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Commissioner of Income-tax, Visakhapatnam Vs. G. Gopal Rao and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberReferred Case No. 73 of 1981
Judge
Reported in(1985)46CTR(AP)38; [1985]151ITR308(AP)
ActsIncome Tax Act, 1961 - Sections 2(7), 2(24), 2(45), 5, 41, 64, 64(1), 139, 139(1), 143(1) and 261; Income Tax Rules, 1962 - Rule 12
AppellantCommissioner of Income-tax, Visakhapatnam
RespondentG. Gopal Rao and ors.
Appellant AdvocateM.S.N. Murthy, Adv.
Respondent AdvocateM.J. Swamy, Adv.
Excerpt:
.....be included in assessee's income. - - learned counsel urges that if an attempt to compute the total income of the assessee is frustrated because of failure of income from any source to an assessee, s. 6. we have given our anxious consideration to the various arguments urged by the learned counsel for the revenue as well as the assessees. such a discrimination would be clearly hit by article 14 of the constitution. 64(1)(iii) of the act, it is not possible to accept the contention that the legislature missed the fire and failed to achieve the object of checking tax avoidance by the above amendment which became effective from april 1, 1976. 8. the provisions contained in s. 139 of the act clearly lays an obligation on the assessee to furnish a return declaring his total income which..........admission of such minor to the benefits of partnership in a firm could be include in computing the total income of the individual, even if such individual did not individually derive income from any source which is liable to be taxed under the act. referring to the facts in the present case, it would appear that the assessee, whose status is that of an individual for the purpose of assessment, did not derive income from any source liable to be taxed under the act for the income-tax assessment year 1976-77. two of the assessee's minor children, venkata ravindranath tagore and srikrishna mohan, were admitted to the benefits of partnership in the firms known as (1) m/s. goli brothers, and (2) m/s. goli venkateswararao & co. of vijayawada. the share income arising to the above-mentioned.....
Judgment:

Anjaneyulu, J.

1. The Income-tax Appellate Tribunal referred under s. 256(1) of the I.T. Act 1961 ('the Act' for short), a batch of cases involving a common point for the opinion of this court. The question involved in each of these cases relates to the interpretation of the provisions of s. 64(1)(iii) of the Act. The question canvassed for our consideration in all these references is the correctness of the ITO's view that the income arising to a minor child of an individual from the admission of such minor to the benefits of partnership in a firm could be include in computing the total income of the individual, even if such individual did not individually derive income from any source which is liable to be taxed under the Act. Referring to the facts in the present case, it would appear that the assessee, whose status is that of an individual for the purpose of assessment, did not derive income from any source liable to be taxed under the Act for the income-tax assessment year 1976-77. Two of the assessee's minor children, Venkata Ravindranath Tagore and Srikrishna Mohan, were admitted to the benefits of partnership in the firms known as (1) M/s. Goli Brothers, and (2) M/s. Goli Venkateswararao & Co. of Vijayawada. The share income arising to the above-mentioned minors from their admission to the benefits of partnership in the two firm referred to above amounted to Rs. 13,795. The ITO included this in the assessment made on the assessee for the assessment year 1976-77 and taxed him on that income. As already stated, the assessee did not derive income from any source. On these facts, the assessee contended before the ITO that the provisions of s. 64(1)(iii) of the Act are not applicable. According to the assessee, the above provisions are inapplicable in a case where the assessee himself has no income in the status of an individual. In order that income arising to minor children of an individual from their admission to the benefits of partnership in a firm is included in the individual's total income, the individual concerned must have total income assessable under the Act, that is to say, the individual must have derived income from some source. If an individual did not derive income from any source liable to be assessed under the Act, the question of computing the total income of such an individual under the Act does not arise and, accordingly, the provisions of s. 64 of the Act do not come into operation at all. It is, therefore, claimed that the assessee in the present case not having derived income from any source whatsoever which is liable for assessment under the Act, the question of including in his total income, the share income arising to the minor children from their admission to the benefits of partnership in a firm did not arise. The ITO declined to accept this contention and, as already observed above, made an assessment on the assessee on the total income representing the aggregate of the share incomes arising to his two minor children from their admission to the benefits of the two partnership firms. On appeal, the AAC accepted the assessee's contention and cancelled the assessment. The ITO filed an appeal before the Income-tax Appellate Tribunal. The Tribunal affirmed the AAC's view and dismissed the appeal filed by the Department. The Commissioner thereupon required the Tribunal to refer the present case under s. 256(1) of the Act.

