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income-tax Officer Vs. Dr. (Mrs.) Kamlesh Madan - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Chandigarh
Decided On
Judge
Reported in(1983)3ITD542(Chd.)
Appellantincome-tax Officer
RespondentDr. (Mrs.) Kamlesh Madan
Excerpt:
.....the taxation laws (amendment) act, 1975, with effect from 1-4-1975, provides that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly (i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner.explanation 1 to sub-section (1) of section 64 provides that for the purposes of clause (i), the individual, in computing whose total income the income referred to in that clause is to be included, shall be the husband or wife whose total income (excluding the income referred to in that clause) is greater ; and where any such income is once included in the total income of either spouse, any such income arising in any succeeding year shall not be.....
Judgment:
1. This appeal by the revenue is directed against the order of the Commissioner (Appeals) dated 1-10-1981 relating to the assessment year 1978-79.

2. In order to appreciate what is the issue involved, we first set out the facts which are relevant for determination of the disputed issue.

Late Dr. R.N. Madan and his wife Dr. Kamlesh Madan were partners in the firm Madan & Co., Simla. The firm of Madan & Co. was assessed for the assessment year 1978-79 on 22-1-1980. In this assessment, share allocation to Dr. Kamlesh Madan inclusive of unabsorbed depreciation came to Rs. 69,822. During the course of the assessment proceedings, it was claimed that this loss should be set off against income of Dr. R.N.Madan in view of the provisions of Section 64(1)(i) of the Income-tax Act, 1961 ('the Act'). However, the ITO negatived this claim by placing reliance upon the Circular No. 104, dated 19-2-1973 issued by the CBDT and appearing at [1972] 85 ITR (St.) 76. The assessee, therefore, felt aggrieved and went in appeal before the Commissioner (Appeals).

3. The Commissioner (Appeals) took into consideration the provisions of Section 64(1)(i), read with Explanation 2 to Section 64(2), inserted by the Finance Act, 1979 with effect from 1-4-1980. He held that the share of loss of Dr. Kamlesh Madan will have to be considered under the provisions of Section 64(1)(i) in the hands of her husband and, therefore, the assessee was entitled to relief of Rs. 68,822. The revenue has come up in appeal as a grievance against this order of the learned Commissioner. The issue, therefore, before us is as under : Whether, on the facts and in the circumstances of the case, the share of loss of Rs. 68,822 allocated to the partner Dr. Kamlesh Madan in the assessment of the firm of M/s Madan & Co., Simla, can be considered for purpose of set off against the income of her husband for that year in view of the provisions of Section 64(1)(i) read with the Explanation 2 to Section 64.

This issue would really depend upon the connotation to be attached to the word 'income' used in Section 64(1)(i).

4. The parties have been heard. Section 64(1), which was substituted by the Taxation Laws (Amendment) Act, 1975, with effect from 1-4-1975, provides that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly (i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner.

Explanation 1 to Sub-section (1) of Section 64 provides that for the purposes of Clause (i), the individual, in computing whose total income the income referred to in that clause is to be included, shall be the husband or wife whose total income (excluding the income referred to in that clause) is greater ; and where any such income is once included in the total income of either spouse, any such income arising in any succeeding year shall not be included in the total income of the other spouse unless the ITO is satisfied, after giving the spouse an opportunity of being heard, that it is necessary so to do. The Finance Act, 1979 added Explanation 2 to Section 64(2) with effect from 1-4-1980. This Explanation clarifies that for the purposes of this section, 'income' includes loss.

5. On the issue whether income includes loss, there is a judgment of the Gujarat High Court in the case of Dayalbhai Madhavji Vadera v. CIT [1966] 60 ITR 551 wherein their Lordships have held that 'income' does not include a loss and, therefore, the share of loss apportioned to a spouse in a partnership cannot be included in the individual's total income. However, the Mysore High Court in the case of Dr. T.P. Kapadia v. CIT [1973] 87 ITR 511, dissenting from the judgment of the Gujarat High Court mentioned above, has held that income in this context includes a loss. Thus, it is clear that there is a conflict of judicial opinion on the connotation of the word 'income' used in Section 64(1)(i). It is now well settled canon of construction that when in a taxing statute, two reasonable views of a provision are possible, the one that favours the subject has to be adopted. In this view of the matter, even if no further reasons are assigned for holding that income in this context includes a loss, the word 'income' should be taken to connote loss as well.

6. Even on general principles, income from membership in the firm would include a loss because income and loss have to be apportioned between those who constitute the firm if all of them are sui juris. The liability to assessment to income-tax cannot alternate from year to year between one spouse and the other depending on whether there is a profit or loss. The clause only gives powers to the ITO to decide where to include the so apportioned income depending upon which of the spouses has higher total income. If the word 'income' is held not to connote loss as well, it will result into a situation where working of the statute would become impossible. In other words, that interpretation will make the statute unworkable. This becomes clear if an example is taken of a case where the share of the wife of an individual has been determined at a plus figure and that is included in the total income of the individual or the spouse and after the assessment is challenged in appeal in the case of the firm, that positive figure is taken into negative. In such a situation, the connotation of the word 'income' taken as positive income would necessitate the loss to be excluded at the time when the assessment may have to be revised in order to give effect to the order of appellate authorities under Section 250/254 read with Section 155(1) of the Act.

It, therefore, becomes clear that the word 'income' in Section 64(1)(i) has to be taken as connoting income as well as loss.

7. The above proposition has found favour with the Supreme Court in the case of CITv. Harprasad & Co. (P.) Ltd. [1975] 99 ITR 118, particular page 124, wherein their Lordships have held that "from the charging provisions of the Act, it is discernible that the words 'income' or 'profits and gains' should be understood as including losses also, so that in one sense 'profits and gains' represent 'plus income' whereas losses represent 'minus income'." This in fact is a quote from the judgment of the Supreme Court itself in the case of CIT v. Karamchand Premchand Ltd. [1960] 40 ITR 106. It may be pointed out that the Supreme Court was, in the case of Harprasad & Co. Ltd. (supra), not interpreting Section 64(1)(i) but, in our considered opinion, the observations of the Court, even if they be in the form of obiter, are equally binding on the subordinate courts particularly when there is no other aid available for the interpretation of a particular provision in the statute.

8. The matter has been in fact set at rest by the Legislature by its legislative wisdom with the introduction of Explanation 2 to Section 64 with effect from 1-4-1980. The question may, however, arise whether the Explanation added by the Finance Act, 1979 with effect from 1-4-1980 can be said to be applicable to the assessment year 1978-79 which is under appeal before us. This issue has been very clearly decided by the learned Commissioner by reference to the speech of the Finance Minister made on 28-2-1975 when he was explaining the provisions contained in the amendments in the Finance Bill, 1979. In paragraph 102 of the speech of the Finance Minister, there is indication, as pointed out by the learned Commissioner, that the changes made in the income-tax law through the Finance Bill which were of minor significance were largely in the nature of clarification and rationalisation of the existing provisions. Therefore, the intent of Parliament in the introduction of Explanation 2 to Section 64 was ostensibly putting at rest the controversy whether 'income' includes loss. Since this Explanation had come on the statute book when the assessment/appeal was decided, the learned Commissioner was fully justified in coming to the conclusion that this Explanation being of clarificatory nature is applicable to the assessment year under appeal. This clearly sets the matter at rest because the statute itself under this Explanation provides that income includes a loss. When this is so, there is no reason why the loss apportioned to the wife could not be included in the hands of the husband. The order of the Commissioner (Appeals) is, therefore, upheld.


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