K. Shivashankar Bhat, J.
1. Out of the three references, in the fi rst reference, the assessee is a firm. In the other two references, the partner of the said firm is the asessee.
2. The following questions are referred to us under the provisions of the Income-tax Act, 1961, for our opinion :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee's ctivity did not amount to business
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the Income-tax Officer's action under section 147(b) on the basis of audit objection amounted to 'change of opinion'
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee's activity did not amount to business
Assuming, but not admitting, that the firm's activity amounted to profession, whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in holding that section 64(1)(i) was not attracted ?'
3. The first question arises in the case of the firm while the other two questions pertain to the assessee in the other two references. The firm in question came into existence by virtue of the partnership entered into between the two doctors, one is the husband and the other is the wife (Dr. Vanamala J. Herekar); the wife is the assessee in the last two references.
4. According to the assessee, the aforesaid husband and the wife started a small nursing home and a substantial number of cases were treated in the nursing home relating to maternity cases. Dr. Vanamala is a gynaecologist while her husband is a general practitioner. The Income-tax Officer sought to apply the provisions of section 64(1)(i) of the Income-tax Act, 1961 ('the Act', for short). Dr. Vanamala objected to this. The Appellate Tribunal has accepted the contention of Dr. Vanamala and held that section 64(1) was inapplicantble.
5. The primary question will be whether the firm in question is carrying on 'business' as referred to in section 64(1)(i) of the Act.
6. The assessee contends that section 64(1)(i) does not apply to a firm constituted by professionals like two doctors. According to them, the said provision is applicantble only to the cases considered as a business in the normal sense and carrying on of a profession cannot be equated with such a meaning attributed to business.
7. Learned counsel for the Revenue first referred to section 4 of the Partnership Act to contend that the very constitution of a firm is to enable the carrying on of a business and, therefore, whenever a firm is constituted it is only to carry on a business and no further investigation is necessary to make any distinction between a profession and any other business.
8. The contention cannot be accepted for the simple reason that the definition of 'business' under section 2(b) of the Partners hip Act is wide and includes a profession. The said definition governs only the said Act. Learned counsel then referred to sec tion 2(36) as well as section 2(13) of the Act. Section 2(13) of the Act defines 'business' in an inclusive manner, to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Section 2(36) states that 'profession' includes 'vacation'. In view of the inclusive definition of 'business', Mr. Chanderkuma r contended that 'profession' also would fall within the concept of 'business'. For this purpose, a few decisions were referred to starting with the decision of the Supreme Court arising out of the Industrial Disputes Act in Hospital Mazdoor Sabha's case [1959-60] 17 FJR 423; AIR 1960 SC 610. It should b e noted that the decision therein is entirely based on the interpretation of the relevant word and the meaning attrubuted to the concept of 'trade' or 'business' flowed out of the context of the Industrial Disputes Act. A hospital was treated as an industry in the said decision. Having regard to the scheme of the Industrial Disputes Act and the objectives sought to be achieved, it was observed at paragraph 11 that the meaning attributable to the work 'trade/business' cannot be a conventional meaning. This observation itself shows that, conventionally, running of a hospital may not fall within the meaning of 'trade' or 'business'.
9. In Dr. P. Vadamalayan v. CIT : 74ITR94(Mad) , the Madras High C ourt held that a doctor who was running a nursing home by himself was entitled to claim the development rebate treating the nursing home as a 'business'. The Madras High court did not find that the nursing home in question was confined to the patients of the assessee therein. The nursing home was being ru n as a business concern and, in the context of section 33 of the Act, the assessee was given the benefit of development rebate.
