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TMI Blog1978 (5) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... r adjustment of the interest received from the firm, is Rs. 8,635 in respect of the assessee and Rs. 2,995 in respect of the assessee's wife. After adding the interest paid on borrowings, the net business loss worked out to Rs. 11,260 in case of the assessee and Rs. 7,371 in the case of the assessee's wife. The firm has been assessed as an unregistered firm for the asst. yr. 1974-75 and there being no change in the circumstance, it was likely to be assessed as an unregistered firm for this assessment year also and, therefore, the ITO said that the share of loss of the assessee or that his wife was not likely to effect that assessment. The ITO, however, proceeded further and relying upon the Gujarat High Court decision in the case of Dayal Bhai Madhavji Vadera vs. CIT(1), he observed that even if the status of the firm is taken as registered firm, even then the loss of Mrs. Surekha shall not be includible in the assessee's total income. It seems in the course of discussion, the assessee had placed before the ITO the Mysore High Court decision in the case of J.M. Gotala vs. CIT(2) and the earlier decision of the same High Court in Dr. T.P. Kapadia vs. CIT(3), in which referring to CB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the capacity of a lender of money to the firm. Reference was made in this context to the Supreme Court decision in the case of Srinivasan vs. CIT(5) The learned A.A.C. however, rejected these submissions. He agreed with the Income-tax Officer, following the Gujarat decision in Dayal Bhai Madhavji Vadera's(1) case that under s. 64(1)(i) the share of loss of the assessee's wife from the firm in which the husband was also a partner, was not liable to be included in the husband's assessment. With regard to the assessee's plea that the term 'income' occurring in s. 64 included negative profits, the learned A.A.C. held that the Supreme Court decision in the case of Har Pd. co. (Pvt.) Ltd.(4) on the authority of which this proposition had been advanced, was not applicable at all to the present case as the facts and the ratio decidendi of that case were entirely different. The learned A.A.C. also upheld that inclusions of the interest income of the wife as it was admittedly derived by the assessee's wife from the firm in her capacity as a partner and the inclusion was supported by the Supreme Court decision in Srinivasan vs. CIT(5). As such the learned A.A.C. upheld the action of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sri Patni said that the CBDT had also said the same thing in their Circular No. 20 of 1944. In their earlier Circular No. 35 of 1941 it had been laid down that where the wife or minor child of an individual incurs a loss which, if it were income would be includible in the income of that individual under s. 16(3), such loss should be set off only against the income, if any, of the wife or minor child and if not wholly set off should be carried forward subject to the provisions of s. 24 (2). Dealing with the said earlier Circular, it was stated in the Circular No. 20 of 1944 that the other and more equally tenable view was that such loss should be treated as if it were a loss sustained by that individual. Shri Patni said that the highest administrative authority concerned with the implementation of the IT Act and also the Mysore High Court thus came to the conclusion that the more equitable view tenable in law was that the share of loss of the assessee's wife should be included in the total income of the husband in terms of s. 64(1)(i) treating the said loss of the assessee's wife as if it were loss sustained by the husband himself. The learned counsel urged that out of the two equa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm in her capacity as a partner. referring to the Supreme Court decision in Srinivasan's(5) case he said that it supported the assessee s case but the learned AAC had mis-applied it inasmuch as he completely ignored the provisions of s. 67(1)(c). The learned Departmental Representative, on the other hand, supported the orders of the authorities below. 7. We have considered the rival submissions. the question for our consideration is whether the loss arising to the assessee's wife from the membership of the firm is includible in the assessee's total income in terms of s. 64(1)(i) or not. as already stated the assessee, Sri S.K. Surekha and his wife were both partners in the firm M/s. National Castingis and Industries. In the relevant previous year this firm suffered loss and the assessee's share of loss after taking into account the interest derived from the firm, worked out to Rs. 8,635 and the similar share of loss of the assessee's wife worked out the Rs. 2,995. Both, the assessee and his wife had paid interest on borrowings amounting to Rs. 3,625 and Rs. 4,376 respectively. Adding these to the share of loss the said firm, the net business loss was Rs. 11,260 in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er words it is the net income derived from the membership of the firm that is to be added and not any income derived from the firm. The amount to be included, therefore, firstly, must be the wife's income from the membership of the firm which obviously would cover the share of income derived by the wife as a partner and, secondly, it must be the net income from the said source. In the present case the assessee's wife, Mrs. Surekha, had derived from the firm share of loss and also interest. She had paid interest on borrowed money which was invested in the firm. her share of income from the firm has to be determined in terms of s. 67(1)(c) which has been reproduced above. This provision is mandatory and it requires that where the amount apportioned amongst the partners is a loss, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of previous year has to be adjusted against that amount and the result has to be treated as the partners share of loss from the firm. Having so determined the share of loss of a partner from the firm, then, for the purpose of s. 64(1)(i), the net income from the membership of the firm has to be worked out by ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee s total income under s. 64(1)(i). 