2. We have heard Sri M. Suryanarayana Murthy, learned counsel for the Revenue, and Sri Ch. Srirama Rao, Sri M. J. Swamy, Sri S. Parvatha Rao and Sri D. Srinivas representing different assessees whose references came up for consideration. Learned counsel for the Revenue urged that the Tribunal was in error in coming to the conclusion that the provisions of s. 64(1)(iii) of the Act are not applicable. It is urged that it makes no difference whether the individual, in whose assessment the share income arising to the minor children has to be included, has any total income liable for assessment under the Act. Learned counsel submitted that under s. 139 of the Act, every person whose total income exceeds the minimum liable to tax is under an obligation to file an income-tax return and on the plain language of s. 64(1)(iii) of the Act, the share income arising to a minor child on his admission to the benefits of a partnership in a firm is part of the total income which has to be declared in the return to be filed by the assessee. That being so, urged the learned counsel for the Revenue, the individual is liable to be taxed on the share incomes arising to the minor children on their admission to the benefits of a partnership in a firm. Learned counsel relied on the decision of this court in Sivalal Sovaji, In re : [1983]140ITR39(AP) .

3. Sri Ch. Srirama Rao leading the arguments on behalf of the counsel appearing for the assessees initially submitted that the decision of this court in Sivalal Sogaji, In re : [1983]140ITR39(AP) requires reconsideration, inasmuch as that was a decision of this court dismissing a writ petition at the admission stage, without considering the various aspects arising for consideration in the case. In any event, that decision is distinguishable, because, in that case, the individual in whose hands the share income arising to the minors was included has income from some sources, although it was far below the minimum liable to tax, whereas in the cases on hand, the assessees do not have income from any source whatsoever excepting the share income. That fact, urged the learned counsel, distinguishes the present cases. Learned counsel pointed out that the income arising to the minor from their admission to the benefits of a partnership in a firm was really not the income of the assessee, but the income of the minor children. But for the fiction enacted by s. 64 of the Act, the income derived by the minor children was not liable for assessment at all in the assessee's hands. The language of s. 64 of the Act, according to the learned counsel, was clear that it was the obligation of the ITO to include the income arising to the minor children while computing the total income of the assessee for the purpose of assessment in his hands. In a case, where the assessee has absolutely no income for the purpose of assessment in his hands. In a case, where the assessee has absolutely no income for the purpose of assessment in his hands, the question of the ITO computing the total income of the assessee under the provisions of the Act does not arise. If the ITO cannot enter into the exercise of computing the income of the assessee, the provisions of s. 64(1)(iii) of the Act become inoperative as the sanction under s. 64 of the Act is only to include the share income arising to the minorns in the computation of the total income of the individual.Learned counsel drew our attention to the definition of the expression 'assessee' contained in s. 2(7) of the Act and claimed that in accordance with the definition, the assessee could not be considered to be a person by whom any tax is payable under the Act for the simple reason that the assessee himself has no income. Reference is also invited to the provisions contained in s. 5 of the Act which sets out the categories of income liable to be assessed in the hands of an individual. Reference is also invited to s. 2(45), which defines the expression 'total income' according to which 'total income' means the total amount of income referred to in s. 5 computed in the manner laid down under the Act. A combined effect of ss. 2(7), 2(45) and s. 5 of the Act, according to the learned counsel, is that an assessee is liable to tax on the income derived by him and in the process of computing the total income of an assessee under the provisions of the Act, the ITO can take recourse to s. 64 to include the categories of fictional income included therein. Share income arising to minors from their admission to the benefits of partnership in a firm is one of such fictional items of income and that income can be included in the process of computing the total income of an assessee and not otherwise. Learned counsel urges that if an attempt to compute the total income of the assessee is frustrated because of failure of income from any source to an assessee, s. 64 of the Act becomes inoperative. Learned counsel further pointed out that there is built-in-evidence in s. 64 of the Act itself that an assessee must have total income for the purpose of assessment under the Act before considering the question of including the share income arising to minor children. Our attention has been invited to Explanation 1 to s. 64(1) which provides that the share income arising to minor children can be included in the total income of that parent whose total income excluding the income referred to in s. 64(1)(iii) of the Act is greater for the purpose of assessment. This provision, according to the learned counsel, makes it clear that before the inclusion of the share income arising to minors under s. 64(1)(iii) of the Act, the ITO has to find out the total income of the parents of the minor children and ascertain whose total income is greater and then determine the situs of assessment. This provision, the learned counsel proceeded to urge, makes it unmistakably clear that there must be a total income, other than the income referred to in s. 64(1)(iii) computed under the Act in the hands of the parents. If no such income exists, then Explanation 1 to s. 64(1) becomes unworkable. Learned counsel submits that this gives a clue to the real effect of the provisions of s. 64(1) of the Act.

