J. H. GOTLA v. COMMISSIONER OF INCOME TAX — 1973 DIGILAW 50 (KAR)

( 1 ) THESE are three references made at the instance of the Assessee by the Income Tax Appellate Tribunal, Bangalore Bench under S. 66 (l) of the Indian Income Tax Act, 1922, hereinafter called the Act'. They relate to the assessment years 1959-60 1960-61 and 1961-62. The question of law referred in ITRC. No. 33 of 1970 is: whether on the facts and circumstances of the case, the assessee would be entitled to carry forward and set off of the losses against the share income of the assessee's wife and minor children in respect of the assessment year 1959-60 under S. 24 (2) of the Income tax Act, 1922 ? ( 2 ) SIMILAR question has been referred in respect of the assessment years 1960-61 and 1961-62 in ITRC. Nos. 34/1970 and 35/1970 respectively. The assessee is an individual who was carrying on the business of manufacture and sale of groundnut oil and cake. He was also an abkari contractor. On 1-6-1957 he gifted away a part of the oil mill machinery to his wife and three minor sons and a firm was constituted by the assessee's wife and another person to the profits of which the minor sons were admitted. The mill premises as well as the remaining machinery of the assessee were leased to the said firm and the firm carried on the business of manufacture and sale of groundnut oil. The assessee also entered into agreements with the said Arm under which for certain services rendered to the firm by way of management, the assessee was entitled to get commission at the stipulated rates on the purchase and sale of oil and cake made by the firm. The Assessee himself continued to carry on the business in the purchase and sale of groundnut oil and cake on a smaller scale. He also continued his business as abkari contractor. ( 3 ) THE assessee had incurred huge losses; in his individual business in the earlier years which were being carried forward from year to year upto the assessment year 1958-59. The loss carried forward from the assessment year 1958-59 was Rs. 7,88,734. The assessee's profits from his own business for 1959-60 was Rs. 14,324. The share income of the assessee's wife and minor children from the firm for the assessment year 1959-60 was Rs. 24,592. The loss carried forward from the assessment year 1958-59 was Rs. 7,88,734. The assessee's profits from his own business for 1959-60 was Rs. 14,324. The share income of the assessee's wife and minor children from the firm for the assessment year 1959-60 was Rs. 24,592. The said income was included in the computation of the total income of the assessee under S. 16 (3) of the Act for the assessment year 1959-60. The assessee claimed set off of the loss carried forward from the assessment year 1958-59 against the profits of his own business as also the share income of his wife and minor children. The Income Tax Officer rejected the claim for set off in so far as it related to the share income of his wife and minor children. Similar claims for set off were made in the assessment years 1960-61; and 1961-62 but were rejected. ( 4 ) ON the appeals preferred by the assessee, the Appellate Assisant Commissioner allowed the set off claimed on the ground that the assessee himself is deemed to be carrying on the business from which the share income was derived by his wife and minor children. The department appealed to the Income Tax Appellate Tribunal, Hyderabad Bench. The Tribunal held that although the assessee was not carrying on the business of manufacture and sale of oil during the years under appeal, he was continuing to carry on the business of oil in general; that the firm did carry on the same business as was hither i to carried on by the assessee but there was no connection between the assessee and the business carried on by the firm and they were two different entities and as such the assessee cannot be said to be carrying on the business out of which the share income of the wife and minor children arises. Accordingly it held that the assessee is not entitled under S. 24 (2) of the Act to claim set off of his losses against the income of his wife and minor children. Accordingly it held that the assessee is not entitled under S. 24 (2) of the Act to claim set off of his losses against the income of his wife and minor children. ( 5 ) THE claim for carry forward and set off of loss is made under Sec. 24, (2) (ii) of the Act which reads thus : 24 (2): Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March 1940, in any business, profession or vocation, and the loss cannot be wholly set off under sub-sec. (I) so much of the loss as is not so set off or the whole loss where the asesssee had no other head of income shall be carried forward to the following year, and (i ). . . . . . . . . . . . . . . . (ii) Where the loss was sustained by him in any other business, profession or vocation it shall be set off against the profits and gains, if any, of any businesss, profession or vocation carried on by him in that year provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year; in