COMMISSIONER OF INCOME-TAX, MADRAS VS P. DORAISWAMY CHETTY
1991 P T D 1143
[Supreme Court of India]
Present: M.N. Venkatachaliah, N.D. Ojha and J.S. Verma, JJ
COMMISSIONER OF INCOME-TAX, MADRAS
Versus
P. DORAISWAMY CHETTY
Tax Reference Case No. 1 of 1977, decided on 26/10/1989.
(Direct reference under section 257 of the Income-tax Act, 1961, by the
Income-tax Appellate Tribunal, Madras Bench B, in R.A. No.187 of 1975-76 arising out of I.TA. No. 1480 of 1972-73).
Income-tax---
----Total income---Inclusions---Firm---Wife partner of firm in which husband is a partner---Inclusion of wife's share in husband's total income---Husband entitled to carry forward wife's share of loss also---Income-tax Act, 1961, S. 64(1)(i) (before amendment w.e.f. 1-4-1980), S. 64, Expln. (inserted w.e.f. 1-4-1980).
The assessee and his wife were the two partners of a firm each having a half share in the profits or losses. The question was whether the assessee could claim to add his wife's share of the loss of the firm to his share for carry forward and set-off against his future business income. The Income-tax Officer and the Appellate Assistant Commissioner held that he could not, but the Appellate Tribunal held that he could. On a direct reference to the Supreme Court under section 257 of the Income-tax Act, 1961, in view of a divergence of judicial opinion between the Karnataka and Gujarat High Courts.
Held, affirming the decision of the Tribunal, that the assessee was entitled to carry forward to subsequent years not only his share but also the share of his wife in the loss of the firm.
C.I.T. v. J.H. Gotla (1985) 156 ITR 323 (SC) applied.
Explanation 2, inserted in section 64 of the Income-tax Act, 1961, with effect from 1st April, 1980, though not retrospective in its operation, serves as a legislative exposition of the import of section 64(1)(i).
C.I.T. v. Badri Prasad Agarwal (1983) 142 ITR 353 (MP); C.I.T. v. Manilal Dhanji (1962) 44 ITR 876 (SC); Dayalbhai Madhavji Vadera v. C.I.T. (1966) 60 ITR 551 (Guj.); Kapadia (T.P.) (Dr.) v. C.I.T. (1973) 87 ITR 511 (Mys.); Manickam & Co. v. State of Tamil Nadu (1977) 39 STC 12 (SC) and (1977) AIR 1977 SC 518 ref.
(b) Income-tax---
----Interpretation of statutes---Subsequent insertion of explanation---Serves as legislative exposition---Indian Income-tax, 1961, S. 64, Expln. 2. .
STATEMENT OF CASE
By this application, the Commissioner of Income-tax requires the Appellate Tribunal to state a case and refer, for the decision of the Hon'ble High Court of Judicature at Madras, a question of law said to arise out of the order of the Tribunal dated 26th January, 1975, in I.TA. No. 1480 of 1972-73. We are of opinion, not only that a question of law arises from the order of the Tribunal abovementioned, but also that the question is one in respect of which there is a conflict in the decisions of the High Courts and that, therefore, it is expedient that a reference should be made to the Hon'ble Supreme Court. We, therefore, draw up a statement of case agreed to by the parties and refer the question of law set out at the end of this statement to the Hon'ble Supreme Court through the President, Income-tax Appellate Tribunal.
2. The reference arises, under the Income-tax Act, 1961, out of the assessment of Shri P. Doraiswamy Chetty of Vellore for the assessment year 1968-69, the relevant previous year for which was the financial year 1967-68.
3. The assessee is an individual, who was a partner in Messrs Dhanalakshmi Pictures, Vellore, with a half share in the profits and losses. His wife was the other partner of the firm also with a half share in the profits and losses. The assessee had filed a return declaring a loss of Rs.30,945 for the above assessment year which was arrived at as under:
(1) Assessee's share of loss from MessrsRs.15,473
Dhanalakshmi Pictures as per firm's memo of adjustment
(2) Share of loss of the assessee's wife from
Messrs Dhanalakshmi Pictures as per firm's
memo of adjustment5 472
_____
30 945
4. The Income-tax Officer served a notice under section 143(2) on the assessee fixing the case for hearing on 17th January, 1972. As there was no response from the assessee, the assessment was completed under section 144 of the Act. The assessee's correct share of loss from the firm was determined at Rs.6,306. The share of his wife was also the same. The assessee claimed that not only his share of the loss but also the share of loss of his wife should be carried forward to the subsequent years for being set-off against future business income. The Income-tax Officer, however, rejected his claim. According to him, it was only where the assessee's wife made an income that her income was includible in the total income of the assessee under section 64(1)(i). But where there was only a loss in the case of the wife, it could not be included in the assessee's loss. He, therefore, directed that the assessee would be entitled to carry forward the loss of Rs.6,306 only.
