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TMI Blog1985 (8) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... also admitted. The mill premises as well as the remaining machinery of the assessee were leased out to this firm which carried on the business of the manufacture and sale of groundnut oil. The assessee had also entered into an agreement with the firm under which certain services were rendered to the firm by way of management. The assessee was entitled to get commission at stipulated rates on the purchase of oil cake and sale of deoiled cake made by the firm. The assessee himself continued to carry on business in the purchase and sale of groundnut cake and oil on a small scale. The assessee also continued his business as abkari contractor. The assessee had incurred huge losses in his individual business in the earlier years which were being carried forward from year to year up to the assessment year 1958-59. The loss carried forward from the assessment year 1958-59 was Rs. 7,88,734. The assessee's profits from his own business for 1959-60 were Rs. 14,324. The share income of the assessees' wife and minor children from the firm for the assessment year 1959-60 was Rs. 24,592. The said income was included in the computation of the total income of the assessee under s. 16(3) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess, profession or vocation in which the loss was originally sustained must be continued to be carried on by the assessee in the year in which the carried forward loss is sought to be set off : and (3) the business, profession or vocation against the profits of which set-off is claimed must be carried on by the assessee in that year. There is no dispute that the loss was from business in this case. The business in which the loss was originally sustained was continued to be carried on by the assessee in the year in which the carried forward loss was sought to be set off and this aspect was found in favour of the assessee by the Tribunal. The only ground on which the Tribunal had denied the right to set off was that the assessee could not be said to be carrying on the business out of which the share income of his wife and minor children was derived. The High Court noted that the Tribunal had based its decision on the Gujarat High Court decision in Dayalbhai Madhavji Vadera v. CIT [1966] 60 ITR 551, but a different view was taken by the Karnataka High Court in the case of Kapadia v. CIT [1973] 87 ITR 511. Relying on the said decision in Kapadia's case and on a consideration of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year :" It is not necessary to refer to the provisos which deal with speculative losses and the exceptions indicating the speculative losses. The relevant provisions of subs. (2) of s. 24 which are material for the present purpose are : " Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be wholly set off under subsection (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year, and (i) where the loss was sustained by him in a business consisting of speculative transactions, it shall be set off only against the profits and gains, if any, of any business in speculative transactions carried on by him in that year; (ii) where the loss was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be included in the total income of an assessee under s. 16(3)(a), the ITO had to take the totality of all the income under the four sub-clauses of cl. (a) of s. 16(3) and arrive at the net result and it was such net result that had to be included in the total income of the assessee. His contention, therefore, was that if there was income under one head but loss under another, covered by any of the four sub-clauses of cl. (a) of s. 16(3), such loss had to be set off against the income or the profits or gains accruing or arising under another head, and it would be the resulting balance which had to be added to the total income of the assessee. He argued that, while computing the total income of the assessee, when the ITO sought to include therein the income of the assessee's wife or the minor child arising from membership of the wife in the firm in which the assessee was a partner or from the admission of the minor son to the benefits of partnership in that firm and the income arising from the assets transferred to the wife and the minor son, the ITO must, in computing such income of the wife and the son, take into consideration the loss, if any, that had come to their share in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the husband has suffered loss in a year subsequent to the transfer of certain assets, income arising out of which is sought to be included in the assessee's income. The question here is in including such an income whether the loss suffered by the assessee in his own business could be set off. Learned counsel for the Revenue stressed that the Legislature has not, in s. 16(3) of the Act, used the expression " deemed to be the income " in contradistinction to the same expression used in s. 16(1)(c) of the Act. But in judging the controversy of the present case, whether the income is deemed to be or actually included would not, perhaps, in the facts and circumstances of the case, make any material difference. What has to be found out is what is to be included. The Indian I.T. Act, 1922, was replaced by the I.T. Act, 1961. Section 64 of the I.T. Act, 1961 (hereinafter referred to as " 1961 Act "), deals with inclusion of income of the assessee arising out of the assets transferred directly or indirectly to the spouse or the minor child. The provisions on significant aspects are similar to the provisions of s. 16(3) of the Act except that in s. 64 of the 1961 Act, the expression " s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried on by the assessee in the year in which the carried forward loss is sought to be set off. But the question is was the assessee carrying on the business from which the share income of his wife and minor children was derived? This is also a condition which is required to be fulfilled. In section 4 of the W.T. Act, 1957, which also makes assets transferred to the wife or the minor child includible in the net wealth of the assessee, uses the expression " in computing the net wealth of an individual, there shall be included, as belonging to that individual " (emphasis supplied). Then the different items including the items of assets transferred have been mentioned. The I.T. Act only makes these as includible as such while the W.T. Act makes these includible as belonging to the assessee. It is not necessary to examine whether in view of s. 2(m) of the W.T. Act read with s. 3 of the said Act, which is the charging section, such a provision was necessary unlike s. 10 and s. 2(6C) read with s. 3 of the said Act. Reliance was placed on behalf of the Revenue on the decision of the Madras High Court in the case of CIT v. Srinivasan [1977] 108 ITR 667. The assessee in that case had claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncidence of tax