4. Sri M. J. Swamy, learned counsel for some of the assessees, referred to the definition of 'income' under s. 2(24) of the Act and pointed out that the 'income' as defined therein does not include the income assessable under s. 64 of the Act. It is stated that fictional income is liable to be included under s. 41, but fictional income liable to assessment under s. 64 is not so included in the definition of 'income'. Learned counsel urges that the share income arising to the minor children cannot, therefore, be considered as income at all in the hands of the assessee. Learned counsel otherwise adopted the arguments of Sri Ch. Srirama Rao.

5. While adopting the above arguments, Sri Parvatha Rao, learned counsel, further contended that absurd results would follow if the provisions of s. 64 are interpreted as conferring sanction on the ITO to include the share income arising to minors in the hands of an individual, even if such individual has no income. He referred to Explanation 1 to s. 64(1) of the Act and pointed out that in a case where both the parents have no income whatsoever from any source, the question of including the share income arising to minors in the income of that parent whose total income, other than the income referred to in s. 64(1)(iii), is greater, does not arise. According to the learned counsel, s. 64 presupposes the existence of 'total income' in the hands of the parents and with reference to such total income, the ITO has to find out whose total income is greater and then include the income arising to the minors under s. 64(1)(iii) of the Act.

6. We have given our anxious consideration to the various arguments urged by the learned counsel for the Revenue as well as the assessees. The arguments advanced by the counsel for the assessees are undoubtedly attractive. We, however, consider that the answer to the question referred in all these references is self-evident from the decision of the Supreme Court in CIT v. Kochammu Amma : [1980]125ITR624(SC) . Before we refer to the decision of the Supreme Court, it may be relevant to make a few observations. Section 64 contains provisions intended to check tax avoidance by persons through diversion of income to the members of their family. Prior to the Taxation Laws (Amendment) Act, 1975, the provisions of s. 64 dealt with the inclusion of income arising to a minor child from a partnership firm of which the assessee himself is a partner. There is no sanction to include the income arising to a minor child admitted to the benefits of a partnership in a firm of which the parent was not a partner. To plug the loophole, the Taxation Laws (Amendment) Act, 1975, introduced s. 64(1)(iii) with effect from April 1, 1976, that is to say, with effect from the assessment year 1976-77. We have already referred to the provision, but for the sake of completeness, we may quote below the relevant provision :

'64. Income of individual to include income of spouse, minor child, etc. - (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly - ...

(iii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm;'

7. Thus, up to and in the assessment year 1975-76, the income arising to the minor children on their admission to the benefits of partnership in firms was not included in the total income of the parents, unless either of the parents is a partner in the same firm. The amendment referred to above brought about a change from the assessment year 1976-77. Pursuant to the amendment, the income arising to the minor children on their admission to the benefits of partnership in a firm is liable to be included in computing the total income of any individual irrespective of the fact whether such individual is a partner in the same firm. Learned counsel for the assessees do not dispute that if the individual has total income liable for assessment under the Act, then in computing the total income of such individual the share income arising to minors on their admission to the benefits of partnership in a firm is liable to be included. They, however, contend that if such an individual has no total income for the purpose of assessment, then there is no sanction to include in his total income the share income arising to the minors. Such a construction of the section is prima facie unacceptable, because it brings about discrimination as between two categories of individual assessees, one having total income under the Act and another having no total income. The provision would be beneficial to persons having no total income. Such a discrimination would be clearly hit by article 14 of the Constitution. The classification of the assessees as between those having total income for the purpose of assessment and those having no total income, has also no relation to the object sought to be achieved, the object being to check tax avoidance by diverting the income to the minor children of the family by their admission to the benefits of partnership in a firm. It is settled law that courts should lean in favour of the constitutional validity of a provision, unless the invalidity is writ large in the provisions enacted. A harmonious construction which would uphold the constitutional validity of a provision has to be preferred. Since the object sought to be achieved by the amendment introduced in the Act is to check tax avoidance, it must be held to be applicable to all categories of assessees having the opportunity to avoid tax by recourse to the above measure. It is, therefore, reasonable to interpret the provision as being applicable to all categories of assessees,irrespective of the fact whether they have total income liable for assessment under the Act, or they have no total income at all. On the plain language employed in the provisions of s. 64(1)(iii) of the Act, it is not possible to accept the contention that the Legislature missed the fire and failed to achieve the object of checking tax avoidance by the above amendment which became effective from April 1, 1976.