5. The assessee preferred an appeal to the Appellate Assistant Commissioner and submitted that the assessee was entitled to carry forward the loss pertaining to his wife's share also. The Appellate Assistant Commissioner observed that while the appellant's claim appeared to be reasonable on equitable grounds, the Income-tax Officer's stand was correct in view of the decision of the Gujarat High Court in Dayalbhai Madhavji Vadera v. C.I.T. (1966) 60 I T R 551. Following the above decision, the Appellate Assistant Commissioner dismissed the assessee's appeal by his order dated 13th July, 1972.
6. The assessee preferred an appeal to the Appellate Tribunal,
7. Before the Tribunal, the assessee, apart from relying upon the statutory provision, also relied upon a decision of the Mysore High Court in the case of Dr. T.P. Kapadia (1973) 87 1 T R 511. The Hon'ble Mysore High Court held that where losses are incurred by a firm, and the question arises as to how the share of loss of the wife or minor child is to be dealt with, there are two views possible. One is that the loss should be set-off only against the income of the wife or minor child and if the loss is not wholly set-off, it should be carried forward and set-off. The other and more equitable view is that such loss should be treated as if it were a loss sustained by the individual. Referring to the general rule of interpretation that where two views are possible, the one that is just should be accepted and also pointing out that the Central Board of Revenue in a circular had taken the more equitable view and that this circular was binding on all the officers of the Department, the High Court held that the share of loss of the wife in the registered firm in which the assessee was also a partner could be set-off against the income of the assessee while computing his total income. In the course of the judgment their Lordships of the Mysore High Court referred to the decision of the Gujarat High Court in Dayalbhai Madhavji Vadera v. C.I.T. (1966) 60 I T R 551, and the criticism of that decision in the Commentary on the Law and Practice of Income-tax by Kanga and Palkhivala (Volume I, 6th Edition, at page 526). The Tribunal followed the decision of the Mysore High Court and allowed the assessee's appeal by its order dated 26th February, 1975.
8. From the narration above, it will be seen that the decision of the Tribunal gives rise to,. a question of law on which there has been a conflict of judicial decisions. It is true that the Hon'ble Mysore High Court has not expressed a direct dissent from the view taken by the Gujarat High Court and has rested its ultimate conclusion on the principle that where two interpretations are possible, that which is favourable to the assessee must be adopted particularly when the Central Board of Revenue itself has issued instructions to that effect. Nevertheless, the conclusions of the Hon'ble Gujarat High Court and the Hon'ble Mysore High Court are directly in conflict. The question is also one which is likely to recur frequently. We are, therefore, of the opinion that this is a case in which it is expedient that a direct reference should be made to the Hon'ble Supreme Court.
9. For the reasons abovementioned, we refer for the decision of the Hon'ble Supreme Court, the following question of law which, in our opinion, arises out of the order of the Tribunal:
"Whether, on the facts and in the circumstances of the case, the assessee is entitled to carry forward to subsequent years not only his share of loss but also the share of loss of his wife from the firm of Messrs Dhanalakshmi Pictures, Vellore?"
We refer the above question to the Hon'ble Supreme Court through the President.
Dr. V. Gauri Shankar, Senior Advocate with B.B. Ahuja and Miss A. Subhashini for Applicant.
Nemo for Respondent.
JUDGMENT
J.S. VERMA, J: --This is a reference under section 257 of the Income tax Act, 1961 ("the Act"), made by the Income-tax Appellate Tribunal, Madras-B Bench, in R.A. No.187/MDS of 1975-76 arising out of ITA No.1480/MDS of 1972-73 stating a case directly before this Court and referring the following question of law for the opinion of this Court:
"Whether, on the facts and in the circumstances of the case, the assessee is entitled to carry forward to subsequent years not only his share but also the share of loss of his wife from the firm of Messrs Dhanalakshmi Pictures, Vellore?"
The reference was made to this Court directly on the view that, having regard to the difference of judicial opinion among the High Courts, recourse should be had to section 257 of the Act. The assessee, whose assessable status was that of an "individual", was a member of a firm of partners carrying on business in the name and style of Messrs Dhanalakshmi Pictures, Vellore, in which he had a half share in the profits and losses, his wife, the other partner, having the other half share. For the assessment year 1968-69, the assessee filed a return declaring a loss of Rs.30,945 which was arrived at by including the assessee's own share of loss of Rs.15,473 from the business of the firm and the share of loss of Rs.15,472 of the assessee's wife in the same firm. The assessee claimed that not only his share of the loss but also that of loss of his wife in the firm should be carried forward to the subsequent years for being set-off against his future business income.
