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TMI Blog1965 (8) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... being included in the income of the assessee under the provisions of section 16(3) of the Act. The assessee was a partner along with four others in a firm which carried on business of manufacturing tea under the name and style of Terrace Nilgiri Tea Estate Co., Naduvattam, Ootacamund. This firm has been granted registration. All the partners of the said firm are non-residents and they are the assessee having 10/100, share, Smt. Prabhakunvarbai Dayalbbai, the assessee's wife having 10/100 share, the assessee's minor son, Rasikchandra Dayalbhai having 20/100 share and Vinodkant Dayalbhai and Narendrakant Dayalbhai, the assessee's sons having a share 30/100 each. The deed of partnership is dated February 2, 1956. The relevant clause of the deed is as follows: "4. The parties shall share the profits and losses in the same proportion as the capital contributed by them, viz.: First party ... 10 per cent. Second party ...10 per cent. Third party ... 30 per cent. Fourth party ... 30 per cent. Rasikchandra Dayalbhai Vadera ... 20 per cent. The minor party's share of losses shall not exceed the capital subscribed by him." A copy of the deed of partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider the share in loss of the registered firm. In doing so, he has observed as follows: "The assessee has property income, interest income and is also a partner in the firm of M/s. Terrace Nilgiri Tea Estate Co. In the shares from the firm of M/s. Terrace Nilgiri Tea Estate Co., the assessee has also shown the share of his wife and his minor son. These have been taken in the past in view of section 16(3)(a)(i) and (ii). However, this year the firm has been assessed at a loss and the share of the partners including the assessee's wife and minor son have been determined at loss. In my view, the share of loss of the wife and minor son cannot be taken to the assessee's assessment. The loss cannot be considered to be 'income'. Shri Parikh argued that the loss 61 wife and minor son should be considered in the present assessment, as there may be either business income or business loss. However, it is seen that section 10 speaks of 'profits' or 'gains' and the phrase may be considered as including loss. But the phrase 'income' in section 16(3) cannot be considered to include loss". A copy of the Income-tax Officer's order for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence the department's action in disregarding the losses of the wife and minor son in assessing the assessee was correct. A copy of the Tribunal's order is annexure "E" and forms part of the case. 7. The assessee has thereafter preferred this reference application and sought to raise the following two questions of law: (1) Whether, on the facts and circumstances of the case and on a proper interpretation of section 16(3) of the Income-tax Act, 1922, the loss-share of the wife and the minor son of the assessee in the registered firm in which the assessee is also a partner should be included in the total income of the assessee or not? (2) Whether, on the facts and circumstances of the case, the loss-share of the wife and minor son of the assessee should be set off against their other income includible under section 16(3) of the Income-tax Act, 1922, before including the same in the total income of the assessee or not?" The departmental representative objects to the second question being raised as according to him this matter had not been considered or dealt with by the Tribunal in its order. The assessee on the other hand contends that such a contention was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 10/100 share, while his minor son, the said Rasikchandra, had 20/100 share and two other major sons had together between them 30/100 share. The said firm was being assessed by the Income-tax Officer, Ootacamund. The firm's income consisted of income from property, business and other sources. For the assessment year 1958-59, there was a net loss computed at ₹ 11,322 and the Income-tax Officer, who made the firm's assessment for that year, held that as the firm was registered, the loss would be apportioned amongst the partners and would be considered in their individual assessments. So far as the assessee was concerned, the share of loss which was allocated to him came to ₹ 1,132. The same amount was also allocated to his wife, the said Prabhakunvarbai. As regards the minor son, Rasikchandra, a sum of ₹ 2,266 was the amount apportioned to him from out of the aforesaid net loss of ₹ 11,322. Apart from the aforesaid shares that the assessee's wife and minor son had in the aforesaid firm, they had also certain deposits in the Bank of India Limited, Bombay. From the deposit standing in the wife's name, a sum of ₹ 9,583 was earned as interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id not mean or include loss and, therefore, the Income-tax Officer's view of disregarding the share of loss of the wife and the minor son in computing the total income of the assessee was correct. On an application made by the assessee for a reference under section 66(1) of the Act, the Tribunal framed the following two questions for our answer: "(1) Whether, on the facts and circumstances of the case, and on a proper interpretation of section 16(3) of the Income-tax Act, 1922, the loss share of the wife and the minor son of the assessee in the registered firm in which the assessee is also a partner should be included in the total income of the