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Issues involved: Interpretation of section 64 of the Income-tax Act, 1961 regarding treatment of loss incurred by the wife of the assessee in a partnership firm where the assessee is also a partner.
Judgment Summary: The High Court of Madhya Pradesh addressed a reference under section 256(1) of the Income-tax Act, 1961, concerning the treatment of the loss incurred by the wife of the assessee in a partnership firm where the assessee is a partner. The dispute revolved around whether the wife's loss should be considered as the loss of the assessee and allowed to be set off against his income. The assessee and his wife were partners in a firm named M/s. Ganpat Pannalal, Harda. The assessee sought to deduct the loss incurred by his wife in the partnership from his total income for the assessment year 1974-75. Initially, the claim was rejected by the Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC). However, the Tribunal, following a precedent set by the Mysore High Court, allowed the deduction of the wife's loss from the assessee's total income. The conflicting interpretations arose from sections 70 and 64 of the Act. Section 70 allows an assessee to set off losses against income from other sources under the same head, while section 64 mandates the inclusion of income arising to the spouse from a partnership firm where the individual is a partner. Different High Courts held divergent views on whether the term "income" in section 64 encompasses loss. The Mysore High Court and certain commentaries supported the inclusion of loss within the definition of income, contrary to the Gujarat and Madras High Courts. The Court favored the interpretation aligning with the Mysore High Court's stance, which considered loss as part of income for the purpose of section 64. The Court highlighted that subsequent legislation, specifically Explanation 2 added to section 64 by the Finance Act, 1979, clarified that "income" includes loss. This legislative clarification reinforced the correctness of the Mysore High Court's interpretation. The Court emphasized the principle of adopting a construction favorable to the taxpayer when two interpretations are equally plausible. In conclusion, the Court ruled that the share of loss incurred by the wife of the assessee in the partnership firm should indeed be deducted from the total income of the assessee. No costs were awarded for the reference.
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