The Income-tax Officer held that it was only where the assessee's wife made au income that such income would become includible in the total income of the assessee under section 64(1)(i) and that where there was only a loss in the case of the wife, such loss could not be set-off against, or added to, the income or loss, as the case may be, of the assessee. The assessment was concluded accordingly. In the first appeal preferred before the Appellate Assistant Commissioner of Income-tax, the appellate authority, following the decision of the Gujarat High Court in Dayalbhai Madhavji Vadera v. C.I.T. (1966) 60 I T R 551, upheld the view of the Income-tax Officer and dismissed the appeal.
In the further appeal before the Income-tax Appellate Tribunal, the assessee succeeded, the Tribunal having placed reliance upon a decision of the Karnataka High Court in Dr. T.P. Kapadia v. C.I.T. (1973) 87 I T R 511. The Revenue sought a reference to the High Court on a question of law. The Tribunal, being of the opinion that a question of law did arise, referred the question for the opinion of this Court directly under section 257 of the Act, in view of the divergence of judicial opinion between the Karnataka and Gujarat High Courts on the question.
Dr. Gauri Shankar, learned Senior Advocate for the Revenue, submitted that section 64(1)(i) of the Act, which corresponded to section 16(3)(a)(i) of the 1922 Act, clearly envisaged an artificial liability and that though the expression "income" might, in certain circumstances, include "negative income" also, such a construction was excluded by the manifest intention in section 64(1)(i). The two expressions "income" and "shall be included" in section 64(l), it was urged, clearly excluded any concept of such "negative income" as the idea was clearly one of adding rather than one of subtracting or set-off. Dr. Gauri Shankar said that the provision was intended to curb a tendency on the part of the tax-payer to endeavour to avoid or reduce liability to tax by distributing the source of income to the spouse so that the income could not, in law, be said to be received by him, yet he would retain certain power over the source -- and the income itself. But, he urged, where the statutory language was plain and unambiguous, there would arise no need to resort to any process of interpretation so as to give the statutory language a meaning to accord with its supposed intention. The plain meaning of a provision, it was said, must be given effect to, whatever the inequity or hardship that might be thought to result from its enforcement, as long as the meaning of the provision was plain and unambiguous.
Section 64(1)(i) is analogous to section 16(3)(a)(i) of the 1922 Act. Section 16(3) of the 1922 Act was introduced by the Amending Act IV of 1937, before which there was no provision at all for inclusion of the income of the wife in the total income of any individual. Apart from genuine cases where the source of income of the wife or the minor child were independent of the sources acquired from the father, cases of avoidance of tax by the device of creating partnerships with wives and minor children, as partners or persons admitted to the benefits of partnerships respectively presented serious problems and were considered in the Income-tax Enquiry Report, 1936, which envisaged as "obvious remedy", for this state of affairs, so far as husband and wife are concerned, the aggregation of their incomes for assessment. However, the report recognised that such a course would involve the aggregation in a quite different class of cases, i.e., where the wife's income arose from sources unconnected with the husband. The report, therefore, said: "We recommend, therefore, that the incomes of a wife should be deemed to be, for income-tax purposes, the income of her husband, but that where the income of the wife is derived from her personal exertions and is unconnected with any business of her husband, her income from her personal exertions up to a certain limit, say Rs.500, should not be so included". However, section 16(3), introduced by the Amending Act IV of 1937, adopted a slightly different legislative expedient.
In C.I.T. v. Manilal Dhanji (1962) 44 I T R 876, this Court, referring to the object of section 16(3) of the 1922 Act, said (at page 881):
" ....Then we come to subsection (3). This subsection aims at foiling an individual's attempt to avoid or reduce the incidence of tax by transferring his assets to his wife or minor child or admitting his wife as a partner or admitting his minor child to the benefits of partnership in a firm in which such individual is a partner.
The subsection creates an artificial liability to tax and must be strictly construed."
Though the question referred, as formulated, refers to the carry forward of the share of loss of the wife, the preceding sequential, and indeed the core proposition is whether section 64(1)(i), which speaks of the includibility of the income of a spouse from the membership of the spouse in a firm in which the assessee is a partner, would also permit the share of the loss of the spouse to be set-off against or accumulated with the income or the loss, as the case may be, of the husband and if the result in the hands of the husband is an unabsorbed loss, whether it could be carried forward if the other conditions for the set-off are satisfied. In the present case, the question of such carry forward of the loss arose in view of the fact that the assessee had also sustained a loss. The basic question is whether the expression "income" in section 64(1) includes "loss" also.
