1989 (10) TMI 2 - SC - Income Tax

Husband and wife are partners in a firm when wife s share is included in husband s total income under s.64(1)(i) - Whether the assessee is entitled to carry forward to subsequent years not only his share of loss but also the share of loss of his wife from the firm - question answered in the affirmative

Summary

Issues Involved:
1. Whether the assessee is entitled to carry forward to subsequent years not only his share of loss but also the share of loss of his wife from the firm of Messrs. Dhanalakshmi Pictures, Vellore.

Detailed Analysis:

Issue 1: Carry Forward of Wife's Share of Loss

Background:
The case arose from the assessment of an individual for the assessment year 1968-69. The assessee, a partner in Messrs. Dhanalakshmi Pictures, Vellore, declared a loss of Rs. 30,945, which included his own share of loss and the share of loss of his wife, who was also a partner in the same firm.

Income-tax Officer's Decision:
The Income-tax Officer determined the correct share of the assessee's loss at Rs. 6,306 and rejected the claim to carry forward the wife's share of loss. The officer held that under section 64(1)(i) of the Income-tax Act, 1961, only the income of the wife could be included in the assessee's total income, not the loss.

Appellate Assistant Commissioner's Decision:
The assessee appealed, but the Appellate Assistant Commissioner upheld the Income-tax Officer's decision, citing the Gujarat High Court's ruling in Dayalbhai Madhavji Vadera v. CIT [1966] 60 ITR 551, which supported the exclusion of the wife's loss from the assessee's total income.

Tribunal's Decision:
The assessee further appealed to the Appellate Tribunal, which relied on the Mysore High Court's decision in Dr. T. P. Kapadia v. CIT [1973] 87 ITR 511. The Tribunal allowed the appeal, holding that the share of the wife's loss could be set off against the assessee's income, based on the principle that where two interpretations are possible, the one favorable to the assessee should be adopted.

Supreme Court's Analysis:
The Supreme Court considered three main factors:

1. Circular No. 20 of 1944 by Central Board of Revenue:
This circular suggested that the loss of a spouse should be treated as if it were a loss sustained by the individual, allowing it to be set off against the individual's income.

2. Explanation 2 to Section 64:
Added by the Finance Act, 1979, this explanation clarified that "income" includes "loss," supporting the interpretation that the wife's loss could be included in the assessee's total income.

3. Precedent from CIT v. J. H. Gotla [1985] 156 ITR 323 (SC):
The Supreme Court in Gotla's case held that the share income of the wife included in the assessee's total income should be regarded as business income derived from the business carried on by the assessee, allowing for the set-off and carry forward of losses.

Conclusion:
The Supreme Court upheld the Tribunal's decision, affirming that the assessee is entitled to carry forward not only his share of loss but also the share of loss of his wife from the firm. The court emphasized that the provisions of section 64(1)(i) should be interpreted to include losses, aligning with the equitable view and legislative intent.

Final Judgment:
The question was answered in the affirmative and against the Revenue, allowing the assessee to carry forward both his and his wife's share of losses to subsequent years.