THAKKAR J.- 'Till death doth us part' - the oath uttered at the time of solemnization of marriage may have to be altered into 'till the I.T. authorities doth us part' by the medicos who marry and intend to carry on their professional activities in partnership. That cannot be helped if the interpretation placed by the Income-tax Appellate Tribunal in respect of the provision popularly known as the 'clubbing provision' embodied in s. 64(1)(i) of the I.T. Act of 1961 is untenable as is canvassed by the revenue. The said provision speaks 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) 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.'
In essence it provides that when the husband and the wife are members of the very same partnership firm carrying on a business, the income of the two is to be clubbed together. In so far as the income arising directly or indirectly from the business of the partnership is concerned, such clubbing together would naturally result in a higher rate of tax being attracted having regard to the fact that income-tax at a higher rate is levied in regard to the slab of income which is in a higher bracket. The assessee is, therefore, interested in escaping the clutches of this provision. The revenue on the other hand would be anxious to call into aid this provision in case any question of interpretation arises which would result in an assessee being in a position to successfully contend that the provision would not be attracted in his case. Such a question has arisen in the context of a partnership firm between two spouses who happen to be professionals. Each of them is a qualified medical practitioner (doctor). The husband and the wife team of doctors have formed a partnership and are carrying on their professional activities in partnership. The activities, inter alia, consist of the running of a nursing home where the patients under the treatment of the team of doctors are admitted as indoor partients and the income from the nursing home also forms a part of the professional income of the partnership firm. The assessees contended that the clubbing provision contained in s. 64(1)(i) would be attracted provided and only provided the basic pre-condition envisioned by the provision, namely that the two spouses must be members of a partnership firm carrying on a business is satisfied. The expression 'carrying on a business' has been placed under spotlight and it has been contended that when a doctor-husband and a doctor-wife carry on their 'profession' in partnership, it cannot be said that they are 'carrying on a business'. If the contention is right, the assessees must succeed. Otherwise the revenue would be justified in clubbing together their income. It appears that a similar question on similar facts has arisen in the cases of a number of doctor-couples carrying on their profession in partnership. In the case of a couple from Godhra the question arose in three successive years, viz., 1972-72, 1973-74 and 1974-75. The Income-tax Appellate Tribunal upheld the contention of the assessee-couple that the provision in question was not attracted because they were partners in a firm carrying on 'profession' and not partners in a firm 'carrying on business'. Thereupon three allied references have been made at the instance of the revenue. In I.T.R. Nos. 193/78 and 113/79 we are concerned with the case of the doctor husband who has succeeded in respect of assessments for the aforesaid three years. In I.T.R. No. 154/78 we are concerned with the doctor wife who has also succeeded before the Tribunal. All these three references will be disposed of by this common judgment. We will also dispose of two income-tax applications (I.T.A. Nos. 158/81 & 159/81) pertaining to another doctor-couple from Ahmedabed in respect of two successive years 1974-75 and 1975-76. These applications have been made by the Commissioner with a view to invoke the jurisdiction of this court under s. 256(2) in order to require the Appellate Tribunal to state the case and refer the question to us. A reference is sought by the Commissioner in the case of a doctor-couple from Bhuj (I.T.A. No. 167/81). If we negative the plea of the revenue that the Income-tax Tribunal was wrong in holding that the provisions concerned would not be attracted in the case of a husband and wife couple carrying on a 'Profession' in partnership, these three applications must of necessity fail. That is why these three applications have been tagged on and being disposed of along with the aforesaid three references. These three Income-tax Applications will also be disposed of by this common judgment.
For the purposes of the present judgment it will be sufficient to advert to the facts giving rise to Income-tax Reference No. 193/78 which may be treated as typical for the entire group. The facts pertaining to the each of these matters need not, therefore, be unnecessarily stated. In the allied references and the I.T. applications an indentical question of law arises on similar facts.