order to entitle the assessee to carry forward the loss to the following year and claim set off, the following conditions have to be fulfilled : (1) The loss must be in a business; (2) the business, profession or vocation in which the loss was originally sustained must be continued to be carried on by the assessee in the year in which the carried forward loss is sought to be set off and (3) the business, profession or vocation against the profits of which set off is claimed must be carried on by the assessee in that year" that the loss is from business is not disputed and therefore the first condition is satisfied. That the business in which the loss was originally sustained was continued to be carried on by the assessee in the years in which the carried forward loss is sought to be set off has been found in favour of the assessee by the Tribunal. That the business in which the loss was originally sustained was continued to be carried on by the assessee in the years in which the carried forward loss is sought to be set off has been found in favour of the assessee by the Tribunal. The only ground on which the Tribunal denied the right to set off was that the assessee cannot be said to be carrying on the business out of which the share income of his wife and minor children was derived. ( 6 ) THE argument of Sri K. Srinivasan, learned Counsel for the assessee was that the share income of the assessee's wife and income of the asses- see's wife and minor children included in the assessee's income under s. 16 (3) of the Act was brought to charge under the head 'business income' under S. 10 which section provides that the tax shall be payable by the assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. Therefore, when the charge to tax of the income of the assessee's wife and minor children is on the basis that the business from which the income is derived is carried on by the assessee, the said fiction cannot be limited for the purpose of charging to tax, but to be given its full play for all purposes including the benefit under S. 24 (2) of the act. ( 7 ) SRI Rajasekhara Murthy learned Counsel for the Department however contended that the share income of the assessee's wife and minor children included in the assessee's income onder S. 16 (3) was not brought to charge under S. 10 under the head of 'business income' but under the head 'other sources' and that income against which set off is claimed not being income from business, the right to set off cannot be claimed. Sri Rajasekhara murthy relied on the assessment order made by Income Tax Officer wherein the share income of the assessee's wife and minor children has been shown under the head 'other sources. Sri Rajasekhara murthy relied on the assessment order made by Income Tax Officer wherein the share income of the assessee's wife and minor children has been shown under the head 'other sources. Sri K. Srinivasan learned Counsel for the assessee submitted that the argument of Sri Rajasekhara Murthy cannot be accepted as the Appellate assisant Commissioner had in the first instance remanded the matters in appeal holding that the share income in the hands of the assessee under s. 16 (3) is 'business income' and that finding has not been challenged by the department before the Tribunal and the Tribunal has proceeded throughout on the basis that the share income brought to charge in the hands of the assessee under S. 16 (3) is 'business income'. ( 8 ) IF the share income of the assessee's wife and minor children has been brought to charge in the hands of the assessee not under S. 10 but under s. 12 under the head 'other sources' then, it is clear that the benefit of Section 24 (2) cannot be claimed by the assessee. But it has to be pointed out that no such contention was urged by the department before the Tribunal. The Appellate Assistant Commissioner in paragraph 9 (iii) of his order has stated thus: the question now is whether this benefit is denied to the appellant because of the fact that in the firm, the partner is not the asseasee, but his wife and that the appellant's minor children are admitted to the benefits. Now I find that the issue had been decided in favour of the appellant by my predecessor thus so the share income from M|s. Jai Hind Fertiliser Co. assessed in the hands of the appellant under s. 16 (3) is business income eligible for set off against brought forward loss subject to the provisions of Section 24 (2 ). Apart from this, 1 find that the ratio of 1958 (34 ITR. 553) and 1962 (44 ITR. SC. 1) is that the character of income does not change by reason of the fact that such income is included in an assessment under s. 16 (3) of the Act. As such, 1 will hold that the appellant is entitled to claim the benefit of the set off of oil mill losses against the businees income assessed for each of the three years. As such, 1 will hold that the appellant is entitled to claim the benefit of the set off of oil mill losses against the businees income assessed for each of the three years. ( 