1. The assessee-individual held 2020 shares out of 16,400 shares in a company Diamond Shamrock (I) Ltd. His wife held 282 shares in the same company, whereas his daughter and son held 2,898 and 3,000 shares, respectively. Both the wife and the husband thus had substantial interest in this company as defined in Section 64 of the Income-tax Act, 1961 ('the Act'). In another company Speciality Formulations (P.) Ltd., the assessee held 1,250 and his wife 3,735 out of the total 5,000 shares of the company. In this company also the assessee and his wife thus had substantial interest.
2. For the assessment year 1978-79 under appeal in working out the total income of the assessee, the ITO included the salary received by the assessee of Rs. 82,800 from Diamond Shamrock (1) Ltd. and, under Section 64(1)(ii) of the Act, two amounts of Rs. 33,000 each totalling up to Rs. 66,000 being the salary income of the assessee's wife in the two companies Diamond Shamrock (I) Ltd. and Speciality Formulations (P.) Ltd. The assessee's claim before the ITO that only the income of his spouse can be included in his total income and not his own income of Rs. 82,800 was rejected by the ITO.3. On appeal this alleged claim 'clubbing on reciprocal basis' was rejected by the Commissioner (Appeals) also. Hence the assessee's appeal before us.
4. The learned counsel for the assessee has pointed out that undisputably both the assessee and his wife had substantial interest in the two limited companies. Under the provisions of Section 64(1)(ii) as it applied for the assessment year under appeal, i.e., prior to the amendment of the section by referring to clause (ii) in the Explanation 1 inserted with effect from 1-4-1980, only the income of the other spouse was assessable in an assessee's case. According to the learned counsel a direct application of the provisions of Section 64(1)(ii) to the assessee's case required that only the sum of Rs. 66,000 representing his wife's income from the two companies should be assessed in his hands, whereas his own income of Rs. 82,800 should be assessed in the hands of the wife. During the relevant assessment year Explanation 1 remained unamended to the extent of the reference made to Clause (ii) in that Explanation. The income of any person, therefore, was only assessable in the hands of his or her spouse and not in his own hands. This type of assessment is referred to by the learned counsel as the reciprocal clubbing of the income of spouses. The amendment with effect from 1-4-1980 of Explanation 1, only brought in for the first time, the question of clubbing the spouse's income in the hands of the person having the larger income and also the question of the department's exercising an option in this regard relevant to the assessment of consecutive years. The department has followed the very same method in the preceding years and it was not proper for the department to go back on this method correctly followed by it from year to year. Thus, referring to the assessment year 1976-77, it is pointed out that in the assessment of the assessee's wife her own income of Rs. 57,000 salary assessed in the hands of the husband under Section 64(1)(ii) was not assessed whereas the salary of the husband of Rs. 76,200 was assessed. Likewise for the assessment year 1977-78 in the assessee's own assessment the salary received by him of Rs. 82,800 which was assessed in the hands of his wife under Section 64(1)(ii) was not included, whereas the wife's income of Rs. 72,000 was assessed in his hands. The department, thus, according to the learned counsel, was following strictly the correct legal method of assessing one's spouse's income in the other's hands and vice versa. There was no reason to give up this method and include in the assessee's assessment for the year under appeal both his income and his wife's income. It is also pointed out that his income of Rs. 82,800 has already been assessed in his wife's hands. There was thus a clear double assessment for which there was no justification at all. The doubly taxed amount of Rs. 82,800, therefore, it is claimed, should be deleted from the assessee's total income.
5. For the department reference is made to the provisions of Section 64(1) (ii) and Explanation 1 thereto. The amendment of the Explanation with effect from 1-4-1980 it is pointed out, is only clarificatory in nature. It was necessary to include the income of both the wife and the husband in the hands of one person.
6. The provisions of Section 64(1)(ii) and Explanation 1 thereto, so far as are relevant for the purpose, are as under : 64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly-(i) ** ** ** (ii) to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest : ** ** ** Explanation 1 : For the purposes of Clause (i) and Clause (ii), 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, for the purposes of Clause (iii), the income of the minor child from the partnership shall be included in the income of that parent 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 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.
Under the Income-tax Act tax is charged on the total income of the previous year of every person and Section 5 of the Act gives the scope of total income. Section 64 is admittedly a provision seeking to avoid certain loopholes whereby persons closely related divide the income of one person between themselves so as to reduce the liability to tax. It is in this context that Section 64(1)(ii) provides that where a person has got substantial interest in certain concerns which pays salary, commission, etc., to his spouse, these last amounts should be included in his assessment as his own income under the fiction rendered therein.