The following facts are not in dispute :
(1) The assessee, Dr. K. K. Shah, is a qualified Gynaecologist. His wife, Dr. Mrs. Haribala K. Shah is also a qualified Gynaecologist.
(2) Both of them are carrying on their profession as Gynaecologists in partnership with ecah other under the name and style of Sevashram Hospital.
(3) They are also running a nursing home for purposes of carrying on their profession.
(4) Patients are admitted to this nursing home and are treated by the doctor-couple.
(5) It is not the case of the revenue that any patient other than the patients treated by the one or the other of the partners is admitted as a patient.
(6) Nor is it the case of the revenue that any other activity not wholly connected with the activity pertaining to the medical practice of the two doctor is carried on in partnership. For instance, it is not the case of the revenue that Sevashram Hospital also runs a chemists shop as a partnership activity where drugs are sold to patients.
The last mentioned factor requires to be highlighted because in such an event the profits attributable to that branch of the activity would require to be accorded a different treatment. No such question arises in the present reference, or in the allied references, wherein the doctor-couples are carrying on their profession which consists of treating their patients, acting as consultants, performing operations, and treating them as indoor patients in the nursing home which is run exclusively for the purpose of treatment of the patients under the treatment of the doctor-couple.
Before we deal with this question in the context of s. 64(1)(i) of the I.T. Act, 1961, it is necessary to trace the history of the relevant provision as it existed prior to the enactment of the said Act, i.e., in the context of the Indian I.T. Act of 1922 (hereinafter referred to as the 'old Act') which was replaced by the I.T. Act of 1961 (hereinafter referred to as the 'new Act'). The corresponding provision in the old Act was contained in s. 16(3). These provisions require to be reproduced in juxtaposition.
16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included -
64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly
(a) so much of the income of a wife or minor child of such individual as arises or indirectly -
(i) to the spouse of such from the membership individual of the spouse in a firm carrying on a business in which such individual is a partner.
(i) from the membership of the wife in a firm her husband is a partner.
It is necessary to stress the circumstance that s. 16(3)(a)(i) of the old Act has undergone a metamorphosis in the corresponding provision contained in s. 64(1)(i) of the new Act. An analytical study of these provisions would reveal the following features :
(1) Section 16(3)(a)(i) of the old Act provides for the clubbing together of the income of the wife with the income of the husband when the income of the wife is derived directly or indirectly (what follows is of great significance) 'in a firm of which her husband is a partner'. In other words, the mere membership in the firm on the part of a wife would attract the clubbing with the income arising to the wife from the firm would be clubbed with the income of her husband.
(2) As against this, under the corresponding provision in s. 64(1)(i) of the new Act (the clubbing provision), has introduced the concept of income arising to a spouse in a firm carrying on a business. The expression 'membership of the spouse in a firm carrying on a business' requires to be underscored with red ink.
(3) Under the old Act the mere membership of the wife in a firm was sufficient to attract the clubbing provision. Under the new Act the Legislature has made the applicability of the clubbing provision dependent on the spouse deriving income not in 'any firm' but in a 'firm carrying on business'. The expression 'membership... in a firm' has been replaced by the expression 'membership.... in a firm carrying on business'. Is this change a mere incidental change or is it a change which is introduced with some deliberate design or purpose - is a relevant question to ask. It is pertinent to pose this question because the expression 'a firm carrying on business' is not inter-changeable with the expression 'a firm'. The rider added in the corresponding provision in the new Act pertains to the carrying on of 'business'. Is it merely an amplification of the earlier provision, a mere elaboration of the earlier provision, or is it a purposeful change introduced by the Legislature To this question we must now address ourselves. The expression 'business' has been employed by the Legislature in order to emphasise the distinction between a business and a profession. The Legislature in enacting the Indian I.T. Act of 1922 as also the I.T. Act of 1961 has shown great awareness about the distinction between the concept of a 'business' and that of a 'profession' and has accorded different treatment depending on whether the activity falls within the description of 'business' or 'profession.' This distinction between the two concepts has been projected in some of the provisions of the Act as we shall presently point out.
