1973 (3) TMI 10 - HC - Income Tax

Carry Forward and Set Off - share income of the assessee s wife and minor children included in the assessee s total income under section 16(3) of the Act should be regarded as business income derived from business carried on by the assessee and in that view the assessee is entitled to the set off of his loss carried forward from the previous years

Summary

Issues Involved:
1. Entitlement to carry forward and set-off of losses against the share income of the assessee's wife and minor children.
2. Interpretation of Section 24(2) of the Indian Income-tax Act, 1922.
3. Classification of income under Section 16(3) of the Indian Income-tax Act, 1922.
4. Legal fiction and its implications under Section 16(3).

Detailed Analysis:

1. Entitlement to Carry Forward and Set-off of Losses:
The primary issue was whether the assessee could carry forward and set off his business losses against the share income of his wife and minor children included in his assessment under Section 16(3) of the Indian Income-tax Act, 1922. The Tribunal initially denied this right, asserting that the assessee was not carrying on the business from which the share income was derived. The High Court, however, disagreed, concluding that the share income should be regarded as business income derived from the business carried on by the assessee.

2. Interpretation of Section 24(2):
Section 24(2) allows the carry forward and set-off of losses under specific conditions:
- The loss must be from a business.
- The business in which the loss was sustained must continue to be carried on by the assessee.
- The business against which the set-off is claimed must be carried on by the assessee.

The Tribunal found that the assessee continued his business, thus satisfying the second condition. However, it denied the set-off, arguing that the business from which the share income arose was not carried on by the assessee. The High Court overruled this, emphasizing that the share income should be treated as arising from the business carried on by the assessee due to the legal fiction created by Section 16(3).

3. Classification of Income under Section 16(3):
The Tribunal and the department contended that the share income of the assessee's wife and minor children should be classified under "other sources" rather than "business income." The High Court rejected this, noting that the Tribunal had accepted the Appellate Assistant Commissioner's finding that the share income was "business income." The High Court held that the income included under Section 16(3) retains its original character, thus remaining business income.

4. Legal Fiction and Its Implications under Section 16(3):
The Tribunal argued that Section 16(3) created a fiction by which the income of the assessee's wife and minor children was deemed to be the assessee's income but did not imply that the assessee was carrying on the business. The High Court cited precedents, including the Supreme Court's decision in Commissioner of Income-tax v. Marimuthu Nadar, to support the view that income included under Section 16(3) should be treated as if it were derived from the business carried on by the assessee. The High Court concluded that the legal fiction must be given full effect, allowing the assessee to set off his carried-forward losses against the share income.

Conclusion:
The High Court ruled in favor of the assessee, holding that the share income of the assessee's wife and minor children included in his total income under Section 16(3) should be regarded as business income derived from a business carried on by the assessee. Consequently, the assessee was entitled to set off his carried-forward losses against this income. The question referred was answered in the affirmative, and the assessee was awarded costs.