1. This is a reference made under s. 256(2) of the I.T. Act, 1961, by the Income-tax Appellate Tribunal, Bombay Bench 'B', and the following four questions stand referred to u :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the provisions of section 64 of the Income-tax Act, 1961, have no application in respect of the income earned by an individual in the year of his death ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the provisions of section 159 of the Income-tax Act, 1961, apply and the provisions of section 64 of the said Act have no application ?
(3) Whether, on the facts and in the circumstance of the case, the Tribunal erred in holding that the income did not accrue to the husband of the assessee ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the Income-tax Officer was not competent in include the income of the assessee's husband in the hands of the assessee ?'
3. We are concerned in this reference with a partnership styled as M/s. Sylvester and Company. It was between the assessee, Mrs. Fernandez, her deceased husband and her son, and the firm was carrying on business since October 1, 1947. On December 23, 1957, a fresh deed of partnership was executed in which the share of the assessee was 25%, that of her husband 25% and that of her son 50%. The assessee's husband died on 21st relevant in the context of his death. Clause 15, which is set out in para. 2 of the statement of the case, inter alia, provided that the death of any partner shall not dissolve the partnership as to the other partners, but his assets were to be divided amongst his legal heirs and representatives. The remaining portions of the said clauses and cl. 17(b) indicate the manner in which the needful was to be done.
4. Throughout the period prior to the death of Mr. Fernandez, the income received by the assessee from this firm was being added to the income of her husband initially under s. 16(1)(a) of the Indian I.T. Act, 1922, and thereafter under s. 64(1) of the I.T. Act, 1961. In the assessment year 1964-65, the year under reference, the ITO made a department from this long-standing practice and included the income of Rs. 17,486.78 received by the assessee's husband from the firm in the assessment of the assessee. The assessee objected in writing to the proposed departure, but the ITO opined that it was necessary to do so.
5. The assessee carried the matter in appeal to the AAC who allowed the same for the detailed reasons contained in para. 5 of his order. He seems to have accepted the assessee's contention that the relationship of husband and wife must exist at the time when the income accrues and that as the income accrued to the husband not on April 21, 1963, when he died, but on the making up of the accounts on September 30, 1963, on which dated the relationship of husband and wife had ceased to exist, s. 64(1) of the I.T. Act, 1961, die not apply.
6. The revenue carried the matter in further appeal before the Tribunal. The Tribunal found in favour of the assessee on several difference ground, and each of theses aspects indicated in the order of the Tribunal stands reflected in the four questions referred to us.
7. In our opinion, it is unnecessary to discuss in detail all the interesting questions of law which arise from the order of the Tribunal. In para. 10 of the order of the Tribunal, the tribunal has dealer with the assessment order, and it has come to the conclusion that the ITO was not competent to include the income of the assessee's husband in the hands of the assessee. this aspect is reflected in question No. 4. At the relevant time the Explanation to be found at the foot of s. 64(1) of the I.T. Act, 1961, indicated the manner in which ITO was permitted to reverse the course of conduct adopted for the earlier year. The relevant portion of this Explanation reads as under :
'Explanation 1 - ... and where any such income is once included in the total income of either spouse or parent, any such income arising in any succeeding year shall not be included in the total income of the other spouse or parent unless the Income-tax Officer is satisfied, after giving that spouse or parent an opportunity of being heard, that it is necessary so to do.'
8. In the instant case in a rather cryptic assessment order, the ITO has dealt with this aspect of the matter as unde :
'The assessee is a partners in the firm of M/s. Sylvester & Co. in the year prior to the assessment year 1964-65, the assessee's share income was clubbed with the income of her husband, late Shri S. M. Fernandez, expired during the accounting year, and it was found necessary to frame an assessment on Mrs. T. Fernandez clubbing the income of her late husband in her assessment. This was notified to the assessee. Her objection to this procedure is kept on record. After considering all the facts of the case, I find it necessary to frame an assessment on this party clubbing the income of her husband.'
9. In para. 10 of his order, the Judicial Members of the Tribunal has dealt with the various infirmities in the approach of the ITO. As the matter has been succinctly and satisfactorily dealt with in the said paragraph, we reproduce the same in its entirely :
'10. The third objection raised by Mr. Nair against the inclusion of the disputed income in the assessee's assessment is equally formidable. Till the assessment year 1963-64, the income received by the assessee form the firm was included in the assessment of her husband. The Explanation to s. 64 enables the Income-tax Officer to reverse this process, provided he is satisfied that it is necessary to do so. The satisfaction of the Income-tax Officer must be based on sound and valid ground, and should not be a subjective satisfaction only. Though the Income-tax Officer has mentioned in the assessment order that it was necessary to reverse the process, he has not cared to enlighten us about the reasons, which justify such a conclusion. He did not deal with the objections raised by the assessee in this regard, not did he point out any materials on which he based his conclusion. The revenue also could not bring to our notice any reasons or material to enable us to hold that it was necessary to reverse the process in the present case. It is significant in the present case that the assessee as well as her husband received income from the firm and form no other source whatsoever. It cannot, therefore, be said that the interest of the revenue would have suffered if the assessee's income had been included in the hands of her husband instead of the including the income of her husband in her hands, as, in either event, the not bring to our notice any hitch, legal or otherwise, in including the assessee's income in the assessment of her husband. To us, it appears, there is total absence of any reason or material for the Income-tax Officer to be satisfied that it was necessary to reverse the process. We, therefore, hold that the Income-tax Officer was not competent to include the income of the assessee's husband in the hands of the assessee.'
10. In our opinion, nothing more is required to be said or added. The Tribunal gave the revenue an opportunity, even at the second appellate stage, to satisfy the Tribunal that it was necessary to reverse the earlier practice. That opportunity also was not availed of by the revenue. The Tribunal appears to be right when it concluded that there was total absence of any reason or material for the ITO to be satisfied that it was necessary to reverse the process hitherto followed. If that be so, question No. 4 has to be answered against the revenue. Once that question it to answered, it becomes unnecessary to express any opinion on questions Nos. 1, 2, and 3.
11. Accordingly, we answer the questions referred to us as follow :
11. Question No. : In the negative and in favour of the assessee. In our opinion, the Tribunal was right in holding that the ITO was not competent to include the income of the assessee's husband in the hands of the assessee.
12. Question Nos. 1 to : In view of the answer to question No. 4, it is unnecessary to answer these questions.
13. In the special circumstances of this case, the parties are directed to bear their own costs of the reference.