1961 Act (new Act)
1922 Act (old Act)
Business is defined by s. 2(13) as under :
Business is defined by s. 2(4) as under :
'Business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
'Business includes any trade, commerce, or manufacture or any adventure or concern in the' nature of trade, commerce or manufacture.'
The expression 'profession' has been defined by section 2(36) as under :
The expression 'profession' has not been defined.
'`profession includes vocation.'
It takes within its sweep the expression 'vocation'.
Section 28 which is the charging section treats professional income as of a different category from that of business income as is evident from the opening words.
Section 10(1) refers to business, profession or vocation.
'The following income shall be chargeable to income-tax under the head Profits and gains of business or profession
(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;...
(iii) income derived by a trade, professional or similar association from specific services performed for its members;
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.'
Explanation 1 refers to profits of business only in the context of profits of managing agency.
Explanation 2 refers to business only in regard to speculative transaction.
NoteThe expression 'vocation' employed by s. 10(1) of the old Act 'vocation' is included in the dictionary of the new Act (see s.2(36)).
(NoteIn the new Act the expression 'vocation' is omitted and is brought within the ambit of the expression 'profession which is defined for the first time by section 2(36)
Section 29 refers to the method of computation of profits from business or profession.
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 assumes importance. It assumes 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, the incomes of the partners in a firm would be 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 the domestic chores. And by and large such would be the case in the case 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 stranger 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 hare to the real partner. There would be no such risk when a wife is introduced as a partner. That is conceivably the reason why s. 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 clubbibg would arise. It must also be realised that a doctor-husaband 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 do 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 business 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. Even so she can be introduced as a partner in a partnership firm in a business. It is here that the aspect regarding the difference in the situation in the context of a doctor-husband and a doctor-wife would require to be emphasized. A doctor-wife is capable of carrying on her own profession, say as a Gynaecologist and earn her own income. It would be unreasonable to make her pay tax at a higher rate merely because she carries on an activity in partnership with her doctor-husband. Again, so far as the businessmans wife is concerned, nobody would ever accept her as a partner and give her a share in the profits if she is herself not capable of carrying on a business and making any worthwhile contribution in the business activity. As against this, the doctor-wife of a doctor-husband can enter into partnership with any other doctor and carry on the professional activity. There would be no reluctance on the part of another doctor to take her in as a partner because she would be fully qualified and can share the work and contribute her talent in the profession in order to secure income for the firm. Thus, the raison detre for clubbing together the incomes of non-professionals does not exist in the case of professionals. It is this aspect which was presumably realised and that is why in the new Act a change was introduced by providing that the provision would be attracted only in the case of spouses carrying on business in partnership and not in the case of spouses who do not carry on business (but carry on profession) in partnership. And it is now worthwhile to reproduce an extract from the speech of the Finance Minister made on the floor of the House at the time of introducing the I.T. Bill of 1961. We will refer to that part of the speech which pertains to the clubbing provision under the old Act and the change sought to be introduced in this sphere by the new Act. The speech has been reproduced on page 33 of the Treatise on the Income-tax Act, 1961, by S. C. Manchanda, K. Srinivasan & B. Malik in Volume I of the 1st Edn. of 1962. The relevant extract from p. 37 may be quoted :
'A provision which will be of interest to persons engaged in the professions is that in clause 64. Under the existing law if a husband and wife are partners in the same firm, the share income of the wife is clubbed with that of the husband, who has to pay tax on the income so aggregated The Law Commission has expressed itself agains this provision as applied to partnerships between husband and wife engaged in professions as doctors, lawyers, etc. The Commission has recommended that such cases should be exempt from the operation of the provision. The Government has accepted this suggestion and the provision has been suitably modified.'.
