2000 P T D 3103

[237 I T R 561]

[Gujarat High Court (India)]

Before C.K. Thakker and M. C. Patel, JJ

ASHABEN ROHITBIIAI and others

versus

COMMISSIONER OF INCOME-TAX

Income-tax References Nos.372 of 1983, 86 of 1985, 90 of 1986 and 101 of 1988; decided on 29/06/1998.

(a) Income-tax---

----Capital gains---Special deduction---Special deduction under S.80T is admissible with reference to capital gains after setting off capital losses-- Indian Income Tax Act, 1961, S.80T.

The deduction under section 80T of the Income Tax Act, 1961, is admissible with reference to the capital gain only after setting off the capital loss.

H.H. Sir Varma v. CIT (1994) 205 ITR 433 (SC) Fol.

Income- Tax---

----Total income---Inclusion in total income---Salary paid to spouse by concern in which individual has substantial interest---Exception---Income attributable to application of technical or professional knowledge and experience of spouse---Requirement of technical or professional knowledge and experience must relate to post occupied by spouse---Finding that spouse had such professional knowledge and experience---Income of spouse was not includible in total income of individual---Indian Income Tax Act, 1961, S.64(1)(ii), proviso.

Clause (ii) of subsection (1) of section 64 contemplates that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual. Clause (ii) refers to payment made by way of salary, commission, fees or any other form of remuneration to the spouse of such individual in which such individual has substantial interest. But the proviso engrafts an exception and provides that clause (ii) will not apply in relation to any income arising to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience. The, proviso contemplates two conditions: (i) the spouse must possess technical or professional qualification; and (ii) income derived by him or her must be attributable to the application of such technical or professional knowledge and experience. The requirement of technical or professional qualification is not general in terms. It must relate to the post which he or she occupied and, secondly, the salary or fees must be attributable to the application of his or her technical or professional knowledge. If these two conditions are fulfilled, the income must be considered to be of that person and should be assessed accordingly. If the job is of a technical nature requiring a degree or diploma, the holding of such degree or diploma would be essential. The nature of professional qualifications, however, varies from profession to profession. Likewise, the nature of technical qualifications also differs depending on the nature of the job. It is not each and every qualification, academic or otherwise, which can bring the spouse within the scope of the proviso so as to enable him or her to take the income out of the clubbing provision. If the spouse possesses technical or professional qualifications necessary to undertake the particular technical job or carry on the profession to which the income is attributed, that will meet the requirement of the first part of the proviso. But even if the first part of the proviso is complied with, it must further be shown that the payment made to the spouse is attributable to the application of such technical or professional knowledge and experience falling under the latter.

Held, that, in the instant case, the assessee held a Master's degree (M.A.) and before she started working as managing director in the company in question, she had experience as managing director and had received substantial sums as remuneration. Considering the nature of her duties and work, the Company Law Board had permitted an increase in her salary: It was not the case of the Revenue that any degree or diploma was required for the post of managing director either under the Companies Act or under any other law. There was no finding against the assessee that the income was not solely attributable to the application of her technical or professional knowledge and experience. Her income was not includible Zn that of her husband. Hence, the protective assessment of the assessee should be made into substantive assessment.

Batta Kalyani v. CIT (1985) 154 ITR 59 (AP); CIT v. Rajagopal (D) (1985) 154 ITR 375 (Kar.); CIT v. Sorabji Dorabji (1987) 168 ITR 598 (Ker.) and CIT v. Madhubala Shrenik Kumar (1990) 181 ITR 180 (MP) fol.

CIT v. Gautam Sarabhai (1981) 129 ITR 133 (Guj.) and Mokashi (J.M.) (Dr.) v. CIT (1994) 207 ITR 252 (Bon.) ref.

Manish J. Shah for the Assessees.

Mihir Joshi with Manish R. Bhatt for the Commissioner

JUDGMENT

C. K. THAKKER, J.---The first two references are at the instance of the assessee, whereas the remaining two are at the instance of the Revenue. In Income-tax Reference No.372 of 1983, the following two questions have been referred for opinion of this Court:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the shares held by the Hindu undivided family should be considered while determining the 'substantial interest' in the company for the purpose of Explanation 2(i) to section 64(1)(ii) of the Act?

