1991 (2) TMI 53 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee's activity amounted to business.
2. Whether the Income-tax Officer's action under section 147(b) on the basis of audit objection amounted to 'change of opinion'.
3. Whether section 64(1)(i) was attracted assuming the firm's activity amounted to a profession.

Issue-wise Detailed Analysis:

1. Whether the assessee's activity amounted to business:
The primary question was whether the firm, constituted by two doctors (husband and wife), was carrying on business as referred to in section 64(1)(i) of the Income-tax Act, 1961. The assessee contended that section 64(1)(i) does not apply to a firm constituted by professionals like doctors, arguing that the provision is applicable only to business in the conventional sense, and carrying on a profession cannot be equated with business. The court noted that the definition of "business" under section 2(13) of the Act is inclusive, covering trade, commerce, or manufacture. However, the court distinguished between the conventional meaning of business and profession, noting that many professionals are barred from commercializing their professions. The court referenced previous judgments, including CIT v. Dr. K. K. Shah and Dr. K. Thomas Varghese v. CIT, which highlighted the distinction between business and profession, particularly in the context of professional partnerships. The court concluded that professional firms cannot be brought under section 64(1) of the Act, as the concept of "business" in section 64(1) does not include professions.

2. Whether the Income-tax Officer's action under section 147(b) on the basis of audit objection amounted to 'change of opinion':
The second issue pertained to whether the Income-tax Officer's action under section 147(b) based on an audit objection amounted to a 'change of opinion'. The court referenced the Supreme Court decision in Indian and Eastern Newspaper Society v. CIT, which held that an audit objection cannot be the basis for action under section 147(b). Consequently, the court answered this question in the affirmative and against the Revenue, indicating that the Income-tax Officer's action did indeed amount to a 'change of opinion'.

3. Whether section 64(1)(i) was attracted assuming the firm's activity amounted to a profession:
Assuming the firm's activity amounted to a profession, the court examined whether section 64(1)(i) was applicable. The court discussed the legislative history of section 64, noting that the current provision applies only when the income of a spouse arises from membership in a firm carrying on a business, unlike the earlier provision under the 1922 Act, which applied regardless of the firm's activity. The court emphasized that the departure in the present Act was purposeful, considering the nature of professional firms. The court also discussed the constitutional implications, stating that treating professional income differently based on the spouse's involvement would violate the equality clause under Article 14 of the Constitution. The court concluded that professional firms, such as the one constituted by the two doctors, do not fall under section 64(1) of the Act, and thus, the section was not attracted.

Conclusion:
The court answered all questions in the affirmative and against the Revenue. It held that the assessee's activity did not amount to business, the Income-tax Officer's action under section 147(b) based on an audit objection amounted to a 'change of opinion', and section 64(1)(i) was not attracted to the professional firm constituted by the two doctors. The reference was answered accordingly.