10. One decision of the Supreme court referred to by Mr. Chanderkum ar is to be noted in this context. In Barendra Prasad Ray v. ITO : 129ITR295(SC) , it was observed that 'business business' includes professions, vacations and callings. The basic f acts involved in the said case are relatable only to section 9(1). The question was whether a particular income of the assessee accrued or arose in India as deemed under section 9(1). This had to be considered along with section 161(1)(i) b cause the assessee therein was treated as a representative assessee. A legal practitioner in Calcutta had appeared in a case which was ultimately found to be connected with the appearance of a counsel in U.K. The court was not concerned with the concept of 'business', but with the meaning attribute le to the phrase 'business connection' found in section 9(1)(i) of the Act. Having regard to the facts of the said case read with the significance attached to the phrase 'business connection', the Supreme court held that there was a business connection between the English counsel and the Calcutta solicitor. The decision is entirely based on the concept of 'business connection' and the ratio of the decision of the Supreme court shows that the phrase 'business connection' is a phrase of 'art'; it need not necessarily arise out of a connection regarding a business. Learned counsel for the assessees pointed out that, in the case of a professional, it i s the individual quality and qualification that counts and the income derived out of the profession, therefore, is directly attributable to the individual concerned. In the case of a business, no special qualification is necessary and it is possible for any man to take his wife as partner to reduce the tax liability and it is in this background that section 64(1) was introduced to club the income of the spouses. Conventionally, a 'business' is a 'business' which is distinct from a 'profession'. In fact, many professionals are barred from carrying on their respective professions on commercial lines.
11. The history of section 64 was also referred to. In the earlier Indian Income-tax Act of 1922, the predecessor section was section 16(3). The said provision provided for including the in come of the wife of an individual arising directly or indirectly from her membership in a firm of which the individual is a partner. The present section 64(1) has made a c lean departure from this and is applicantble only when the income of the spouse (in the instant case, the wife) arises fro m the membership in a firm carrying on a business in which the other spouse (husband) is a partner. Thus, in the earlier Act, so long as the wife is a partner of a firm in respective of the nature of the activity of the firm, clubbing of the income was effected. In the present Act, the firm should carry on business. In other word, section 64(1) is applicable only to a business firm.
12. This departure was purposefully made by Parliament obviously having regard to the nature of the professional firms.
13. In CIT v. Dr. K. K. Shah : 135ITR146(Guj) , an identical question arose before the Gujarat High Court. After noticing the difference between the earlier Act of 1922 and the present Act, the Bench held that Parliament has shown great awareness about the distinction between the concept of a 'business' and that of a 'profession' and accorded different treatment to these two activities, not only under these two relevant provisions, but also under a few other provisions. At page 154, the Bench observed.
'That is why it is of considerable importance to find out whether the intendment and purpose of the Legislature in introducing the new concept of a firm carrying on a 'business' in the new Act in order to replace the existing concept of a mere firm in the corresponding provision of the old Act as sumes importance. It as sumes importance because the provision is a provision pertaining to the clubbing of the income of two partners by reason of the 'relationship' between them. Ordinarily, they income of the partners in a firm would b e assessed independently. There would be no question of clubbing (them) together. The provision for clubbing together was introduced in the old Act presumably in order to prevent evasion of tax. It is not difficult to visualise a husband forming a partnership with a wife so that the income would be distributed and both of them may escape the tax net altogether in the event of their incomes falling below the exempt line or at any rate would attract tax at a much lower rate having regard to the fact that the scheme of taxation is such that a higher rate of tax is applicable to income falling within a higher slab in the case of an assessee. An individual can form a partnership with his wife regardless of the fact that the wife may have no capacity to make any contribution in running the business. She may be an altogether illiterate wife, who does no more than engage herself in domestic chores. And by and large such would be the case in the cases of a large number of assessees in India having regard to the structure of the society as it has existed for a number of years. She would be only a nominal or a notional partner who has been made a partner only for the sake of escaping the rigour of tax liability. It must be realised that when an individual forms a partnership with a stranger, even if the strangest agrees to be a nominal partner, the person who enters into such arrangement runs a risk because the stranger may assert his right and may not agree to make over the amount falling to his share to the real partner. There would be no suc h risk when a wife is introduced as partner. That is conceivably the season why section 16(3)(a)(i) has introduced the clubbing provision. The situation, however, would be altogether different when a professional couple, say a doctor-couple, enters into a partnership. Each of the two can carry on his or her profession in his or her individual capacity. Each of them can also enter into a partnership with other members of the same profession. In that event, their professional income would be assessed separately and no question of clubbing would arise. It must also be realised that a doctor-husband cannot form a partnership with a wife who is not a doctor in order to carry on his profession. The rules of professional ethics would not permit this. It would be unethical to decided on so and he would run the risk of being debarred from practice. It would not also be recognised by law. But when both of them are qualified doctors and they join in partnership there is practically no risk of the partnership coming into existence being a nominal one. As mentioned earlier, in a businesses partnership, the husband may be an astute businessman and the wife may be no more than an illiterate housewife or a housewife who is not capable of carrying on an economic activity on her own. On her own, the wife may not be able to earn any income or make any contribution.'