(2.) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in its interpretation of the proviso to section 64(1)(ii) and holding that the same was not applicable in the case of the appellant?"

In Income-tax Reference No.86 of 1985, three questions have been referred for our opinion, which read as under:

"(1) Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the shares held by the Hindu undivided family should be considered while determining the substantial interest in the company for the purpose of Explanation 2(i) to section 64(1)(ii) of the Act?

(2) Whether, on the facts arid circumstances of the case, the Tribunal was right in law in its interpretation of the proviso to section 64(1)(ii) and holding that the same was not applicable in the case of the appellant?

(3) Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that deduction under section 80T is admissible with reference to the capital gain only after setting off the capital loss?"

In Income-tax Reference No.90 of 1986, the following two questions are referred for our opinion:

"(1) Whether, the salary income received by the assessee as a managing director of Rajiv Traders (P.) Ltd., in which the assessee's husband had substantial interest, is not taxable in the hands of the assessee, but is liable to be included in the hands of the assessee's husband under section 64(1)(ii) of the Income Tax Act, 1961?

(2) Whether, when several factors were pointed out regarding experience, qualifications, etc., the Tribunal was right in law in taking a view that the salary income from Rajiv. Traders (P.) Ltd., should be taxed in the hands of the assessee and not taxed in the assessment of her husband?"

In the last reference, i.e., Income-tax Reference No. 101 of 1988 the following question is referred.

"(1) Whether the salary income received by the assessee as the managing director of Rajiv Traders (P.) Ltd., in which her husband has a substantial interest was taxable in her hands on a substantive basis?"

The assessee, Smt. Ashaben Rohitbhai, was working as a Managing Director in McGaw Ravindra Laboratories (India) Ltd., a company registered under the Companies Act, 1956, and was getting remuneration from the said company. One of the questions, which arose for consideration was as to whether the remuneration received by her would be treated as her substantive income under the proviso to section 64(1)(ii) of the Income Tax Act, 1961 (hereafter referred to as "the Act"), or that it. should be considered as income of her husband, Rohitbai.

The second question was whether the holding of shares by Rohibhai should be considered as shares held by the Hindu undivided family of Rohitbhai held beneficially by him and falling within the provisions, of section 64(1)(ii) of the Act.

The third question which was raised before the authorities which is one of the questions in Income-tax Reference No.86 of 1985 was whether deduction under section SOT of the Act was admissible with reference to capital gain after setting off the capital loss.

So far as the third question raised in Income-tax Reference No.86 of 1985 at the instance of assessee is concerned, it was decided against the assessee and in favour of Revenue by all the authorities including the Tribunal following the decision of this Court in CIT v. Gautam Sarabhai (1981) 129 ITR 133 (Guj.). Our attention was invited at the time of hearing of the reference that now the question is finally determined by a pronouncement of the Supreme Court in H.H. Sir Rama Vartria v. CIT (1994) 205 ITR 433. Their Lordships of the Supreme Court in H.H. Sir Rama Varma v. CIT (1994) 205 ITR 433, have observed that the view taken by several High Courts including the High Court of ,Gujarat that the deduction under section 80T is admissible with reference to the capital gain only after setting off the capital loss was correct and accordingly the said view .was confirmed.

In view of the decision of this Court as well as of the Supreme Court, the said question must be answered in the affirmative, i.e., against the assessee and in favour of the Revenue.

As far as the question regarding the holding of shares by Rohitbhai is concerned, the case of Rohitbhai was that he was holding that shares independently and that the authorities as well as the Tribunal had committed an error of law in holding that the shares held by him as beneficiary of the Hindu undivided family. At the time of the hearing, however, Mr. Shah, learned counsel for the assessee, submitted that in case the second question in Income-tax Reference No.3 7Z of 1983, is answered in favour of the assessee and the income of Ashaben is held to be her income by applying the proviso to section 64(1)(ii), he would not press the first question and, it would not be necessary for this Court to answer the question regarding holding of shares by Rohitbhai and, no opinion may be expressed thereon.

The point for our consideration, therefore, is whether the authorities below were right in law in. interpreting the proviso to section 64(1)(ii) and in not extending the benefits there under to Ashaben Rohitbhai.