10. As against the Gujarat decision aforementioned, the assessee s counsel has placed before us the Mysore High Court decisions in the case of Dr. T.P. Kapadia J.H. Gotla (3), respectively in which a contrary view has been taken. In the latter, at page 540 their Lordships have observed as follows:- "On a reference to this Court, it was held disagreeing with the view of the Gujarat High Court in Vadera s case (60 ITR 551) that the share of loss of the wife in the registered firm in which the assessee was also a partner can be set off against the income of the assessee while computing his total income. It was held that it is possible to take the view that the loss incurred by a spouse should be treated as if it were a loss sustained by the assessee. (44 ITR 1) as well as Kapadia s case (87 ITR 511) is that the income or the loss included under s. 16(3) in the total income of the assessee has to be treated as income or loss sustained by the assessee. The object of s. 16(3) of the Act was to foil an individual s attempt to avoid or reduce of incidence of income-tax by transferring his assets to his wife or minor child or admitting his wife a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Har Pd. Co. Pvt. Ltd.(4) wherein their Lordships have said in clear term that income includes both positive profits and negative profits and both must enter into the computation of an assessee s income for the purpose of the IT Act. We have reproduced in para 6 above the relevant observation from this decision. 13. We have thus, on the one hand, the Gujarat decision and on the other, the decisions of the Mysore High Court. Both have considered the question before us and have come to the contrary conclusions which have been set out in paras 9 10 supra. In brief the view taken by their Lordships of the Mysore High Court is that the loss arising to the spouse or the minor child from membership of the firm is as if it were the loss of the individual and is as such includible in the total income of the individual. It is supported by Supreme Court decisions in the cases of CIT vs. Mari Muthu Nadar (6) and the decision in CIT Central Delhi vs. Har Pd. Sons Pvt. Ltd.(4) The thinking of the Central Board of Direct Taxes was also on the same lines till the Gujarat decision in the case of Dayal Bhai Madhavji Vadera (1) was announced. Their Lordships of the Gujarat High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied forward. It thus deprives the spouse of the benefit of set off and carry forward of loss which the law has given to all assessees and there would be no justification for the denial of such benefit. 16. Sec. 64, inter alia, impose on the individual an artificial liability of tax with reference to the income of the spouse or the minor child. It takes for granted that the introduction of the spouse as a partner or the admission of the minor to the benefits of the partnership has been with a view to avoiding the proper levy of tax and in order to off set that device it has been provided that the income of the wife of the minor child arising from the firm would be included in the total income of the individual. But the artificial liability imposed on the individual cannot be made further artificial by including only the profits and ignoring the losses. In the case of S. Naganathan vs. C.W.T.(7), a similar question had arisen. In that case the assessee had transfered without consideration certain immovable property to his wife which was included in the net wealth of the assessee in terms of s. 4(1) (a) (i) of the WT Act, 1957. The assessee claimed exemption in respect of this prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which, if the putative state of affairs had, in fact existed, must inevitably have flowed from or accompanied it; inevitable corollaries flowing from the putative state of affairs which one is bidden to treat as real must be drawn and given effect to. Therefore, if the legal fiction introduced in s. 64 (1) (i) includes the income of the spouse in the total income of the individual for a specific purpose, it must be given its full effect without of course damaging or defeating the object for which it has been created. Since the term income , embraces both, the positive profits and the negative profits, for the purpose of s. 64 both must be taken into account and included in the total income of the individual. The effect of such a connotation would be: (i) the tax sought to be avoided would be recouped; (ii) the individual would not be put in a worse position than he would have been in if the spouse had not been introduced in the partnership; (iii) the negative profits would receive proper treatment according to law in the hands of the individual and do not become a dead loss; and (iv) the legal fiction would be given a more fair and proper effect without any damage to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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