Three considerations are relevant in answering the question. The first is the effect of the Circular No. 20 of 1944 of the Central Board of Revenue as to its understanding of the analogous provision in section 16(3)(a) of the Act, 1922. The relevant part of that circular says:
"------The Board has reconsidered the question and has decided that, although this view may be tenable in law, the other and more equitable view is at least equally tenable that such loss should be treated as if it were a loss sustained by that individual. Thus, if the wife or minor child has a personal income of Rs.5,000 which is not includible in the individual's income and sustains a loss of Rs.10,000 from a source the income of which would be includible in the income of the individual, the loss should be set-off against the income of the individual under section 24(I), and if not wholly set-off should be carried forward under section 24(2) --------"
The second is Explanation 2 added to section 64 by the Finance Act, 1979, with effect from April 1,1980. That Explanation says that: "For the purpose of this section, `income' includes `loss'."
The third consideration is the decision of this Court in C.I.T. v. J.H. Gotla (1985) 156 I T R 323 (SC), dealing with section 16(3) of the Act, 1922, which has examined and evaluated the first two interpretative criteria. It appears to us that the answer to the question referred is covered by the pronouncement in Gotla's case (1985) 156 I T R 323 (SC) and must need be in the affirmative and against the Revenue.
In Gotla's case (1985) 156 I T R 323, this Court said (at p..340):
"--Therefore, where section 16(3) of the Act operates, the profit or loss from a business of the wife or minor child included in the total income of the assessee should be treated as the profit or loss from a 'business carried on by him' for the purpose of carrying forward and set-off of such loss under section 24(2) of the Act.
On a consideration of the scheme of the Act and the provisions therein as noted before, the share income of the wife and minor children included in the assessee's total income under section 16(3) of the Act should be regarded as business income derived from business carried on by the assessee and, in that view of the matter, the assessee is entitled to set-off his loss carried forward from the previous years."
The provisions dealt with in Gotla's case (1985) L56 I T R 323 (SC) were, of course, the corresponding provisions of the Act, 1922. But the provisions of section 64(l)(i) are substantially the same and the exposition of the law under the relevant provisions of the Act, 1922 must be held to govern the corresponding provision under the Act, 1961 as well. Explanation 2 inserted in section 64 with effect from 1st April, 1980, though not retrospective in its operation, serves as the legislative exposition of the import of section 64(1)(i). The Madhya Pradesh High Court in C.I.T. v. Badri Prasad Agarwal (1983) 142 I T R 353 considered the effect of this legislative exposition and the learned Chief Justice, speaking for the Division Bench of the High Court, said at pp. 355, 356):
"Speaking generally, subsequent legislation cannot be used for construction of an earlier statute but if an enactment is really ambiguous, subsequent legislation can be used as a parliamentary exposition of the former (see Craies on Statute Law, 7th Edition, pp. 147 and 148. This principle was recently applied by the Supreme Court in construing section 15(b) of the Central Sales Tax Act, as it stood before its amendment by Act No. 61 of 1972, and the amendment introduced by this Amending Act, though not retrospective, was used as a parliamentary exposition of its intent contained in the unamended section (see Manickam and Co. v. State of Tamil Nadu (1977) 39 STC 12; A I R 1977 SC 518). The Explanation added in section 64 by the Finance Act, 1979, though not in terms retrospective, serves as a parliamentary exposition of the meaning of the word `income' as used in the unamended section, for, that word, in the context of section 64, was really ambiguous and had given rise to diverse meanings."
This view of the Madhya Pradesh High Court has been referred to with approval by this Court in Gotla's case (1985) 156 I T R 323.
This construction of the provision also commended itself to the Direct Tax Law Committee, 1978, which, in its final report, said:
"The provisions for aggregating income of the spouse under clause (i) of section 64(1) has led to a dispute in regard to the treatment of losses, which may fall to the share of the spouse from the partnership. The, Gujarat High Court in Dayalbhai Madhavji Vadera v. C.I.T. (1966) 60 I T R 551 has ruled that the section contemplates inclusion of income and I accordingly, the share of loss arising to the spouse cannot be set-off' against the total income of the other spouse. The Karnataka High Court in Kapadia v. C.I.T. (1973) 87 I T R 511 has dissented from this view and has held that income in this section includes a loss. On genera principles, income from membership in a firm would include a loss and the context of clause (i) of subsection (l) does not warrant the contrary construction. The liability to assessment cannot alternate from year to year between the individual and the spouse depending on whether there is a profit or a loss .."
We are in respectful agreement with the view taken in Gotla's case (1985) 156 I T R 323 (SC) and are not persuaded to take a different view which the acceptance of the submissions of Dr. Gauri Shanker would require. Accordingly, we answer the question referred in the affirmative and against the Revenue.
M.B.A./944/T Question answered in the affirmative.