Section 64 is in Chapter V, which provides for income of other persons which are to be included in the assessee's income. The said section enacts that in computing the total income of any individual there shall be included the income arising to the spouse, minor child etc., received from a concern in which such individual has a substantial interest.

The proviso to section 64(1)(ii) reads:

"Provided that nothing in this clause shall apply in relation to any income arising to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience. "

The case of the assessee was that she was working as a Managing Director in McGaw Ravindra Laboratories (India) Ltd., a public limited company, registered under the Companies Act, 1956, and in that capacity, she was paid remuneration. According to the assessee, the income received by her ought to have been considered as her independent income under the proviso to section 64(1)(ii) of the Act, and the authorities have committed an error of law in applying clause (ii) -of subsection (1) and by treating her income as income of her husband and by assessing it on that basis. In Income-tax References Nos. 372 of 1983 and 86 of 1985, we are concerned with the assessment years 1978-79, 1979-80 and 1980-81, respectively. In these three assessment years, the authorities decided against the assessee treating her income as the income of her husband, Rohitbhai. The Tribunal also applied clause (ii) of subsection (1) of section 64 relying on a decision of the Tribunal, Bombay, Special Bench-B-Dr. J. M. Mokashi v. I.T.O. (I.T.A. No.2273 (Bom.) of 1979, dated July 28, 1981). A reference to that decision was made in the judgment. In Mokashi (supra), the Tribunal considered clause (ii) and the proviso and held that technical or professional knowledge would mean special knowledge of mechanical or scientific subject or of any particular subject. Likewise, experience should include experience acquired in the course of technical or professional qualifications.

In the instant case, it was the case of the assessee that even before she was appointed as a Managing Director in McGaw Ravindra Laboratories (India) Ltd., she had worked as Managing Director in two companies in the past, and that she had sufficient professional qualifications and experience within the meaning of the proviso to clause (ii) of section 64(l). The said contention, however, was negatived and it was held that her income should not be treated as independent income but it should be included in the income of her husband.

In the subsequent four years, however, the Tribunal decided the question in favour of assessee which is challenged in Income-tax Reference No.101 of 1988. The Tribunal observed that though in the past, the point was decided against the assessee on the basis of the decision of the Tribunal, Bombay, subsequently, there was a decision of the High Court of Andhra Pradesh in Batta Kalyani v. CIT (1985) 154 ITR 59. Following that decision, the point was decided in favour of the assessee and against the Revenue.

The question, therefore, is whether the case falls within the proviso to clause (ii) of section 64(1) of the Act, and: whether the assessee can get the benefits there under. It is true that clause (ii) of subsection (1) contemplates that in computing the total income of the any individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual. It is also true that clause (ii) refers to payment made by way of salary, commission, fees or any other form of remuneration to the spouse of such individual in which such individual has substantial interest. But the proviso engrafts an exception and provides that clause (ii) will not apply in relation to any income arising to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience.

Our attention was invited by learned counsel for the assessee to the following decisions:

Batta Kalyani v. CIT (1985) 154 ITR 59 (AP); CIT v. Rajagopal (D.) (1985) 154 ITR 375 (Kar.); CIT v. Sorabji Dorabji (1987) 168 ITR 598 (Ker.) and CIT v. Madhubala Shrenik Kumar (1990) 181 ITR 180 (MP).

From the above decisions, it is clear mat before the benefit of the proviso is claimed, certain conditions must be fulfilled. The spouse must possess technical or professional qualifications `and the income must be derived by such spouse from the application of technical or professional knowledge and experience, i.e., the income must be solely attributable to the application of such knowledge and -experience. The authorities and the Tribunal - held that since the assessee was not holding the necessary qualifications, the case could not be said to have been covered by the proviso and she was not entitled to the benefit thereof. The contention do behalf of the assessee is that to invoke the benefit of the proviso, it is not necessary that a person must hold a degree or diploma, if such is not the requirement of law. In this connection, heavy reliance was placed on Batta Kalyani v. CIT (1985) 154 ITR 59 (AP). In that case, the assessee was running a hardware and paint shop. She employed her, husband to manage the business, and paid him salary. The Income-tax Officer included the salary in the total income of the assessee which was upheld by the Tribunal. On behalf of the assessee, it was contended that an error of law was committed by the Tribunal in not extending the benefits of the proviso, in favour of the husband. On the other hand, the Revenue contended that the husband of the shop owner was not possessing technical or professional qualifications and hence the proviso had no application. Upholding the contention on behalf of the assessee and interpreting proviso to clause (ii) of section 64(1), the High Court of Andhra Pradesh observed (page 62):