9 ) IN the Memorandum of Appeal before the Tribunal, no ground was taken by the department that the above finding of the Appellate Assistant Commissioner is erroneous. Sri Rajasekhara Murthy submitted that we should call for a fresh finding from the Tribunal on the question whether the share income of the assessee's wife and minor children included in the assessee's assessment under S. 16 (3) should be regarded as income from business or income from other sources'. We are unable to accede to the request of the learned Counsel for the revenue since no such ground was taken before the Tribunal and the finding of the Appellate Assistant Commissioner was accepted and the Tribunal proceeded on the basis that the said income was 'business income'. It is necessary to note that the Tribunal has agreed with the view of the Appellate Assistant Commissioner and has held that 'the income which is includible under See. . 16 (3) partakes of the same nature as the income which is actually derived by the Assessee's wife, minor children etc. ( 10 ) THE precise question for decision is whether the business from which the share income of the assessee's wife and minor children was derived can be regarded as business carried on by the assessee in the relevant years. There is no direct authority of any Court and therefore we have to decide this case on first principles. ( 11 ) THE decision of the Supreme Court in Commr. of Income Tax v. Marlmuthu nadar 44 ITR. 1, SC and the decision of this Court in Dr. T. P. Kapadia v. Commr. of Income Tax 87 ITR. 511 are of some assistance in deciding the question. In Nadur's case (l), the question was whether the assessee was entitled to regard the income of his minor sons included in his income under Section 16 (3) as the assessee's earned income. Minor sons were admitted to the benefits of partnership in a firm of which the assessee was a partner, it was held by the Madras High Court in Marimuthu Nadar v. Commr. of income tax 30 ITR. 670that such income should be regarded as the assessee's earned income. Minor sons were admitted to the benefits of partnership in a firm of which the assessee was a partner, it was held by the Madras High Court in Marimuthu Nadar v. Commr. of income tax 30 ITR. 670that such income should be regarded as the assessee's earned income. That view was affirmed by the Supreme Court and it was held that earned income relief should be granted to the assessee not only on the basis of his share in the profits of the business but also on the basis of his shares in the profits of the business but also on the minor's shares in the profits of the firm which were included in his toal income. In Dr. Kapadia's case (2), the aasegsee was a partner in a registered firm in which his wifs was also a partner. The income of the wife including the losses were included in the assossee's total income during the assessment years 1and61-62, 1962-63 and 1963-64 and the assessments were completed. After the assessments were completed, the Income Tax Officer became aware of the decision of the Gujarat High Court in Ddyalbhai Madhauji vodera v. Commr of Income Tax 60 ITR. 551 in which it was held that where the share of the wife or miner child in a firm in which the assesse is a partner is a loss, such low cannot be allowed in computing the total income of the assessee. Thereupon, the Income Tax Officer reopened the assessments under Sec. 147 (b) of the 1961 Act and withdrew the benefit of the loss sustained by the assessee's wife which had been taken into account while computing the total income of the assessee. This Tribunal affirmed the order of the Income Tax Officer. On reference to this Court, it was held disagreeing with the view of the Gujarat High Court in Vadera's case (4) that the share of loss of the wife in the registered firm in which the assessee was also a partner can be set off against the income of the assesses while computing his total income. It was held that it is possible to take the view that the loss incurred by a spouse should be treated as if it were a loss sustained by the assessee. It was held that it is possible to take the view that the loss incurred by a spouse should be treated as if it were a loss sustained by the assessee. The ratio of the decisions in nadar's case (l) as well as Kapadiak's case (2) is that the income or the loss included under S. 16 (3) in the total income of the assessee has to be treated as income or loss sustained by the assessee. The object of S. 16 (3) of the Act was to foil an individual's attempt to avoid or reduce incidence of income 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. In such a case the income of the wife or minor children is regarded as the income of the assessee. The transfer is ignored and the natural family consisting of the assessee, his wife and minor children are regarded as one unit for purpose of assessmenrt. The character of the income also does not change by reason of the fact that such income is included in the total income of the assessee under Section 16 (3) of the Act. ( 12 ) SEC. 3 which is the charging section charges income tax on the total income of the previous year of every individual, Hindu undivided family etc. S. 4 states that the total income of any previous year of any person includes all income, profits and gains from whatever source derived which are received or are deemed to be received in the taxable territories in such year by or on behalf of such person. The various heads of income which are charged to tax are enumerated in S3. 