Two salient features required to be highlighted are : (1) that the Law Commission had expressed the opinion that the clubbing provision should not be applied to the husband and wife partnerships engaged in professions such as doctors, lawyers, etc., and (2) that the Government had accepted this suggestion and had suitably modified the clubbing provision. Thus, it is evident that the change reflected in the clubbing provision in the new Act is not a mere casual change of phraseology or an incidental or a purposeless change in phraseology without any design or purpose. It is a change introduced with open eyes and with full awareness of the need to exempt professional couples carrying on their profession in a partnership firm from the clutches of the clubbing provision. There was a deliberate design and purpose in introducing the new concept of a spouse carrying on a 'business' in place of the old concept of a membership of a spouse in partnership regardless of the nature of the activity carried on. The intendment and the purpose of the legislation and the drift of the legislative mind is manifest. It was intended to exclude spouses carrying on professional activity from the purview of the clubbing provision. Incidentally we may advert to the content of the expression 'professional activity' as interpreted by the Supreme Court in Dr. Devendra Surtis case  34 FJR 376 ; AIR 1969 SC 63. Says the Supreme Court :
'There is a fundamental distinction therefore between a professional activity and an activity of a commercial character' (p. 68) : '... a 'profession'... involves the idea of an occupation requiring either purely intellectual skill, or of manual skill controlled, as in painting and sculpture, of surgery, by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale of commodities' (p.67) '... a professional activity must be an activity carried on by an individual by his personal skill and intelligence...... and unless the profession carried on by (a person) also partakes of the character of a commercial nature' (pp. 67/68) the professional activity cannot be said to be an activity of a commercial character.
We are, therefore, of the opinion that when professional couples such as a doctor-husband and a doctor-wife or a lawyer-husband and a lawyer-wife or an architect-husband and a architect-wife form a partnership for the purpose of carrying on a professional activity which would fall within the scope of the interpretation in Dr. Devendra Surtis case, AIR 1969 SC 63, their income is not liable to be clubbed together under s. 64(1)(i). We would, however, add the following riders :
(1) If a doctor-husband and a doctor-wife are also carrying on the activity of a nursing home in the context of their professional activity for the purpose of treating their own patients, the income from the nursing home can be treated as the professional income of the professional couple and no question of clubbing together can arise.
(2) If any business activity is carried on by a firm constituted by the doctor-husband or doctor-wife such as of running a drug store for selling drugs to the patients or to others, the income from such activity can be clubbed together. Such income will not be exempt from being clubbed together merely because it is an activity which is adjunct to the main professional activity. Similarly, when a doctor-couple carries on the nursing home activity by admitting patients of other doctors and charging fees such as room fees or fees for services rendered to them, it may amount to a business activity carried on by the firm and that part of the income can be clubbed together.
(3) Merely because a part of the activity is professional activity, the assessee cannot escape the clutches of the clubbing provision even in respect of its income which can be said to be an income arising in the context of his business activities as distinguished from professional activities. Accordingly, we decide the group of references and the group of income-tax applications in the following manner :
I.T.R. No. 193/78, I.T.R No. 154/78 & I.T.R. No. 113/79.
Question Answer Nos. 1 & 2 The income of the spouses from the professinoal activities of the firm cannot be clubbed together but it the spouses are also engaged in any distinct business activity such as running a chemists shop their income come to that extent can be clubbed together. Income from a nursing home run by the doctors who them-selves treat their own patients as an intergral part of professional must be treated as professional income. If the nursing home is one where patients of doctors other than the partners are admitted and treated, it may be considered a business as discussed in the main judgment provided the tests indicated in the course of the discussion are satisfied.
Income-tax Applications Nos. 158/81, 159/81 & 167/81.
These three applications are rejected having regard to the fact that the activity carried on is absolutely professional activity and the view taken by the Tribunal is unexceptionable and in accordance with the view taken by us in the course of the discussion hereinbefore.
In the result, the three references are answered in the aforesaid manner. The three Income-tax Applications are rejected. There will be no order regarding costs in all the six matters.