"We find considerable force in the submission of the learned counsel for the assessee that the words 'technical or professional qualifications' occurring in the first part of the proviso do not necessarily relate to the technical or professional qualifications acquired by obtaining a certificate, diploma or a degree or in any other form from a recognised body like a university or an institute. That this was not the intention of the Legislature is clear from the use of the expression 'knowledge and experience' in the latter part of the proviso, as otherwise it would have been perfectly permissible for the Legislature of use the same expression as occurring in the first part. The harmonious construction of the two parts of the proviso, in our opinion, would be that if a person possesses' technical or professional knowledge and the income is solely attributable to the application of such technical or professional knowledge and experience, the requirement for the application of the proviso is satisfied, although the person concerned may not passes any qualification issued by a recognised body. In our opinion, the Tribunal erred in coming to the conclusion that unless recognised body conferred a qualification, it should not be considered that a person possessed technical or professional qualifications. It is enough, in our opinion, for the purpose of the proviso, if the recipient of the salary possesses the attributes of technical or professional qualification, in the sense that he has got expertise in such profession or technique. If by use of that expertise in the profession or technique, the person concerned earns salary, then the latter part of the proviso is also satisfied."

A similar view was taken by the High Court of Karnataka in D. Rajagopal (1985) 154 ITR 375. The Court observed that the proviso contemplates two conditions: (i) the spouse must possess technical or professional qualifications; and (ii) income derived by him or her must be distributable to the application of such technical or professional knowledge and experience. The Court, however, stated that the requirement of technical or professional qualification is not general in terms. It must relate to the post which he or she occupied and, secondly, the salary or fees must be attributable to the application .of his or her technical or professional knowledge. If these two conditions are fulfilled, the income must be considered to be of that person and should be assessed accordingly. In Madhubala Shrepik Kumar's case (1990) 181 ITR 180, the High Court of Madhya Pradesh also held that the expression "technical or professional qualifications" does not mean degree or diploma from a recognised institute. Following the decision in Batta Kaiyani's case (1985) 154 ITR 59 (AP), the Court held that it is also not the requirement that before a person claims benefits of the proviso, he must prove that he has obtained a certificate or diploma or degree from a recognised body like a university or any institute.

On behalf of the Revenue, however, reliance was placed on a decision of the High Court of Bombay in Dr. J. M. Mokashi v. CIT (1994) 207 ITR 252. To recall, the Tribunal in the first two matters, decided the question against the assessee relying on a decision of the Tribunal at Bombay in the case of Dr. J.M. Mokashi (supra). The said matter was carried by the assessee to the High Court and the High Court of Bombay, confirming the view taken by the Tribunal decided the question against the assessee and in favour of the Revenue.

It was contended that the High Court of Bombay upheld the decision of the Tribunal answering the question against the assessee and in favour of the Revenue. We have been taken to the said decision by learned counsel for the Revenue. Dr. Mokashi, the assessee, was a medical practitioner. He had employed his wife as a receptionist-cum-accountant. She had passed First Year Arts. For the assessment year 1978-79, the assessee paid Rs.8,100 to his wife by way of salary The Income-tax Officer, applying the .provisions of section 64(1)(ii) of the Act, included that amount in the income of the assessee. The order was confirmed even by the Tribunal. The assessee approached the High Court.

The question before the High Court was whether or not the wife of the assessee possessed technical or professional qualifications and whether or not the salary was received by her by application or technical or professional knowledge and experience.

Referring to the, dictionary meanings of "qualification" and "profession" and dissenting from the view taken by various High Courts, the Court stated (page 267):

"In the instant case, the spouse the assessee neither possessed any technical or professional qualification nor was she paid for any technical or professional services rendered by her. Admittedly, she had passed First Year Arts of the Bombay University and that was her only qualification. She was employed by her husband, the assessee in his case, as a receptionist-cum7accountant and paid a salary for that employment. In such a case, it is not only difficult but impossible to hold that she possessed any 'technical or professional qualification' which is necessary. to bring her within the proviso. That being so, the proviso to section 64(1)(ii) is not applicable to her and, as such, the assessee is not entitled to get the benefit thereof to bring her income out of the purview of the clubbing provision contained in section 64(1)(ii)."