8. The provisions contained in s. 64 of the Act form part of an indivisible scheme for the purpose of assessment in the hands of an assessee of income in respect of which he is assessable under the Act. The income so assessable in the hands of an assessee may be his own income or the income of any other person in respect of which the assessee is assessable under the provisions of the Act. Section 139(1) of the Act enjoins that every person, if his total income or the total income of any other person in respect of which he is assessable under the Act during the previous year exceeded the maximum amount which is not chargeable to income-tax, shall furnish a return of his income or the income of such other person during the previous year in the prescribed form. The categories of income specified in s. 64 are incomes of other persons in respect of which the assessee is assessable under the Act. Thus, s. 139 of the Act clearly lays an obligation on the assessee to furnish a return declaring his total income which consists of not only his income, but also income of any other person in respect of which he is assessable. Rule 12 of the I.T. Rules, 1962, prescribes the form of return to be furnished by an individual assessee. The form of return in Form No. 2 as amended by the Income-tax (Amendment) Rules, 1976, with effect from April 1, 1976, relevant for the assessment year 1976-77, contains a provision in Part I that the assessee shall include in that Part income under Chapter V of the Act. It may be mentioned that s. 64 of the Act comes under Chapter V. Therefore, Part I of the income-tax return obliges the assessee to include the income under Chapter V of the Act. Against Item No. 12 in Part I, statement of total income of the return, the assessee is required specifically to state the income arising to a minor child as referred to in Chapter V of the Act and included in Items Nos. 1 to 6 which form part of the total income. It may be relevant to observe that in the form of income-tax return till March March 31, 1972, there was no specific provision for the inclusion of the income falling under Chapter V of the Act and for that reason courts held, following the decision of the Supreme Court under s. 16(3) of the 1922 Act, in Muthiah Chettiar v. CIT : [1969]74ITR183(SC) that an assessee was under no obligation to include the income falling under s. 64 of the Act and it was the duty of the ITO to include that income while computing the assessee's total income under the Act. In order to cover this omission, the form of return was amended with effect from April 1, 1972, specifically requiring an assessee to include in Part I, the income falling under Chapter V and a provision is also made to show separately the total of the income falling under Chapter V and include under the respective heads of income. These provisions render it obligatory on the part of an assessee to include the income arising to minor children on their admission to the benefits of partnership in a firm under s. 64(1)(iii) of the Act. If an assessee omits to include the income, it will be contrary to the requirements of the return prescribed under rule 12 of the I.T. Rules and the assessee may be held liable for necessary consequences for the omission to declare such income. If the assessee could be held to be under an obligation to himself include in his return under the respective heads of income, the income falling under s. 64 of the Act, it is futile to contend that the ITO cannot assess the assessee on the income, falling under s. 64(1)(iii) of the Act on the ground that apart from that income, the assessee has no other income. If pursuant to the obligation on the part of the assessee, the income arising to the minor children is declared in the return, the ITO is entitled to a accept that return under s. 143(1) of the Act and no further proceedings will ensue.

9. Whatever may be the position in law prior to April 1, 1972, regarding the assessee's obligation to include income under s. 64 of the Act, it is clear that after the amendment of the return with effect from April April 1, 1972, the assessee cannot escape his obligation to include in his return the income falling under s. 64(1)(iii) of the Act. We derive full support for this view from the judgment of the Supreme Court in CIT v. Kochammu Amma : [1980]125ITR624(SC) above referred. Dealing with the contention urged in the above case that an assessee is not obliged to include the income arising to his minor sons in the return filed by him under s. 139, the Supreme Court made the following observations (at page 628) :

'It is clear from this provision that though the share of the spouse or minor child in the profits of a partnership firm in which the assessee is a partner is not the income of the assessee but is the income of such spouse or minor child, it is liable to be included in computing the total income of the assessee and it would be assessable to tax in the hands of the assessee. The total income of the assessee chargeable to tax would include the amounts representing the shares of the spouse and minor child in the profits of the partnership firm. If this be the correct legal position, there can be no doubt that the assessee must disclose in the return submitted by him all amounts representing the shares of the spouse and minor child in the profits of the partnership firm in which he is a partner, since they form part of his total income chargeable to tax. The words 'his income' in s. 139, sub-s. (1), must include every item of income which goes to make up his total income assessable under the Act. The amounts representing the shares of the spouse and minor child in the profits of the partnership firm would be part of 'his income' for the purpose of assessment to tax and would have to be shown in the return of income filed by him'.