6 to 12. Income from business, profession or vocation falls under S. 10. Tax is payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of profits or gains of any business, profession or vocation carried on by him. The business income included in the total income of the assessee under s. 16 (3) has to be treated as business income of the assessee under S. 10. Such income is taxable only on the basis that the business is carried on by the assessee. The business income included in the total income of the assessee under s. 16 (3) has to be treated as business income of the assessee under S. 10. Such income is taxable only on the basis that the business is carried on by the assessee. By legal fiction the business income of his wife or minor children included in the assessee's total income under S. 16 (3) is regarded as the business income of the assessee arising from the business carried on by the assessee. ( 13 ) THE Tribunal has dealt With this question in paragraph 6 of its order which reads thus : it is said that the share income of the assessee's wife and minor children was included in his total income under S. 16 (3) and, therefore, by a legal fiction, he must be deemed to have earned that income or, in other words, carried on the business out of which the said income arose. Support for this contention is sought to be found from the language of S. 10 (l) and of S. 16 (3 ). No doubt, under S. 10 (l) the income which is assessed under the head 'business' is, strictly speaking, the income of business, profession or vocation carried on by the assessee. The income which is included under S. 16 (3) also, no doubt, is assessed under the same head. There is no separate head of income as income under S. 16 (3 ). The income which is includible under s. 16 (3) partakes of the same nature as the income which is actually derived by the assessee's wife, minor children, etc. But this, by itself, in our view, does not justify the inference that the assessee himself must be deemed to be carrying on the business the income from which is sought to be included in his assessment under 3. 16 (3 ). S. 16 makes a distinction between the income of other persons which is deemed to be the income of the assessee and income which is merely included in the total income of the assessee. This distinction has been elucidated in Dayalbhai Madhavji Vndera v. Commr. of Income Tax (1966 -60 itr. 551 ). We respectfully produce the relevant observations of their lordships : ' The scheme of clause (a) in sub-sec. This distinction has been elucidated in Dayalbhai Madhavji Vndera v. Commr. of Income Tax (1966 -60 itr. 551 ). We respectfully produce the relevant observations of their lordships : ' The scheme of clause (a) in sub-sec. (3) thus is not to set off loss arising under any one of the sub-clauses against income arising from the other or the rest of the sub-clauses. Such a thing perhaps might have been possible if instead of providing for the inclusion of income of a wife or minor child in the total income of an assessee, such income had, by a legal fiction been made the income or the share of the assessee himself. That, however, has not been done in this sub-section though such a deeming fiction is to be found "in S. 16 (1) (c) While enacting, therefore sub-sec. (3) the legislature had before it such a deeming fiction in S. 16 (1) (c) Yet the legislature did not follow that method, but followed a different method as set out in sub-sec. (3 ). It would, therefore, appear that the income which is includible in the assessee's total income under S. 16 (3) is not deemed to be the assessee's income nor can the assessee be said to be carrying on the business out of which such income arises. ( 14 ) THE above view of the Tribunal was based on the decision of the Gujarat high Court in Vadera's case (4) which has been dissented by this Court in Dr. Kapadia's case (2 ). On a consideration of the scheme of the Act and the provisions therein. referrred to earlier, we are of the opinion that the share income of the assessee's wife and minor children included in the asgessee's total income under S. 16 (3) of the Act should be regarded as business income derived from business carried on by the assessee and in that view the assessee is entitled to set off of his loss carried forward from the previous years. Accordingly, we answer the question referred in each of the cases in the affirmative and in favour of the assessee. The assesee is entitled to his costs of these references Avocate's fee Rs. 250. One set. --- *** --- .