Neither after the amendment of Explanation 1 with effect from 1-4-1980, or prior to that date could it be spelt out that the application of Section 64 to a person's case should result in the exclusion from his total income of income which accrued, arose or was received, etc., by himself. In order to delete such an amount from the total income of a person that income has to be covered by an exemption provision of the Act. The proper purpose of Section 64 is to include in the total income of a person, the income of his spouse, i.e., the fictional income referred to in Section 64. The provisions of Section 64 cannot, as pointed out by the learned counsel, mandate the inclusion of the husband's income in the wife's hands and vice versa and the exclusion of the husband's own income from his assessment and the wife's income from her assessment. This peculiar proposition given by the learned counsel for the assessee under the nomenclature of reciprocal clubbing of income is not only not warranted by the Act but is really contrary to the intention of Section 64 which aims at clubbing the income of the husband and the wife from concerns where one's spouse has substantial interest. The amendment of 1980 has specified that such clubbing should be done in the hands of the spouse having the greater income. It has also laid down that if once such clubbing is done in the hands of one of the spouses for the subsequent years, the inclusion should be in the hands of the same spouse unless the ITO has valid reasons for changing the method. These two provisions-assessment in the hands of the spouse with a greater income and consistency in the procedure-have been culled out from an interpretation of the pre-amendment of the provisions in the decision of the Tribunal in IT Appeal No. 1612 (Ahd.) of of 1980 dated 17-7-1981 referred to by the learned counsel for the assessee, even prior to the amendment. The amendment has made this clearer. We have, therefore, no hesitation in holding that the order of the Commissioner (Appeals) including the wife's income in the assessee's total income which must certainly comprise of income accruing, arising, etc., to him, is a correct one. We are equally sure that the method adopted by the department in the preceding years' assessment both to the assessee as well as his wife including the other spouse's income but omitting his or her income is incorrect. The Commissioner (Appeals)'s order is upheld.7. The learned counsel has pointed out before us that the sum of Rs. 66,000 thus gets doubly taxed once in the hands of the recipient, the wife and again under Section 64 in the hands of the assessee. This really, is the position that obtains. A literal interpretation of the provisions of Section 64 would result where both the spouses have interest in the same concerns, in the assessment in the hands of both the spouses clubbing the income of the other. The Act does not seem to have provided any remedy for this. Both equity as well as the general principle of taxation that no income should be taxed doubly in the same passage would, however, enure to the benefit of the assessee. On this basis the assessee should be exonerated from the double levy by deleting both the amounts from the assessment of one of the spouses. We have no doubt that the department exercising its executive power will do this. It requires, however, to be mentioned that since the appeal of the husband is before us we can only confirm the assessment since it is in conformity with Section 64. If the liability to tax would be more if the same amount is clubbed in the hands of the wife, the proper thing even for the period prior to the amendment of 1980 would be to include both incomes in the hands of the wife. This is because the purpose of Section 64 is to increase the tax rather than reduce it. The department, as pointed out above, has not clubbed that two amounts in the hands of the same spouse for the preceding years. For a first time such clubbing has been done this year. The Tribunal's order referred to by the assessee requires that when once a clubbing is done in a particular spouse's case, it should not be departed from for the subsequent years lightly. The amended Explanation 1 also specifies the same. In effect, therefore, whether the clubbing is done prior to 1980 or subsequently, when once the department has fixed one spouse as the subject-matter of clubbing they should not change the person unless substantial reasons such as tax evasion, deliberate concealment, etc, warrant it. Since we are not sure whether the greater income and tax obtain by having the clubbing process in the hands of the assessee, i e., the husband, rather than that of the wife, we cannot lay down that in the future also the clubbing should be in the husband's hands. If, however, the department after working the income and tax effect find that the clubbing of the incomes in the husband's hands would satisfy the condition of clubbing in the hands of the spouse having the greater income for this assessment year for which the clubbing is done for the first time, in our view, it would be bound to follow consistency with regard to this in the subsequent years also. This should be the case even though the amendment to Explanation 1 came with effect from 1-4-1980 for the reasons stated above.
8. Subject to the above remarks, the Commissioner (Appeals)'s order is upheld and the appeal is dismissed.