10. We have already stated that in Muthiah Chettiar's case : [1969]74ITR183(SC) , arising under the 1922 Act, the Supreme Court held that in the absence of a specific provision in the income-tax return, there was no obligation on the part of an assessee to include the income under s. 16 of the 1922 Act which corresponds to s. 64 of the 1961 Act and it was the duty of the ITO to include such income while computing the income of the individual. The correctness of the above view was doubted by the Supreme Court in Kochammu Amma's case above referred to. The following observations of the Supreme Court, at page 630, are relevant :

'With the greatest respect to the learned judges who decided this case, we do not think, for reasons already discussed, that this decision lays down the correct law on the subject, and had it not been for the fact that since 1st April, 1972, the form of the return prescribed by r. 12 has been amended and since then, there is a separate column providing that 'income arising to spouse/minor child or any other person as referred to in Chap. V of the Act' should be shown separately under that column and consequently there is no longer any scope for arguing that the assessee is not bound to disclose such income in the return to be furnished by him, we would have referred the present case to a larger Bench. But we do not propose to do so since the question has now become academic in view of the amendment in the form of the return carried out with effect from 1st April, 1972.'

11. In our opinion, the above observations provide a complete answer to the questions raised by the learned counsel for the assessees in these references. Once it is accepted that the assessee is under an obligation to himself declare in the return filed by him the income arising to his minor sons on their admission to the benefits of partnership in a firm, no further consideration becomes relevant. It would be immaterial whether such an assessee has income from any other source under the Act. In the first place, the income, although derived by his minor children, is held to be 'his income' and an obligation is imposed on the assessee under s. 139(1) of the Act to declare such income in the return filed by him. It would, therefore, be true to say that the income of the minor children is treated as the income of the assessee. The reliance placed on the definition of 'assessee' under s. 2(7) of the Act is, in our opinion, misplaced because sub-clause (a) of s. 2(7) of the Act specifically provides that the expression 'assessee' includes every person in respect of whom any proceeding under the Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable. Thus, the expression 'assessee' covers a person who is liable for assessment of income belonging to his minor children which is fictionally treated as his income for the purpose of the assessment. Explanation 1 to s. 64(1) relied on by the learned counsel for the assessee does not carry the matter any further because it is easily possible for the ITO to identify that parent whose total income is greater. Once the income under s. 64(1)(iii) of the Act is included in the return filed by an assessee, the ITO has to make an inquiry whether the inclusion by the assessee of such income is proper or not. He has to inquire into the question as to who has greater income between the parents of a minor child. If the ITO comes to the conclusion that the income included in the return by an individual is liable to be assessed, by reason of Expln. 1 to s. 64(1), in the hands of the another parent, the ITO would then be under an obligation to disregard the income returned by the assessee in whose hands it is not assessable because of Expln. 1 to s. 64(1), and assess it in the hands of the real person according to Expln. 1.

12. We do not anticipate any difficulty or absurdity, as claimed by the learned counsel for the assessees, in the working of the provisions contained in s. 64 of the Act. We are not persuaded to accept that the omission to include s. 64 in the definition of 'income' under s. 2(24) is fatal to the claim. It should be borne in mind that s. 41 is referred to in s. 2(24) because the amount does not partake the nature of income. In the case of s. 64, there is no difficulty because the amount includible undoubtedly bears income character and operates in regard to the person in whose hands that income is liable to be taxed.

13. For the aforesaid reasons, we are satisfied that the provisions of s. 64(1)(iii) of the Act empower the ITO to include the share income arising to the minor children of a individual on their admission to the benefits of partnership in a firm under s. 64(1)(iii) of the Act, in the total income of such individual assessee, notwithstanding the fact that the total income of such individual assessee is either less than the minimum liable to tax or that such an individual has no total income at all from any source other than the income under s. 64(1)(iii) of the Act. We hold that the assessments made by the ITO were correct and the Tribunal was in error in coming to the conclusion that such incomes are not liable to be taxed in the hands of the assessee.

14. We, accordingly, answer the question referred to us in the negative, that is to say, in favour of the Revenue and against the assessee. We, however, direct the parties to bear their own costs. Advocate's fee Rs. 300.

15. Sri M. J. Swamy, learned counsel for the assessee, makes an oral application for leave to appeal to the Supreme Court. We do not think that this is a fit case for grant of leave to appeal to the Supreme Court under s. 261 of the Act. In coming to the conclusion that the assessee is bound to disclose the income arising to his minor children on their admission to the benefits of partnership in firm, we have followed the Supreme Court decision in CIT v. Kochammu Amma, : [1980]125ITR624(SC) . Leave, therefore, is refused.


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