by transferring his assets to his wife or minor child or by admitting his wife as a partner or his minor child to the benefits of partnership in firm in which he was a partner by transferring the assets directly or indirectly to them otherwise than for adequate consideration. This court in the case of CIT v. Manilal Dhanji [1962] 44 ITR 876, dealing with s. 16 of the Act observed at page 881 of the report thus : " The object of the legislation is clearly designed to overtake and circumvent a tendency on the part of the taxpayers to endeavour to avoid or reduce tax liability by means of settlements. Sub-section (2) deals with grossing up of dividend, etc. Then we come to sub-section (3). This sub-section aims at foiling an individual's attempt to avoid or reduce the incidence of tax by transferring his assets to his wife or minor child or admitting his wife as a partner or admitting his minor child to the benefits of partnership in a firm in which such individual is a partner. The sub-section creates an artificial liability to tax and must be strictly construed." Attention was drawn in this connection to a circular of the Board of Revenue-CBR Circular No. 20 of 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he question whether computation of income involves deduction of loss from gross profits is not relevant. The question involved in this case is, whether the income of the wife and/or minor children of the assessee from a partnership firm in which the wife is a partner and/or minor children have been admitted to the benefits of partnership carried on with the assets transferred by the assessee in any year subsequent to the year of transfer could be set off against any loss brought forward by the assessee in respect of business carried on by the assessee. In the instant case, the business of the firm in which the assessee's wife and to the benefits of which his minor children had been admitted was a firm in which the assessee himself was not a partner and as such that business was not being carried on by the assessee. Counsel for the assessee contended that the real object of s. 16(3) of the said Act was to restore the position which obtained before the transfer, qua income. In other words, he urged that it was as if the transfer had not taken place. It was his submission that if the transfer had not taken place, the income of the wife and the minor children from the assets transferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year can be carried forward and set off against the income of the wife and the minor children included in the income of the assessee-income which is earned from a firm in which the assessee was not a partner. The Madhya Pradesh High Court in the case of CIT v. Badri Prasad Agarwal [1983] 142 ITR 353, held that the addition of Explanation 2 to s. 64 of the 1961 Act, with effect from 1980, was a parliamentary exposition of the true position in law that was obtaining earlier to the effect that income in s. 16(3) would include loss. The court further reiterated the position that if two views are possible, then the one which is favourable to the assessee should be adopted. " Income " in s. 64 of the Act of 1961 includes loss. Furthermore, Explanation 2 added by the Finance Act, 1979, to s. 64 in specific terms says that " income " would include loss. But that Explanation even on the assumption that this is a parliamentary exposition of the existing position would not solve the present problem. The Bombay High Court in the case of Goculdas v. CIT [1985] 151 ITR 67, had to consider this aspect. CBR's Circular No. 20 in which the Board had taken the view that where the wife or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anted as if that income was also part of the total income of the assessee, etc., i.e., to be treated in the same way. This court in the case of CIT v. Kochammu Amma Peroke [1980] 125 ITR 624, in the context of the obligation of submission of the return and penalty for failure to include the income of the wife or the minor child in the return, has held that the words " his income " in s. 139 of the 1961 Act and s. 271(1)(c) of the 1961 Act would include such income to be included in the assessee's total income. This court has also held that the assessee was entitled to earned income relief in relation to such income-see CIT v. Marimuthu Nadar [1962] 44 ITR 1. In other words, the income was in no way different from the assessee's income for the purpose of this Act. Therefore, the provisions of s. 16(3) of the Act have the same effect as the words " deemed to be " used in s. 16(1)(c). Since both income as well as loss of the wife or minor child, argued counsel for the assessee, has to be included in the assessee's total income and are to be treated as the assessee's income or loss for the purpose of the Act, the effect was that there was complete identity between the assessee and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as such in view of the provisions of s. 24(2)(ii), which stipulates that loss to be carried forward must be " loss sustained by him in any other business, profession or vocation, it shall be set off against the profits and gains, if any, of any business, profession or vocation carried on by him in that year; provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year ". Therefore, it is required that the business, profession or vocation against profits of which the set-off is claimed must be carried on by the assessee in that year. Bat the problem here is that the business out of whose share income of the wife or minor child is derived is no longer carried on by the assessee himself in the subsequent year in which set-off is being claimed. On behalf of the Revenue, it was emphasised that this requirement is to be strictly followed. Revenue emphasised that the requirement continues irrespective of the clarification of the Board of Revenue by its Circular in 1944 and in spite of the addition of Explanation 2 to s. 64(2) by the Amending Act of 1979, with effect from 1980. Therefore, it was urged that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truction leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation found in the manner indicated before, then if another construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. Furthermore, in the instant case, we are dealing with an artificial liability created for counteracting the effect only of attempts by the assessee to reduce tax liability by transfer. It has also been noted how for various purposes the business from which profit is included or loss is set off is treated in various situations as the assessee's income. The scheme of the Act as worked out has been noted before. In view of the aforesaid and in view of the attitude of the law-makers in dealing with this problem as evidenced by the amendment and in the circular originally issued prior thereto and bearing in mind that under the scheme of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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