he entered into these partnerships again in his capacity as the Karta of his Hindu undivided family. He contributed the sum of Rs 15,000 in each of these partnerships out the aforesaid sum of Rs 30,000, as his share, on behalf of the Hindu undivided family, in the capital of the two firm.

2. It has been throughout contended by the department in the Income Tax proceedings pertaining to the assessee that the income, in the form of the share of profits derived by the assessee from these two firms, should be taxed as his individual income under section 64(2)(b) of the Income tax Act, 1961. The Tribunal has, however, held that section 64(2)(b) is not attracted in the present case. It has, therefore, held that the share of income of the Hindu undivided family in the form of profits derived from the businesses of these two firm is not includible in the computation of the assessees income. For the assessment years 1972-73, 1973-74, 1975-76, 1976-77, 1977-78 and 1979-80 (I. T. Reference No. 62 of 1987), the Tribunal has referred the following question to us under section 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the share of profits in the firms of Messrs. Variety Plywood, Bombay, and Messrs. Quality Plywood, Bombay, earned in the capacity of Hindu undivided family of Shri Khimji Nenshi is not assessable in the hands of Shri Khimji Nenshi as individual in view of the provisions of section 64(2), read with section 64(1) of the Income Tax Act, 1961 "

3. The same question has been referred to us under section 256(1) of the Income tax Act for the assessment year 1980-81, the Tribunal has declined to refer any question. Hence, Income tax Application No. 144 of 1990 is filed under section 256(2) of the Income tax Act which is being heard along with these references.

4. Section 64(2), as it was applicable for the assessment years up to 1975-76, was as follows :

Section 64(2). Where, in the case of an individual being a member of a Hindu undivided family, any property having been the separate property of the individual has, at any time... been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family... then... for the purpose of computation of the total income of the individual... -

(b) the Income derived from the converted property or any part thereof, in so far as it is attributed to the interest of the individual in the property of the family, shall be deemed to arise to the individual and not to the family."

5. Section 64(2) was amended with effect from April 1, 1976, by deleting, inter alia, the words "in so far as it is attributed to the individual in the property of the family" from section 64(2)(b). For the assessment years 1977-78 and subsequent assessment years, therefore, the amended section 64(2)(b) was in force.

6. On the facts as found there is no dispute that the capital contributed by the assessee to both the firm in his capacity as the Karta of the Hindu undivided family is converted property as per section 64(2) above. The only question that arises for consideration is whether the Income which the Hindu undivided family has derived by way of a share of the profits from both these firms can be considered as income derived from the converted property under section 64(2)(b).

7. In the case of CIT v. Prem Bhai Parekh : [1970]77ITR27(SC) , the Supreme Court was required to consider the provisions of section 16(3) of the Income tax Act, 1922. In that case the assessee who was a partner in the firm retired from the firm. Thereafter, he gifted Rs. 75,000 to each of his four sons three of whom were minors. The firm was, thereafter, reconstituted whereby the major son became the a partner while the minor sons were admitted to the benefits of partnership. The amounts gifted by the assessee were given to the firm as capital contribution on behalf of the sons. The question was whether the income arising to the minor by virtue of their admission to the benefits of partnership in the firm could be included in the total income of the assessee. The Supreme Court said that the connection between the gifts made by the assessee and the income of the minors from the firm was a remote one and the income arising to the three minor sons could not be considered as income arising directly or indirectly from the transfer of assets by the assessee to the minors. The operative words of section 16(3) (a) (iv) were "Income as arising directly or indirectly." Section 64(2)(b) uses the words "The income derived from the converted property." The Supreme Court in the above case said that the connection between the income derived and the transferred assets was remote. The income arose o account of the minors being admitted to the benefits of partnership. Undoubtedly, they were admitted to the benefits of partnership because of the capital contribution made by them. But, there was no nexus between the transfer of assets to them and the income in question. Hence, the income did not arise directly or indirectly from the transferred assets. For the same reasons, therefore, the income also cannot be said to be derived from the assets so transferred under section 64(2)(b) of the Income tax Act, 1961. The ratio of the above Supreme Court case is, therefore, directly applicable.

8. In the case of Bhaichand Jivraj Muchhala v. CIT : [1976]102ITR385(Bom) , our High Court was required to consider the provisions of section 16(3) (a) (iii) of the Indian Income tax Act, 1922. In the case before our High Court, the assessee gifted some money to his wife. She gave this money as her capital contribution in a partnership firm in which she was taken as a partner. The court said that only the interest paid by the partnership firm on the capital so contributed would be includible in her husbands income under section 16 (3) (a) (iii). But her share of profits from the firm cannot be so included in her husbands income. Our High Court relied upon the Supreme Court decision in the case of CIT v. Prem Bhai Parekh : [1970]77ITR27(SC) above and held that there was no nexus between the transfer of an assets and the income derived by way of share in the profits of the partnership.

9. The same reasoning applies to the language used in the section 64(2)(b) of the Income tax Act, 1961 also. In order that the Income can be considered as being derived from the converted property, there should be a nexus between the converted property and the income which is so derived. When such income has no direct or indirect nexus with the converted property, it cannot be said to be derived from the converted property.

10. Our attention was also drawn to a decision of the Kerala High Court in CIT v. Cochin Refineries Ltd. : [1982]135ITR278(Ker) , when the court said that the word "derived from" in section 80J cannot have a wide import so as to include any income which can in some manner be attributed to the business. There must be some direct connection between the business and the income generated. Similarly in the present case, there must be a nexus between the converted property and the income received. In our view, the profits earned in business do not have such a direct connection with the capital of the partnership.

11. Moreover, section 64(2)(b) contains a deeming provision and hence requires to be construed strictly. An income which is derived from the profits of the firm and not from the capital contributed as such cannot be considered as income derived from the converted property.

12. It was urged by Mr. Upponi that the position of a Hindu undivided family in a partnership must be considered differently because a Hindu undivided family cannot except itself personally in the business of the partnership. Its right to a share in the profits is derived only because of the capital contributed by it. This reasoning is fallacious. The karta of a Hindu undivided family is a partner in the partnership firm like any other partner and may be required to discharge his obligations as a partner. Moreover, the mere fact that the some is contributed by the Hindu undivided family as capital in a partnership firm does not necessarily results in profits earned by the Hindu undivided family because a partnership may still make a loss. There can, therefore, be no special case carved out for a Hindu undivided family which earns a share in the profits of a partnership which would exclude it from the reasoning of the Supreme Court as well as our High Court in the cases cited above.

13. In the premises, the question which is referred to us in Income Tax Reference No. 62 of 1987 and 733 of 1987 is answered in affirmative and in the favour of the assessee.

14. In view of our decision above, no purpose can now be served by referring the same question to the Tribunal for the purpose of it being referred to us under section 256(2) of the Income Tax Act 1961, for the assessment year 1981-82 as the exercise would be academic.

15. The Income Tax Application No. 144 of 1990 is, therefore, dismissed and the rule is discharged.

16. No order as to costs.