14. The Bench also pointed out that the Law Commission had also expressed itself against the earlier provision applying to a partnership between the husband and wife engaged in professions as doctors, lawyers, etc. However, the Bench pointed out that, in the case of a couple running a nursing home admitting patients of other doctors and charges for the same of runs any other business activities like a drug store, section 64(1) will be attracted to that income which is attributable to these activities.
15. The Kerala High court also has taken the same view in the decision in Dr. K. Thomas Varghese v. CIT : 161ITR21(Ker) and followed the views expressed by the Gujarat High Court.
16. Apart from the reasons given by the High Courts of Gujarat and Kerala, we would like to add an additional reason. Any provision of law affecting the rights of individuals will have to be read in the context of the Indian Constitution. The provision of law should not contravene the constitutional provisions like the fundamental rights. If a lady doctor runs a nursing home in partnership with another doctor (who is not her husband), then certainly section 64(1) will not be applicant ble. The income derived by her is attributed to her qualification and her performance and the said income is of her own. Can such an income under almost identical circumstances convert itself into the income of her husband just because her husband happens to be a doctor with whom she joined in partnership to carry on the profession as a medical practitioner This difference in treatment would attract the provisions of article 14 of the Constitution. It seems to us t hat the equality clause of the Constitution would frown upon such a discriminatory treatment meted out to the professionals. In these circumstances, we are of the view that the professional firms cannot be brought under section 64(1) of the Act. The concept of 'business' stated in section 64(1) of the Act cannot include within itself any profession.
17. One more aspect will have to be considered. The Income-tax Officer, in the instant case, held that in the nursing home in question, other doctors are also invited to treat the patients for which the assessee collected fees. But, in the statement of the case referred to us, the Tribunal has not mad e any reference to it. The finding of the Appellate Tribunal a ssumes that the dominant activity of the nursing home is the treatment of the patients of the two partners, especially that of Dr. Vanamala. The Appellate Tribunal in its order states that notwithstanding that certain incidental and ancilliary features of business may be found in such a nursing home, they pertain to its peripheral activites. The core and essential feature of the activity was purely professional. It is thus clear that the Appellate Tribunal did not accept the finding regarding the factum of other doctors generally practising through this nursing home by admitting their patients. It is quite likely that on a few occasions these partners may invite some experts to give advice having regard to the nature of the patients illness; that will not convert the activites of the nursing home into a business activity. The finding of fact in the instant case i s that the husband and wife who are duly qualified doctors constituted a firm in order to run a nursing home through which they carry on their profession. This, in our opinion, will not come within the purview of section 64(1) of the Act.
18. Consequently, our answer to the questions referred to us is in the affirmative and against the Revenue.
19. This answer will cover questions Nos. 1 and 3 also.
20. Regarding the second question, the same is covered by the decision of the Supreme court in Indian and Eastern Newspaper Society v. CIT : 119ITR996(SC) . The said question cannot be a basis for action under section 147(b). The said question is also answered in the affirmative and against the Revenue.
21. Reference is answered accordingly.