At the same time, however, the Court held that a person can be said to possess requisite technical qualifications by virtue thereof, if he is eligible to perform the particular function. Similarly, professional qualification would mean qualification which is necessary for carrying on the particular profession such as medical profession or legal profession. If the job is of a technical nature requiring degree or diploma, holding of such degree or diploma would be essential. The nature of professional qualifications, however, vary from profession to profession. Likewise, the nature of technical qualifications also differ depending on the nature of the technical job. It was, however, stated that it is not each and every qualification, academic or otherwise, which can bring the spouse within the scope of the proviso so as to enable him or her to take the income out of the clubbing provision. If the spouse is possessing technical or professional qualifications necessary to undertake the particular technical job or carrying on the profession. to which the income is attributed, that will meet the requirement of the first part of the proviso. But even if the first part of the proviso is complied with, it must further be shown that the payment made to the spouse is attributable to the application of such technical or professional knowledge and experience falling under the latter part thereof.

In the case on hand, the assessee was working as a managing director. It was her case that before she was working as a managing director in the present company, she had experience as managing director, and had received substantial sutras as remuneration. In her communication, dated May 8, 1980, she has stated that before she was taken as managing director in McGaw Ravindra Laboratories (India) Ltd., she had worked as managing director with C. Doctor & Co. (P.) Ltd. from 1958 to 1961, as a director with Bipin Silk Mills & Co. (P.) Ltd., from 1961, and then she had worked as a Chairperson in-Rajiv Netting, (P) Ltd. She was also asked to look after certain works mentioned in the letter. It was further stated that considering the nature of duties and work put in by her, the Company Law Board had permitted an increase in her-salary. The said letters were also relied upon and the copies thereof were produced alongwith the representation. It was further her case that McGaw Ravindra Laboratories (India) Ltd., was a public limited company which had 40 percent. equity participation of a foreign collaborator.. It is also on record that she was having a Master's Degree (M.A.). It is not even the case of the Revenue that any degree or diploma is required for the post of managing director either under the Companies Act or under any other law.

In the light of all these facts, it cannot be said that the cases do not fall under the proviso to clause (ii) of subsection (1) of section 64 particularly when the nature of work did' not require any statutory qualification and that she was having experience as director, chairperson and also as managing director in the past in some companies and the Company Law Board has also permitted increase in her salary. In our opinion, therefore, the first part of the proviso can be said to have been complied with.

So far as the second part is concerned there is no finding against the assessee that the income was not solely attributable to the application of her technical or professional knowledge and experience. On the contrary, in Income-tax Reference No.90 of 1986, that is, after the Tribunal followed the decision in Batta Kalyant's case (1985) 154 ITR 59 (AP), it was specifically observed:

"Therefore, it can fairly be said that she has got this remuneration solely because of her qualification. In that view of the matter, we hold that the salary income of the assessee could be taxed only as her income and not taxed in the assessment of her husband. Therefore, the protective assessment of the assessee should be made into substantive assessment."

We are in agreement with the view taken by the High Courts of Andhra Pradesh, Karnataka, Kerala and Madhya Pradesh.

In our opinion, the submission made on behalf of the assessee is well-founded and deserves to be upheld. Accordingly, question No.(2) in Income-tax References Nos, 372 of 1983 and 86 of 1985 must be answered in the negative, i.e., in favour of the assessee and against the Revenue. Question No.(1) in Income-tax References Nos.372 of 1983 and 86 of 1985 is not answered. Question No.(3) in Income-tax Reference No.86 of 1985 is answered in the negative, i.e., against the assessee and in favour of the Revenue. Likewise, questions Nos.(1) and (2) in Income-tax Reference No.90 of 1986 must be answered in the negative, that is, against the Revenue and in favour of the assessee. Question No.(1) in Income-tax Reference No.101 of 1988 is also decided in affirmative, that is, in favour of the assessee and against the Revenue.

All the references are accordingly disposed of. In the facts and circumstances of the case, there shall be no order as to costs.

M. B. A./41/FC Order accordingly.