assessee or not? (2) Whether, on the facts and circumstances of the case, the loss share of the wife and minor son of the assessee should be set off against their income includible under section 16(3) of the Income-tax Act, 1922, before including the same in the total income of the assessee or not?" We may observe that, though two questions have been framed for our answer, they are really two facets of the same question, both depending, as already pointed out, upon the construction of section 16(3)(a) of the Act. The conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... daughter, by such individual otherwise than for adequate consideration." The sub-section provides thus for the inclusion, while computing the total income of an assessee, of certain income of a wife or a minor child in the total income of such an assessee. The section obviously aims at preventing an attempt on the part of an assessee to avoid or to reduce the incidence of tax, either by transferring his assets to his wife or minor child, or by admitting his wife as a partner or admitting his minor child to the benefits of partnership in the firm in which he is a partner. The sub- section creates an artificial liability to tax. Sub-clauses (i) and (ii) of clause (a) in sub-section (3) provide that, in computing the total income of an individual, there should be included the income arising to the assessee's wife from her share as a partner or to his minor child from admission to the benefits of partnership in the firm in which the assessee is a partner. Thus, the two clauses are absolute and unqualified in terms and not subject to any exception. What is, therefore, to be included in the total income of an individual is the income of a wife or a minor child arising directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) has four sub-clauses and provides that if there is income under any one or more of them, that income is to be included in the total income of the assessee. The scheme of clause (a) in sub-section (3) thus is not to set off loss arising under any one of the sub-clauses against income arising from the other or the rest of the sub-clauses. Such a thing perhaps might have been possible if, instead of providing for the inclusion of income of a wife or a minor child in the total income of an assessee, such income had, by a legal fiction, been made the income or the share of the assessee himself. That, however, has not been done in this sub-section though such a deeming fiction is to be found in section 16(1)(c). While enacting, therefore, sub-section (3), the legislature had before it such a deeming fiction in section 16(1)(c). Yet the legislature did not follow that method, but followed a different method as set out in sub-section (3). It is true that income may in certain cases include a negative income, namely, loss, but that concept prevails in the case of computation of income of the assessee. Such a thing does not appear to be so so far as sub-section (3) of section 16 is conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss as against her other income not falling within the purview of the subsection. If the construction suggested by Mr. Shah were to be accepted and such share of loss were to be set off against income which is to be included in the total income of the husband or the father, as the case may be, it would, in effect and in substance, be setting off such a share of loss for the benefit of the husband or the father, as the case may be. Such a construction would be contrary to the provisions of section 24 under which it would be the person to whose share the loss has come who alone is entitled to such a set-off. In the absence of a deemed fiction, such as the one to be found in section 16(1)(c), in the present sub-section, the construction suggested by Mr. Shah would be not only not in consonance with but contrary to the provisions of section 24. In support, however, of the construction suggested by him, Mr. Shah relied upon Harakchand Makanji & Co. v. Commissioner of Income-tax [1952] 22 I.T.R. 33. where the High Court of Bombay was concerned with the construction of section 42(3) of the Act and where, in construing that provision, Chagla C.J. and Tendolkar J. held that "profits an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... City Assessment Act of 1859 is hereby repealed, and in lieu thereof the agent or manger of any joint stock company or corporation established abroad or out of the limits of this province, or of any person or persons, whether incorporated or not, doing business abroad, or out of the limits of this province, who shall carry on business within the City of St. John for, or who shall have an office or place of business in the said city of St. John for any such company, corporation, person or persons, shall be rated and assessed, in like manner as any inhabitant, upon the amount of income received by him for the same, as such agent, etc." Construing this section, the Privy Council held that the tax imposed by the section upon income was leviable in respect of the balance of gain over loss made in the fiscal year and where no such balance of gain had been made there was no income or fund capable of being assessed. The Privy Council also held that there was nothing in the section or in the context which should induce a construction of the word "income" when applied to the income of a commercial business for a year otherwise than its natural and commercially accepted sense a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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